3 Supreme tactics to dramatically reduce the cost of an equity crowdfunding campaign.

3 Supreme tactics to dramatically reduce the cost of an equity crowdfunding campaign.

Crowdfunding is supposed to be a way to raise early-stage capital to get your business going at the early stages. However, it turns out to be quite an expensive endeavor. Due to increasing competition of crowdfunding platforms and campaigns, the cost of a full-scale crowdfunding campaign can reach hundreds of thousands of dollars.

In this article, you can find 3 tactics that can reduce the cost of a crowdfunding campaign.

If you are not sure whether to fundraise and are interested in how it can be used for startups, real estate, and private equity, check other articles in our blog.

3 strategies to reduce upfront investment for crowdfunding

Raise the development capital

The biggest component of the cost of crowdfunding is marketing. On average, you spend from 2 to 10 percent of the expected proceeds on marketing. For example, if you are going to fundraise 3 million you need to spend from 60 to 300 thousand dollars on the marketing alone, which is quite a significant upfront investment.

The beauty of such a campaign is that you actually don’t need all of that money upfront. You only need some initial upfront capital, and then you can cover the cost of marketing from the ongoing proceeds. For example, you can invest initially 15k to raise 150k, and then spend those 150k to collect 1.5 million. In such a case, your goal is to generate from the business or fundraise from friends and family the initial “development capital”, which is the money you need to put into tech, legal, and marketing to set up your campaign.

The practice used by private equity funds

Raising the development capital is especially common among private equity funds. Because they are so heavily regulated they have a huge burn rate that can reach millions of dollars per year on legal compliance. And they need to pay all these expenses even before they raise any money and get some fees they can use for operations. This is why before setting up the fund they obtain several million dollars in the development capital to support the fund while they are raising money for the main fund, which may be already hundreds of millions of dollars.

You may ask whether your initial investors will like the fact that you are spending their money not on developing your business but to raise more capital. There are two reasons why this is fine, which you should use in communication with people who are eager to invest in your business:

  1. Marketing of your crowdfunding campaign is also marketing of your brand and your product, so this is money put to the right use.
  2. It is a common practice to include the cost of the campaign in the list of expenses in your financial plan. If you still deliver satisfactory profits, your investors should benefit from it.

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How to reduce the risk for investors and simplify investor relations

It is true that early investors take upon themselves higher risks and therefore it becomes more difficult to attract them. In order to reduce the risk and make investing in your business more appealing, a great practice would be introducing early-bird discounts.

An early-bird discount means that you sell shares at a discounted price to early holders of your stocks. The discount may be more than 50% depending on how early they come and how strongly you need money. These discounts are a very powerful way to get early stockholders on board because it provides them with a nearly instant profit: if today I purchase your share for 50 cents, and in a few weeks someone gets it for 75 cents, I make 50% profit in a few weeks, which is a super-exciting deal. If you combine it with the right to be the first to exit the investment, the deal becomes even more lucrative.

You need early investors not only to get the capital to fuel your marketing campaign but also to create social proof. People are social creatures, we prefer following the crowd to thinking on our own. This means that getting first supporters is harder because it seems like the crowd is not putting money in you. To overcome this social factor you need to turn on greed by offering great discounts. After you get early investors, the social factor starts working for you, and things become easier.

How you can benefit from trading on specialized marketplaces while remaining a private company

One of the biggest fears holding people back from investing in crowdfunding is the risk of never getting the returns. This risk is caused not only by your potential failure but also by the fact that the return on investment in private companies is not that easy because it is impossible to sell your shares.

This is where tokenization comes in. This is a powerful innovative technology that allows making your shares tradable at early stages, long before you go to the IPO. Tokenization transforms your shares into the form of blockchain tokens, which then can be traded on a specialized marketplace for tokens backed by securities. This deals with the principal problem people have with investing and allows you to stand out from the “crowd” of other crowdfunding campaigns.

Stobox offers a set of technology tools as well as industry and legal expertise in the fields of fintech and digital securities. If you are interested in applying tokenization to your business and learning more about security token offering services, schedule a free consultation with our team here.

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