5 Key Learnings on ECF Successes and Failures from the US

Posted on September 9, 2016

What can we learn from the first quarter of US Regulation Crowdfunding?

It’s been three months since Regulation Crowdfunding in the US, and tech news site Venture Beat have done a great piece on what successes and failures in the space so far can tell us.

A key characteristic of equity crowdfunding is that if you don’t raise your funding target before your offer closes, any money committed goes from escrow back to the investors.

So now that we have some campaign data to go on, it’s possible to analyse the differentiating factors between those who succeeded and those who didn’t.

The report, written by Sherwood Neiss, was based on an interview with Marc Snover, CEO and an analyst with Stratifund Inc – a company that rates ECF deals pulled from different platforms using algorithms to generate a score based on team, industry, competition, differentiation and financials.

Just a note, even though article is based on case studies from the US, we think the lessons learned are pretty universal.

So here are five key points we’ve extracted from the article that we think are relevant (and helpful!) for companies trying to raise capital through equity crowdfunding platforms in Malaysia:

1. Keep your business concept simple and easy to understand

If the investor has trouble understanding a product or are confused about the market opportunity, they will be less likely to invest. The article mentioned a company who wanted to create an Ebay for Virtual reality (VR)products, who scored low on Stratifund’s rating system and failed to raise their target capital. A tough sell perhaps, given the early stages of VR product markets. So remember, if the business idea is complex, break down the market opportunity to clear and relatable bite-sized chunks that a layperson will understand.

2. If your investors see people buying it, they will be more likely to invest

If people can see the immediate, practical benefit of a product… in other words, if they see themselves using or buying the product, it’s highly likely they will have a better chance of seeing it succeed in the market. Take one example Venture Beat’s article throws up – a company selling energy efficient fireplaces. A nice idea and great for the planet maybe, but do you see people falling over themselves to buy it?

3. The people running the company matter, credibility sells

The report found that companies who successfully raised their funding targets had leaders with a proven track record – many management teams were already known as entrepreneurs in the same industry space, or had a captive audience who had already bought into the concept.

4. Trust is crucial, be transparent

How forthcoming you are as a company with details of your business plan, and how you plan to achieve your financial projections is up to you, however if this comes at the expense of your business being confusing, it could jeopardise your chances of success. Back up your promises with as much information and data as you can to show your investors you have a workable plan.

5. Different types of success

The article’s interviewee Marc Snover noted that failure isn’t always a bad thing. Stratifund’s attempt at equity crowdfunding failed to reach the target amount. However over the campaign period, its customer traction increased by 300%! Which shows that raising capital is not the only benefit to equity crowdfunding, the learning curve in pitching your business, as well as marketing and exposure during the campaign period are additional benefits that shouldn’t be overlooked!