I get approached by a lot of companies wanting to raise capital using equity crowdfunding. The successes of companies like BrewDog and Boxabl raising hundreds of millions through various forms of online investing from the crowd makes Regulation A (Reg A) and Regulation Crowdfunding (Reg CF) offerings look very attractive to companies needing to raise capital at a company friendly valuation while building a bigger customer/user base at the same time.
In nearly every new client call I have, I get asked this question: Do you think my company a good candidate for equity crowdfunding?
In the theoretical world, this should be an easy question. Nearly any company could raise money, and many could raise significant new capital, using these incredible online securities offering tools.
But in the real world, it's not always easy to know which companies will do well and which companies will not do as well with equity crowdfunding. In this article, I'll explore one part of the equation I use to make an initial assessment of whether a company is a good fit for Reg A or Reg CF. For those of you who love numbers and stats, you are going to enjoy this. For those who are not into numbers and stats, you will also be able to follow the logic here — just skip over the boring calculations!
The reality is Reg A and Reg CF are very similar animals and success with both generally requires a company to drive a lot of eyeballs to an online offering page to invest. I've said it many times… equity crowdfunding is all about marketing. If a company can drive enough people to their online offering page where the investment occurs quickly and inexpensively, they can raise money very fast. If they can't drive enough people themselves, they will have to rely on expensive marketing like paid ads which work, but which also take a long time unless a huge budget is in place.
Equity crowdfunding is a numbers game. So before I start crunching numbers, read the next section to learn what these numbers can do for your company in additional to putting significant new capital into your company's bank account.
The Positive Collateral Effects
Most companies, particularly those that involve consumer goods and services, use equity crowdfunding not just to raise capital, but also to build their customer/user base, drive additional revenues, create a more robust online presence, and develop more brand ambassadors. These collateral effects of equity crowdfunding are just as important as the capital raise itself. I have clients who have shared data and metrics with me that show the average Reg A or Reg CF investor they get during their securities offering will account for hundreds of dollars of sales of their consumer products or services on an annual basis. In those cases, investors are paying my clients money to not only own part of the company, but also to help promote the company online, build sales and brand awareness and drive up company revenue themselves!
Imagine raising $5,000,000 in new capital at an issuer friendly valuation and at the same time getting 10,000 small investors who each spend hundreds of dollars on your products every year.
Let's do the math. That scenario means $5,000,000 in new capital and perhaps another $5,000,000 annually in sales just from those investors!
Now imagine those 10,000 small investors telling their friends, family, co-workers and social media audience about your company and products and posting about them online.
You can see where this is going. Equity crowdfunding is not just about raising capital. It's about growing your business. And it all comes down to numbers.
"In a world older and more complete than ours they move finished and complete, gifted with extensions of the senses we have lost or never attained, living by voices we shall never hear."
— Olivia Rhye, Product Designer
What Numbers Matter To Predict Equity Crowdfunding Success?
What makes a company a good candidate for success in equity crowdfunding?
The analysis below is my starting point. Every offering and every issuer is different. I've seen offerings go from very slow to gangbusters because of one big media appearance, or one endorsement online from the right person. For purposes of this article, I'm pretending those things never happen. I'm assuming an issuer is coming to me asking if they can raise $1,000,000 through equity crowdfunding under either Reg A or Reg CF without spending a lot of money on paid ads and expensive digital marketing. Anyone can pump enough money into digital ads and other marketing and eventually generate investment dollars, but I typically encourage my clients to go after the low hanging fruit first, before pumping tens or even hundreds of thousands of dollars into paid ads, influencers, public relations, and the like to raise new capital.
Here are a few observations I have made in my practice representing equity crowdfunding issuers, and also assisting with their marketing to help them raise capital once the legal work is done. For all the examples, below, let's assume we are trying to raise $1,000,000, so you can easily extrapolate the numbers at $5,000,000, $10,000,000 and more.
Minimum Investment Will Affect The Numbers Dramatically
Let's start with some basic assumptions I use based on analyzing the stats from my own client base using equity crowdfunding since the JOBS Act went into effect for Reg A in 2015.
