How to Promote a Regulation A Equity Crowdfunding Round
Alex Tynion from SeedInvest and I sat down recently to talk through some of the things that we’ve learned from helping the first few companies who have “tested the waters” under the new equity crowdfunding rules. Regulation A is an equity crowdfunding rule that allows private companies to raise money from the general public. So far, we have helped three companies on SeedInvest to reach over $10M in indicated interest from over 2,000 people each.
Equity Crowdfunding is the Ultimate Customer Loyalty Program
Alexandra Tynion: What do companies need to know about marketing a Regulation A capital raising to their customers?
Peter Thomson: For me, Regulation A and the process of raising capital online is really exciting. The most exciting thing about equity crowdfunding is the ability for a company to turn their customers into investors. Companies that are customer centered and really care about their users seem to love the idea of deepening their relationship with their customers by allowing them to invest.
Owning shares in a company is the ultimate customer loyalty program. Companies that put a high priority on building long-term customer relationships, and a high priority on word-of-mouth, want to build long-term customer relationships. Allowing their customers to become investors deepens the customer’s relationship with the brand.
For Regulation A, we look for companies that have a large customer base, a straightforward consumer-facing business model, and an easy to understand technology base. There a number of other things that we look for in a company that will do well with this type of capital raising (with both accredited and non-accredited investors), but the most important thing that I personally look for is companies that are customer-centered, and in particular companies that thrive on word-of-mouth.
If you have good word-of-mouth, then it means that people are talking about your company, it means that they like your products, and that they like your products enough to tell other people about them. In turn, that probably means that some of those customers like your company enough to actually want to own a part of it. They may want to own a part of what you are building, to share in your success, and to invest their own money into being part of it.
I think that this type of capital raising tends to suit companies where users are highly engaged with the product itself. If it’s something that you use every day, then you’re more likely to have a relationship with the product and to feel like you have a relationship with the company. Good examples include clothing and food. Products that go in or on your body, or that you’re in constant physical contact with, are very intimate. Those are very personal things, things that you wear, things that you carry with you every day. Those tend to be the sorts of products and brands that you feel strongly about.
Imagine someone’s wristwatch, it’s a key part of their identity. And for some, a key part of how they communicate their identity to other people. Someone’s phone is in constant use every day. These are the sorts of products that we tend to form deep relationships with. I think those can make for very strong brand relationships, and companies that care about nurturing these types of relationships can build fanatically loyal customer bases. Those are the sorts of companies that I think will do very well in raising money online from their customers.
Think of Equity Crowfunding like a Product Launch
Alexandra Tynion: How should companies approach the campaign and put together a plan to maximize the potential opportunity that a Reg A round presents?
Peter Thomson: We tell companies to think about this whole process in the same way that you would think about a product launch.
Think about whatever you would do in your business to do a good product launch, and those are the same things that you will want to do for an online capital raising.
- In your own business, if you would launch a new product by hosting a glitzy party and inviting lots of journalists along, then that’s the thing that you should do to launch your capital raise.
- If in your business, you would launch a new product by creating a funny video that you would push out through social media influencers, then that’s the way that you should raise capital.
There are also a couple of tricks that are common to every company that is successful in raising money from the crowd. We’ve found that, no matter what your company’s strengths and weaknesses are, email is probably the most important thing in terms of moving the needle. When people receive an email, it’s in their inbox and they can take immediate action on it. We’ve consistently found that email is the most powerful way of reaching out to your users.
If you’re launching a new business, a new product line or an equity crowdfunding campaign, there are three main phases:
The first phase of the launch is reaching out to your direct connections. This phase is really about relationships. The direct phase includes sending an email directly to your most important customers talking about the campaign. You can segment the message to different types of users so thtat they recieve a customized message. You may also want to run events with customers and influencers that you’re already connected with.
The social phase is about building and maintaining momentum. This phase is more about indirect connections, so the focus is on social media and online channels. Best practice these days is for social media engagement to be content-led, so it’s going to be photos on Instagram, YouTube videos, and company blog posts.
This phase is all about creating excitement around the campaign and explaining to affinity groups or communities of interest why they would want to be part of what you are building and therefore why they should invest their own cash into your company.
Also, it’s about social posting and reminding people that the campaign is on and that you’re making progress. The sort of people that are reached during the second wave are going to be most influenced by social proof. They love to see things like “we’ve reached X-million dollars” or “we’ve reached X-thousand people”. This phase is really about momentum and social proof.
Then there’s the third and final phase that comes towards the close of the campaign. This is when we start to activate people’s fear of missing out. It’s also the largest phase in terms of scale because you’ve built up so much momentum from your direct promotion to early adopters, and from the social promotion to create a groundswell of people who are interested in your product and your company. The third phase is where you actually push your campaign out to the public in a big way.
If you think of the six degrees of separation, we’ve gone one degree in phase one, two degrees in phase two, and then beyond that, phase three is basically anyone else.
The people that you reach during this phase will be hearing about your business for the first time as a result of the fundraising campaign. That’s a different type of lead, and they need to hear some slightly different things from the previous audiences. These new people need to hear:
- About the backstory for business, which is similar to the message in the first phase.
- They need to hear about the momentum and the excitement about the round, just like the second phase.
- And they also need to hear about what the product is and why is this an exciting industry.
You need to tell them the whole story to help them understand why they would want to invest in your company.
This final phase is also where PR and mass-scale platforms, like Facebook advertising, do very well. You can push Facebook ads to new demographics, you can use paid video promotions to amplify your efforts from phase two. This final phase is the stage that’s most like launching a new consumer product.
By the time you get to this phase, your message needs to be super simplified. You need to somehow explain to people what the product is, what the company is and how they can invest in it. That’s a lot to try and convey in one advertisement or one press release.
