U.S. startups can now raise money from non-accredited investors through online platforms. But just because this type of fundraising is possible doesn’t mean you should use it.
Non-accredited investor equity crowdfunding makes sense for certain types of startups, but not for others.
Here are five types of start-ups that should pass on equity crowdfunding to non-accredited investors:
1. Businesses that Need to Raise a Lot of Money
Early estimates suggest that the average equity crowdfunding investment by a non-accredited investor is around $1,000. That’s way too small for companies that need to raise several million dollars in capital.
Simple division tells us that a company that needs to raise $7 million would need to take on 7,000 non-accredited investors to meet its funding demands. That is far too many shareholders for a private company to manage effectively.
2. Businesses Needing Multiple Rounds of Financing
Ventures that naturally develop in a staged fashion — like bio-medical companies that need to first prove out their technology, then go through multiple phases of FDA approval, and finally manufacture and market a product — are going to have problems raising money through equity crowdfunding.
Non-accredited investors will likely lack the financial wherewithal to support additional, larger, capital raises. Moreover, when a company raises money through multiple investment rounds, it issues new shares, which dilute down the holdings of investors who do not put in additional funds.
Because few non-accredited investors understand the math of dilution, convincing them to make an additional investment that involves it will likely be difficult.
3. Very Early Stage Businesses
To convince investors to put money into new businesses, entrepreneurs need to persuade them of the future value of the ventures. That is very difficult when the investors have no information about product characteristics, customer adoption patterns, past financial performance or any of the more tangible dimensions on which investors evaluate companies.
Few non-accredited investors have the experience to make these kinds of evaluations, which makes convincing them to make those investments difficult.
4. Businesses that are Difficult to Describe in an Online Format
Because of the small size of non-accredited equity crowdfunding investments, pitching these investors in person is not cost effective. Entrepreneurs will need to pitch their ventures online. Attracting investors online will be easier for ventures that can be understood from viewing a video or seeing a description on a website than for ventures that require a discussion to comprehend.
5. Business-to-Business Ventures
Because people tend to invest in companies they understand, the pool of potential B2B investors on equity crowdfunding platforms will be small.
Unless the crowdfunding site is very large, and tends to attract people from the industry in which a given venture operates, entrepreneurs with B2B ventures will find it tough to attract enough investors to fill their funding needs through non-accredited investor equity crowdfunding.
Crowded Street Photo via Shutterstock
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