If the minimum investment is $200-$250 (which is about as low as you will typically see any issuer go, although I have represented companies that raised a lot of money with a minimum of $100 or even less) the average investment will usually be $700-$750. If the minimum investment is $500, the average investment will usually be $1,000-$1,250. If the minimum investment is $1,000, the average investment will be +/- $2000.
The minimum investment amount will be is a key decision you will make before you launch your equity crowdfunding offering, and it will depend on many factors. For example, don't just look at the numbers above and say, "Well, obviously I'm going to make the minimum investment $1,000, so I'll only need 500 investors!"
There is a huge difference between the number of people who will invest $1,000 and those who will invest $200. In today's world, $200 is what a dinner out with the family can cost. $1,000 still seems like a lot more money to most people. Also, if you are trying to build a bigger customer and user base and more sales of your products, you may want the lower minimum of $200 to allow more people in the door for other purposes.
Let me do some simple math for you. If you got 500 investors at a minimum investment of $1000, and that means an average of $2000 invested for each, so you raised $1,000,000. At $200 minimum, you will probably have an average investment of $700, so you will have close to 1,500 investors to raise $1,000,000.
Now factor in two things: If each investor accounts for $500 of sales of your products or services each year, the 500 investors at a $1,000 minimum means an additional $250,000 in annual revenues. Let's say that holds for 3 years. Your company generated $750,000 of sales, plus $1,000,000 of new capital, for a total of $1,750,000.
Also, don't discount the power of numbers in the marketing and brand ambassador space. Studies show that the average person has between 100–200 social media followers. If your new investors promote your company, with the $1000 minimum investment, your new investors have the potential to reach an average of 50,000–200,000 new customers or investors for your business. With the $200 minimum investment, your new investors have the potential to reach an average of 150,000–300,000 new customers or investors for your business.
This is the power of the crowd. It's all about numbers. And the numbers go beyond just the investment dollars generated, for those who do this the right way.
What Numbers Matter?
One of the first things I look at to decide if a company is a good fit for Reg A or Reg CF is the number of existing customers/clients/users they have the ability to directly reach out to, generally through email. This is the low hanging fruit of equity crowdfunding. Who better to invest in your company when given the chance than customers who already love your products and services?
Plus, the cost of sending emails to a large number of potential investors is negligible, so this is the lowest hanging of the low hanging fruit.
Even in today's world, nothing I've seen converts into investors better than email, especially when used properly. I've seen conversion rates as high as 8–10% of those who open equity crowdfunding emails here, but 5% would be the realistic target in my opinion. Realistically, you can expect at least 1–2% of those who open emails on your customer list to convert into investors.
Let's assume a $200 minimum investment, which means an average $700-$750 investment, for your offering. Assume 5% of your customers who open emails click trough and invest, and assume 25% of your customers open the email. If you have an email customer list of 110,000–120,000, you could raise $1M just using email alone.
Do raw numbers really predict equity crowdfunding success?
You can't rely only on the raw email numbers, you have to dig a but deeper. There is a huge difference between engaged customers who signed up for an email list because they love your company, products and services, and those who simply signed up for an email list to get something free, for example.
I've seen huge email lists produce very small investment numbers. When you dig deep, you find that the email list was often created by a freebie giveaway, or some other email list building trick. Those people will not convert anywhere near 5% like in my example above, they will likely convert at less than 1%.
Another factor to look at is email open rates. Industry standards say 20–25% of emails get opened. If you have a huge email list, but your average open rate is 1%, you do not have an engaged customer base on email, and you can expect a low conversion rate into investors. On the other hand, if you have a 60% average open rate on emails, then you can expect better than 5% to convert.
What about social media audiences?
Social media followers are important, but they will not usually convert at the same rate as email lists of engaged customers. But looking at raw social media follower numbers is a factor in deciding if equity crowdfunding is going to work for your company.
Keep in mind that with social media algorithms only 10–15% of your social media audience sees each social media post. As a result, it takes multiple and consistent posts to get the message in front of as many of your followers as possible. In addition, there is always overlap here with your email lists. But of those who click through to the offering page from a social media post, I typically expect 1%-2% to convert into investors.
Just like with email, the conversion numbers will change for the better if you have a very engaged social media audience. I look to see how many likes and shares an average post gets to determine how engaged a social media audience is. A company with 50,000 social media followers that gets 1–2 likes or comments per post does not have an engaged audience — it probably has thousands of fake followers and bots. But a company that consistently gets dozens of comments and shares and hundreds of likes has the engagement needed to drive investments.
