Background
Last year, I led JustPark through what was until recently the largest ever equity crowdfunding for a tech startup not only in 2015 but (to the best of my knowledge) ever.
After turning away some investments, the crowdfunding round closed out at £3.5M on Crowdcube. The funding round was capped by EU rules which prevented us from raising over EUR 5M without going through the rigamarole and cost of issuing a prospectus. In fact, that barrier now being broken by Crowdcube themselves.
The JustPark raise was a record breaker in terms of investor numbers too. The previous record for the largest number of investors was in the hundreds. We raised money from over 2,900 investors.
Every other week since then, I’ve been contacted by entrepreneurs seeking advice about crowdfunding. “What do you wish someone had told you before you launched?” “Shall I crowdfund or raise from angels?” “How much should I raise?” And so on.
I’ve met or spoken to almost everyone that messaged me. But it’s high time I put down some thoughts that I hope others will find helpful.
ps the lawyer in me says – none of this is to be interpreted as legal advice. Crowdfunding and the related regulation are complex and ever-changing. So get your own advice, folks.
“Plan C”
I’d been thinking about whether crowdfunding could be a good fit for JustPark ever since I was asked to write The Business of Sharing. So when we began to think about our Series A for JustPark, it was an obvious thing to consider.
But it only started out as a Plan B. We can crowdfund, we thought, if we don’t get the offers from the top venture capital firms we were speaking to.
Yet Plan B became Plan C once we got a term sheet from Index Ventures and saw the huge enthusiasm to invest among our users (see Rule 2 below). What was Plan C? A financing round that combined venture capital and crowdfunding and aimed to give us the best of both worlds: the expertise, network and access to follow-on capital of a VC, plus the grassroots evangelism and custom of the crowd.
My 12 Rules
1. Don’t launch too soon
As with any investment round, don’t raise too soon or too much. Especially at early stages, the cost of capital in terms of the large chunk you’ll give away is high. In order to achieve a valuation that is high and credible, you need to show traction on your operational and financial KPIs.
In other words, if your business is little more than an idea, go out there and do whatever you can to get customers and early revenues. That’ll mean hustling and perhaps a few too many meals of beans and toast. But you might be glad down the line if you can negotiate a better valuation on your first fundraise.
2. Test demand
How do you know if your fundraising will pop or crash? One way to help derisk your round is simply to ask your customers. We put together a simple email, explaining what equity crowdfunding is, and then sent interested parties through to a Google Form where they could register interest in a potential round.
Make sure you don’t fall foul of “FSMA”, specifically s. 21. In simple terms, that stops you offering shares in your super high-risk (sorry, this is likely the case even if it feels like a sure thing to you 🙂 company to investors unless they are sufficiently sophisticated or wealthy or approved by an FCA authorised person.
If you get this wrong, you’ll be making what’s called a “financial promotion”. A word of warning – offering shares in a company for sale to the public is a highly regulated activity and there are scary financial and even criminal penalties for those who break the law. As above, get advice if need be.
3. Keep it simple
Raising money – whether venture capital, angel or from the crowd – is, especially at early stages about story telling. Are you all aligned on the 1 sentence vision of your business? How will the world be a better place when your company is at scale? How is this consistent with the all-important founder story?
Finding your company’s most compelling narrative will not only help raise money and close out this crowdfunding round but attract and retain employees and customers.
4. Don’t get distracted by PR
Sorry to break it to you: your crowdfund is not necessarily interesting to people who aren’t employees, friends and family. Crowdfunding is not news.
You might have a particularly novel angle: ours got press due to the involvement of BMW and due to it being the first crowdfunding round to involve a Tier 1 VC firm. But if you don’t you’re better off spending your time engaging specific investors. See 5. below…
5. Pull in pre-pledges before launching
We’re simple instinctual animals who watch and copy. Time and again on all sorts of crowdfunding platforms (including one I’m advising now – Spacehive) it’s been shown that rounds that quickly reach certain thresholds are more likely to close.
Aim to have at the very least 30% of your full raise (and ideally 50% of it) in the bag before going onto the platform and confirm with the crowdfunding platform that it can be shown on the all-important “progress bar”.
The trick is bringing in money at a valuation you’re happy with by showing angels you have the back-up option of the crowd and by showing the crowd that angels have taken the plunge. Crowdfunding is leverage with angels. And the angels are leverage with the crowd.
6. Have a slick video
I hear people whinge about making the video and others lament that it’s crazy people put such weight on a video when it comes to investing. Another way to look at this is as a test of execution and story-telling: if a company (even one with limited funds) does not have the skill and resourcefulness to make a compelling, well-produced video will they really succeed as a startup?
A slick, engaging video is table stakes.
7. Prep your Q&A and updates – before you go live
Certain questions are predictable. Off the top of my head:
- How in the name of **** can you justify that valuation?
- You say this is a global opportunity, but how and when will you launch internationally?
- How will you spend my money?
- When will you become profitable and/or next raise again?
Have these stored away on a Google Doc so that the moment you get asked them you’re not panicking to write your responses. Then it’s little more than copy and paste.
Equally, get all your milestone announcements prepped – such as when you’re 50% funded. So think about the right strategic moments to update the crowd throughout your campaign and plan your copy and creative ahead.
8. Write full and beautiful answers
Don’t panic. We tried to stay calm despite the pressure. When you’re rushed off your feet and don’t have time to respond with the fullness you’d like right away, put down a placeholder on the forum that apologises for the delay and explains how busy you are.
By taking my time to write accurate and well-written answers, I was able to win over potential investors. Also, the kind of investors you want in your crowd will be realistic about the demands they can put on a CEO’s time.
Prep the best you can, but you can’t predict every question. And some will require real thought to respond to.
9. Meet your actual and potential investors
Asking people to invest in your company just on the basis of what they see online… that’s a big ask. You can build trust by meeting them in person and answering their questions and concerns.
You can also put on an investor evening (we did 2 at JustPark HQ). Even if people can’t attend in person, it’s great signalling about your openness as a company and a management team.
10. Vary your disclosure levels – but always full and fair
Inevitably, you won’t want to disclose everything about your business – once it’s out, it’s out. And you can be sure that your competitors will be crawling all over your campaign for intelligence.
But once you launch you might want to sign NDAs and disclose more to investors who you trust. Perhaps these are investors looking to invest larger sums or those with whom there is a personal connection.
11. Be human
I remember Anthony, the JustPark founder, suggesting early that I could be a little less formal in my initial responses. I’m sure he was right. People want to get to know you as an entrepreneur rather than invest in someone they don’t relate to or understand as a human.
Be professional at all times, after all these people are entrusting you with their hard-earned money. But it’s OK to let your personality shine through in your answers and video.
12. Be honest
Has a competitor just raised $10M? Don’t pretend they don’t exist. Rather, explain how you’re differentiated and will win or why there’s space for you both.
Are parts of your business plan unproven? That’s inevitable and don’t pretend you have every wrinkle worked out.
If there’s something that you don’t want to come up, chances are it will. So pre-empt it on the pitch. If it’s left to a potential investor to flag the lack of candour in your pitch or in one of your forum responses, don’t expect the crowd to be forgiving.
Be honest with the crowd about the challenges you face because every young business has them. In the process, you’ll gain the crowd’s respect.
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Thanks for reading and let’s keep the conversation going! Follow me at @AlexStephany
Alex Stephany 
Great post, Alex – this is really useful information.