Setting the objective for an equity crowdfunding campaign… perhaps the second most common question from my clients after how do I set a company valuation?
The two questions are really related, so if you have any doubts, do read my article about the topic.
Here are my three principles on how to set your objective, and some rules of thumb.
Principle 1: willing buyer, willing seller
So, first of all, you need to think about how much you need to execute your business plan. This, in combination with a reasonable company valuation, will determine how much equity you need to release.
Do set some boundaries: don’t give away too much of your company… or too little! There is the general rule of thumb to give between 10% and 20% in early funding rounds. Enough for the investors to get a good deal but not so much that dilutes the founders too much, as this could prevent them from raising money at later rounds.
Principle 2: be realistic
As I discussed in my article on how to build momentum for an equity crowdfunding campaign, the community on the platform is not going to lead the investment round. They will invest alongside your crowd.
So, the key metric for your pre-campaign will be how much investment you’ve secured. My recommendation here would be at least 50% of your objective – ideally from 50 or more investors to give also a sense of being validated by the crowd.
With this in mind, you have a first input to determine your campaign objective.
Principle 3: generate some healthy hype
Secondly, behavioural science shows how we, as humans, like to bet on winning projects with lots of support. So the trick here is to reach your objective as soon as possible, with as many people as possible and then push for overfunding.
To achieve this, my recommendation to my clients is always to go as low as possible with your objective… but not lower. We’ll answer the question: Are there any aspects of your business plan that are not strictly necessary to succeed?
But on the other side it’s important to ensure that we have enough money for, ideally 12 to 18 months.
In this way, we set a minimum objective, that will be the public one on the crowdfunding platform, and an ideal (internal) objective. You can even think of a third objective that reflects the maximum equity that you’re ready to release. The ideal and the maximum could be the same figure.
Then the trick is to get to your ‘minimum’ objective as soon as possible (generating some healthy hype) and push for a figure that will enable you to execute all of the bells and whistles of your business plan.
Some rules of thumb
The minimum raise on the most popular platforms is 50k. But sometimes a low objective might look as not enough to do anything meaningful. The sweet spot for pre-series A companies seems to be an objective between £250k to £500k. At the moment of writing, this is perceived as reasonable and with a good chance of success. You need to have massive support from your community (or a serious cornerstone investment) to justify an objective over £750k.
Putting these principles together and setting the objective for your equity crowdfunding round
So, summarising, set the lowest, realistic objective that you can afford and aim to overfund to reach your ideal target, thinking about the current norms (my rules of thumbs discussed above) in the crowdfunding platforms. Think about giving between 10 and 20% equity in an early funding round.
If you need help setting up your objective or with any other aspects of your equity crowdfunding campaign don’t hesitate to contact me.