Fundraising when you own a small business can be a difficult task. Owners often spend their time running the business and trying to keep the doors open day after day. When they do go to look for financing, they don’t realize how time-consuming looking for money can be. If you have a business that grosses less than $1 million, investors can be scarce and hard-to-find. I’ve often heard that it’s easier to raise $5 million than it is to raise $500,000.
Most of the time, entrepreneurs end up relying on friends and family for investment, or they end up hiring someone to help them secure financing.
Crowdfunding has been around for a few years now to help smaller businesses raise capital. There are a number of loan-based crowdfunding sites available such as Wefundme. I was recently at the American Distillers Institute convention and Slava, the CEO from IndieGoGo, gave a speech about their equity crowdfunding program.
With equity crowdfunding, investors get a financial stake in the company they’re supporting. Owners can decide to offer company shares in exchange for investment or offer a revenue share to investors or even raise capital via debt offering.
This is different than sites like Wefundme because they’re going through highly regulated and verified portals. Companies that have raised capital through this Portland, have gone on to raise more, and they do work with the SBA. The sweet spot so far seems to be newer companies who have only been around for 6 to 12 months with less than $1 million in revenue. However, I just sent Indiegogo referrals for companies that have been in business for several years, and they seemed interested in working with them.
Republic Restoratives is a distillery in Washington DC that raised $300,000 with the terms stating that investors will be paid back 10% of the company’s gross revenue up to repayment of 1.5 X their investment. The hope is to repay in two years, but there is no length to the term. Pia from Republic Restoratives also mentioned in her speech that the funding process generated 600 “champions” for her company, and these “champions” were almost as valuable as the funding itself. Through social media and other avenues her new investors have been promoting Republic Restorative like the business is their own, which in some ways it is.
I am excited to see there is an accredited portal working with accredited investors who earn more than $200,000 a year or have $1 million in net worth. I can see some businesses wanting to do shares, and I could see others wanting to do revenue sharing.
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