You can deliver your message in a couple of separate steps. You don’t have to try and address all of the content in just one step. What you can do is just get the beginning of the idea in front of people, or get what we call the hook in front of people. If you can figure out what the hook that sparks people’s interest, then you can let the funding platform do most of the work in terms of showing momentum and telling a story about the business.
Why raise capital from your customers?
Alexandra Tynion: It seems like a lot of work, why would a company want to take this on if they can just raise the money from a single venture capital investor?
Peter Thomson: There’s a couple reasons to raise investment capital from your customers. It’s completely transformative for a business to go from operating in a closed bubble (where they just have one or two investors), to suddenly having an army of thousands of people who literally have a vested interest in the success of the company.
It takes time to find, create, and manage a community of investors, but there is a game-changing level of passion and excitement that can come from having a highly-engaged audience who are absolutely dedicated to the success of your business.
Research into public companies has found that owning shares makes a material difference to how loyal people are to a brand. And we’re starting to see the same thing with private companies. Over night you can suddenly turn on thousands of people who really want to see your company succeed. They will give you feedback and they will help the company out by spreading the word. That’s where we come back to this idea of customer share ownership as the ultimate customer loyalty program.
If you are not that into customer loyalty, or maybe your business model is based on one-off transactions, or word-of-mouth doesn’t really matter to your company, then maybe this process might not be for you. But for companies where loyalty, word-of-mouth and reputation matters, then having an opportunity for those passionate, raving fans to become investors in the business is hugely exciting.
Secondly, it might seem like a lot of work to promote an equity crowdfunding campaign, but most of the steps are things that you probably know in your heart of hearts that you should have be doing anyway. You already know you should be doing behind-the-scenes videos with your CEO talking about the company, or videos about your manufacturing processes, or redoing your brand and getting your collateral up-to-date, or getting the word out to the press. Those are all the things you probably should be doing to build the reputation of your business anyway.
If you’re good at running your company and marketing your company, then:
- You should be doing promoting your company anyway so it’s not a duplicated effort to also include messaging about raising capital, and
- You should be pretty good at telling your story because that’s what you’re already doing every day.
By doing all of this promotion, you’re also creating a spike of general interest in your company.
As much as it looks like it’s hard work, the amount of work that goes into raising money from institutional investors can be just as significant. At SeedInvest, we love the incredible strategic value that institutional investors can add. But if you spend all your time just focused on raising money from large investors, it can become a distraction from the business.
Traditional fundraising also tends to fall almost entirely on the CEO. Whereas raising investment from your customers is something that the whole team can help with.
How to Prepare for an Equity Crowdfunding Round
Alexandra Tynion: What advice would you give to companies that are too small for Regulation A?
Peter Thomson: If I could give a single piece of advice to myself going back ten years, I would say “build an email list”. For the longest time I was allergic to email marketing. Personally I hate receiving email spam, and I have unsubscribed from every email newsletter that I can. What I have learned over time is that there is no better channel than email to directly communicate a special message, such as a one-off announcement.
I think what really changed my attitude to email was that I subscribed to a few newsletters in the startup community. I think that over time the way that the technology industry does email marketing has improved. These days email marketing is more informative and educational. Good email marketing helpful so that it’s not just like “here’s another product”, spam, spam.
The advanced version would be to start building a CRM. Your CRM could be as basic as an Excel spreadsheet of people who have bought your product. But in today’s age, if you are raising a seed round and thinking in the future you might want to raise capital from your customers then it would benefit you to really think through how to integrate tools like Intercom, MailChimp and SalesForce to build a living CRM.
Think about how to keep track of your most active customers, (either dollar value or frequency of transactions), and how to keep track of word-of-mouth. You need to capture this evolving customer information somewhere so that you can keep track of your relationships over time so that you can actively nurture your most important customers. The people that you have built these relationships with over time are the ones who will be the most excited about investing in the company in the future.
Equity Crowdfunding Will Fundamentally Change Our Relationship with Brands
Alexandra Tynion: Ten years from now, how do you see Reg A transforming the relationships that brands have with their customers?
Peter Thomson: I think that by then we’ll see some of the companies that have raised using Reg A go on to do their full blown IPOs, and I think that will be very exciting. The press are certainly looking out for what the returns will be like, and whether the general public can make money off this type of investing.
But for me, the most exciting thing that will have changed in ten year’s time is the sense of relationship that people will have with the brands, products and the companies that they have invested in. Right now we all have one or two products in our lives that we love. But we only really have a relationship with the product itself, we don’t really have much of a relationship with the company behind the product.
For example, Apple is a publicly traded company, and I could buy Apple shares because I love their products, but they are so large that I don’t feel that if I bought shares in Apple, that me then going out and buying an iPhone would make any real difference to the company or to their share price. By contrast, buying products and telling people about a smaller business that I had invested in could make a real difference to their success.
As society shifts towards more customer-owned companies, there will be more businesses creating new products that people love and you as a consumer will be able to have a relationship with those companies and actually own shares in them. This will start to shift the relationship that we have as consumers with the companies that make the products in our lives.
I think that we will see some small things shift because those companies will also become accountable for maintaining their investor relationships and customer loyalty over time.
I think that equity crowdfunding will make companies more aware of the importance of brand loyalty, it will make companies more aware of the importance of word-of-mouth, and it will force brands to hold themselves to a higher standard. This will be good for the companies themselves, but I think it will be amazing for us as consumers.
Consumer advocacy from a third-party advocate or a public review site is great, but the ultimate in consumer advocacy is for customers to be able to own shares in the company, because then the customer and the company have a shared interest in the success of everything that the company creates.