Equity crowdfunding: risks and mistakes not to make

Equity crowdfunding, like all new tools facilitated by the web, can evoke fears regarding its risks in entrepreneurs unfamiliar with it. Fully understanding this capital-raising method and learning in advance the mistakes not to make is the strategy of the informed entrepreneur to minimize the risks, which exist as in any other business activity.

Here we will elaborate on the main risks of equity crowdfunding and the mistakes not to make to avoid them.

Equity crowdfunding: risks

Equity crowdfunding should be viewed as one of many activities that a company undertakes to further its business and, as such, has risks, many of which overlap with those experienced through all other activities.

Let's look at the main ones:

• loss of time and resources. The most obvious risk is the one a company takes for whatever activity it decides to do. Equity crowdfunding, we never tire of repeating, is not a hobby or a side activity that can be done single-handedly; rather, it requires specifically dedicated time and resources, both human and financial. Should the campaign fail, it will be time and resources lost with no economic or other return. But even in the case of a successful campaign, if time and resources are not properly managed, damage can be done in other areas of the company.
• Non-compliance with regulations. Equity crowdfunding is a complex financial instrument with specific regulations and mandatory bureaucratic requirements, which in case of noncompliance result in financial and/or legal penalties.
• Disclosure of sensitive information. Doing an equity crowdfunding campaign means exposing yourself and presenting yourself transparently to potential investors, and this may also require sharing sensitive company information that competitors or other parties could exploit.
• Reputational risk. Exposure in any context always implies a certain degree of the risk of "making a bad impression." If the equity crowdfunding campaign fails, or even if communication is not handled properly and results in a blunder, the company's reputation is affected, leading to a loss of credibility and attractiveness to varying degrees.
• Misalignment with investor expectations. Managing investors after the campaign is a delicate responsibility, which if not taken seriously enough can do a lot of damage even when the game seems closed. If communications are not consistent and transparent, it breeds distrust in investors, creating fragility and fueling the reputational damage mentioned above.

To simplify it would be enough to say that to minimize these risks it is necessary and sufficient to "get it right," but we prefer to get to the bottom of the issue and explain what this means in concrete terms and what mistakes it is crucial to avoid in order to bring a crowdfunding campaign to success.

Thinking the platform will bring investors

The absolute biggest mistake people make when approaching equity crowdfunding is thinking that putting a project on a platform will automatically bring in investors, from the platform's subscriber base. But the platform is just a megaphone: if the company does not speak, the megaphone has nothing to amplify.

The company must communicate the existence of the campaign, sponsor it and bring in the first and largest investors, then the platform can generate a trailing effect from those. If the base is missing, the campaign counter on the portal remains woefully stagnant, with a negative reputational effect and very high chances of campaign failure.

The investors to go after, as we explained in a previous article, are clients and potential clients. These form the indispensable hard core; only after reaching them you can go after business angels and other institutional investors.

Not having a structured marketing strategy

Conceiving equity crowdfunding as a financial transaction is a serious mistake that leads to underestimating the importance of marketing strategy. Equity crowdfunding, in fact, is first and foremost a marketing tool, aimed at selling the company itself in the form of its equity shares.

Simply communicating your campaign on your social media with a few generic posts is not a marketing strategy; it is just a waste of time. Accurately identifying the target audience, planning ad hoc communication on all appropriate channels, determining what to communicate, to whom to communicate it and when, creating a database in which to manage contacts, cultivating relationships, structuring a path to accompany the investment: this (and more) constitutes a marketing strategy.

It is a delicate phase, in which one must build transparent and challenging relationships with investors, be careful not to lose any valuable contacts along the way and to make misleading promises, and build a consistent and solid image of the company.

Skipping the precrowd phase

A fundamental element of the marketing strategy we have just discussed is the precrowd phase. A paragraph is not enough to explain its importance, and in fact we have devoted a specific article to it.

Campaign preparation includes indispensable activities such as sponsorship, positioning, investor research, gathering expressions of interest, planning and testing all the actions that will be carried out in the campaign. Only in this way is it possible to arrive with a solid structure to the campaign, already have a base of support, and avoid running into a firm counter in the first few days, which are the most important ones, and wasting resources on a mission impossible as it is to bring a campaign to success starting from scratch on the opening day online.

During precrowd there is no active counter, so the exposure is far less and it is time to fine-tune winning strategies.

Confusing marketing and sales

Between seeing a post sponsoring an equity crowdfunding campaign and investing in that campaign there is a considerable jump: the marketing part also needs a sales part, otherwise a lot of resources are wasted on marketing without a concrete result. The marketing part prequalifies contacts, but it is then the role of the sales department to lead those contacts to finalize the investment, otherwise the risk of them falling through the cracks is high.

Marketing and sales should be integrated with appropriate CRM (customer relationship management) tools, but not overlapping or replacing one another.

Underestimating bureaucratic compliance

Bureaucracy is boring, you know, but it is also very dangerous when it is taken lightly. Before you can start doing anything related to an equity crowdfunding campaign, it is essential to catch up on paperwork to avoid potentially compromising penalties.

Solicitation of public savings is a crime in Italy: before publishing an offer document drawn up with a notary public containing all the specifications and conditions of the proposed investment, it is not possible to sponsor the campaign, even at the precrowd stage.

Another key document is the capital increase, which goes to indicate the increase in share capital that is the goal of the campaign. It is not only a numerical value, but also a time value: doing a capital increase that is at least 2 years long is a winning strategy because it allows you to do multiple campaigns without having to go back to a notary (saving time and money) or to lengthen the current campaign, or even to pause it and then resume it in case of problems.

Considering the campaign as a marginal activity

Many companies make the mistake of viewing the equity crowdfunding campaign as a marginal activity, disconnected from the rest of the company's activities, incidental, and as such not deserving of dedicated time, people, and budget. Nothing could be more wrong: an equity crowdfunding campaign is a separate line of business in the form of a marketing campaign, so it requires the three elements we have just listed. Failure to provide sufficient time, resources and money generates a botched campaign with a high probability of failure.

Not making post-campaign communication with the shareholders

Thinking that once a crowdfunding campaign has been successfully closed, that chapter can be sealed and forgotten is a costly mistake. Investors are now partners, so they expect not only the promises that convinced them to invest to be kept but also to know how their money will be utilized!

It is not only out of loyalty that you have to keep your relationship with investors alive, but also because they are the potential supporters of a future second (third, fourth, etc.) crowdfunding campaign and are first and foremost customers. They are an asset that you have to take with you forever. If you neglect them, you lose them, resulting in reputational and economic damage.

How to avoid making mistakes in equity crowdfunding?

The answer is simple: put your mind to it. Devote the right amount of time to this activity, especially if it is completely new, study the data, read books on the subject, inquire online, gather first-hand experience. If this is not enough, because it is challenging to do everything yourself, rely on professionals rather than making haphazard attempts. Whether it is a consulting specific or mentoring all along the way, support from those with practical knowledge from experience in the field can really make a difference.