When deciding to raise capital through equity crowdfunding, a token figure for your target raise will likely have materialised in your mind early on. When the glamour of big numbers comes into play, getting to the position to start asking for them is exciting. One of the many problems with setting a target is that it can get too exciting.
This is where it gets a bit Dragon’s Den. We all know the classic phrase - X amount for an X% share in the company. In Dragon’s Den, however, big drops in seed offers and big jumps up in ownership demands mean that hopeful entrepreneurs rarely walk out with the deal they had in mind. Ask for too little and you may not make it to the next milestone. Too much, and you risk creating doubt and mistrust in your investors’ estimations.
In the real world of CSF, there’s little room for negotiation. A raise target must be both rational and justifiable. Investors will want to know exactly why you’re asking for the target amount, and exactly what you’re going to do with it if they give it to you.
3 strategies for establishing your fundraising target
1. Always come back to your company goals. A good creative knows to come back to the brief time and again, to remind themselves of the intent, and prevent themselves from getting carried away on their own creative tangent. The same rules should apply to companies raising capital through crowdfunding. Come back to your established goals, and let them guide you in your decision making.
2. Budget for time, not just resources. You’ll need to raise enough not just to hit your target and allocate funds to developing aspects of your business, but to carry you through to the next round of funding. AKA: your burn rate. This could be 12 months, it could be 18. Whatever your unique milestones, make sure even the most basic operational costs are considered, including what you’ll need to add to them to progress. The good news is, this is the empirical part - budgeting for things like staff costs and premises should be fairly straightforward.
3. Budget for two outcomes. In equity crowdfunding, you will set a minimum target – the minimum amount you need to achieve your goals – and a maximum target – an amount correlated to the maximum amount of equity you wish to offer to investors. You may achieve the maximum, you may achieve the minimum. Your budget allocation will vary for each. If you achieve the minimum, which aspects of development can you cut back on? If you get the maximum, how can you efficiently distribute the funds so that they work to the maximum potential?
2 mistakes to avoid when establishing a target
1. Looking at the competition. A general rule of thumb is to cover 18 months of ‘runway’ with your first CSF campaign. But the timeframes and milestones of each business will vary dramatically. Same for the outgoings and projections. Look to other startups at your own peril, or for a very rough ballpark only.
2. Trying to overshoot what you actually need just in case you end up with more. Experienced investors may see this as you chancing your arm. It may look like you don’t understand your own numbers, and it’s not conducive to trust. It also exposes you to selling your equity at what should be a lower point in its value, and accepting more dilution than necessary.
Perhaps most importantly, equity crowdfunding is "all or nothing" – you either raise your minimum target and successfully fill your raise, or you fail to hit this target and are legally-obligated to refund investors. If your campaign fails because you set an unrealistic minimum target, it's often very difficult to go again at a later stage. The initial campaign hype is over and the confidence of those who did invest the first time around, is shot.
To sum up
Keeping your focus on the question of what you need, not of what you want, wish for or could get if you chance it, will make it much easier for you to persuade and convert your investors, and maintain a clear, honest path to your goal.
Any business raising growth capital - new or seasoned - can benefit from guidance on valuations, targets and strategy for their campaign. Speak to the STAX Listings team here for a no-obligation chat.