Doing the math, and assuming 2% of those who see the social media post click through the link to the offering page, then 2% of those actually invest, at a $200 minimum investment and a $750 average investment, you can expect about $30,000 of investment from every 100,000 social media followers. To raise $1,000,000 using social media alone, you would need a combined social media audience of more than 3,000,000 followers.
Again, there are always exceptions. I've seen companies with small but engaged social media audiences convert at a much higher rate and for a much higher average investment. While social media audience is a decent predictor of success, remember — it's only one piece of the marketing puzzle. Social media is important to get the word out, and it is easier for people to share than email, but in my experience it does not usually convert to investors as well as email.
What about influencers?
There is a great temptation to use influencers and to assume that they will drive their audience to invest in your company. After all, if the hottest online celebrity with 10,000,000 social media followers posts about your company, you get a whole lot of eyeballs very quickly on your offering page!
It's not that easy. Read my article about the pitfalls of using celebrities and influencers to help sell securities. Assuming you can keep the celebrity/influencer reigned in and that they actually do what you ask them to do, the conversion rates of their posts are still generally very, very small.
Think about it… if a musical artist or a professional athlete who truly has nothing to do with and nothing in common with your company, posts about investing in your company, why would that person's followers click on the link? Unless the celebrity/influencer is somehow related to your company or its industry, the chances of high conversion of their audience into investors is very small.
But again, it's a numbers game. That celebrity with 10,000,000 followers can get a lot of eyeballs to your offering page, and some small percentage will convert into investors… and probably a larger percentage will convert into customers.
As you can probably tell, my experience with influencers in the equity crowdfunding world has been a real mixed bag. But, let's assume you find an influencer with an engaged audience who does this the right way, and actually engages with his or her audience. It can produce great results. But as a general rule, expect less than 1% of any influencer's audience to click on a post, and then less than 1% of those who get to the offering page to invest. Doing the math, the celebrity/influencer (and also assuming only 10–15% of their social media followers actually see their post) would need around 80,000,000–90,000,000 total social media followers to raise $1M from that audience alone. Then again, if the audience is engaged, the posts are done right, and the celebrity/influencer is part of your company or is in your industry, it is also entirely possible that the right influencer for the right issuer would raise $1M from an audience of 1,000,000 or less. But when I look at celebrity/influencer audience to gauge what to expect from that crowd, I always roughly estimate (again, given the $200 minimum investment and $750 average investment) that I expect about $10,000 of investments for every 1,000,000 of their social media followers.
There are other benefits to celebrity/influencer endorsements and they can be very important to the overall success of any equity crowdfunding offering, but don't make the mistake of assuming that a celebrity/influencer, even with a huge audience, is going to make your Reg A or Reg CF offering a success all on its own.
So what does the perfect candidate for a Reg A or Reg CF offering look like?
In my opinion, the perfect client for equity crowdfunding has an existing large and engaged customer base and email list. They also have large and engaged social media following. They have a founder or advisor who is a celebrity or influencer in a field related to the company and they have an engaged audience. If you have all three, you may be able to raise millions without spending a dime on paid advertising and marketing.
But even if you don't have any of those things, your company could still be a great candidate for equity crowdfunding. You and your team may have a lot of friends and family who want to invest, but never had the opportunity. You may have access to the media and one appearance on a network morning TV show or on the Joe Rogan podcast and you just drove more eyeballs than you needed. And, if you have none of the above, you always have the ability to use paid digital marketing to drive eyeballs to the offering page.
Curious about whether your company is a good fit for equity crowdfunding? Reach out. We'll help you decide.
This article was edited and is reprinted with permission from Kendall Almerico, general counsel for Cultivate Capital. The content is not to be considered investment advice of any kind, and is simply for educational purposes. The article is not to be considered legal advice from Kendall Almerico or his law firm. In all instances, you should consult your own investment or legal advisors and should not rely on this article for anything other than general informational purposes. The article, in its original form, was published at https://medium.com/@KendallAlmerico/crunching-numbers-to-predict-equity-crowdfunding-success-for-your-company-078016747cae
