Investment crowdfunding as a fundraising alternative to banks and venture funds: how to raise capital with STO￼￼
Raising money for the business is one of the most difficult milestones companies are trying to reach. In this article, you will learn how to fundraise without sacrificing your vision or a lion’s share of your equity and income.
The problem with banks and venture capitalists
Banks and venture funds are notorious for trapping company owners in bad terms. Tokenized equity crowdfunding helps you to collect capital on cheaper terms, whether you’re a small or large business. In this article, you’ll find out about the issue with banks and investment capital, how crowdfunding operates, whether it’s a better solution to raise capital, and how to start your crowdfunding initiative.
The biggest disadvantage of finding a single large investor or a small group of large investors is that they have significant negotiating power. What this means is that if the company takes money from a single investor, that investor decides the terms of the deal, such as the interest rate charged by the bank or the equity stake you would give, and the interest rate or equity stake ends up being very high. This is a challenge that affects all companies, not just entrepreneurs and small businesses. In reality, in our consultancy practice, there are businesses from the farming or manufacturing fields that are unable to fund their projects because the interest rates charged by banks are intolerable to them.
Venture funds aren’t a better solution since what they want from you as a business owner is not simply to be profitable but to kick into the level of the next Facebook or Amazon, and sell at a premium. That is, if you are unable to work on such terms, your business won’t be considered. Furthermore, it is easier for them to scale your company than let you remain a simple-to-run and profitable business. Thus, venture capital is not the best solution. If you want to learn more about banking and venture financing, watch the video on the cost of capital, which explores far more deeply and technically into the topic.
Alternative of investment crowdfunding
Crowdfunding is not the same as a Kickstarter campaign or even Indiegogo-style crowdfunding where people contribute money in return for perks or bonuses. Investment crowdfunding is about offering people real securities in return for their capital, such as debt, stock, or a revenue share in your business. The distinction is that instead of turning to one or two major investors, there are hundreds or even thousands of small and large investors all around the world at your disposal.
Benefits of investment crowdfunding
This form of fundraising has three advantages.
1. The first advantage is that you can theoretically raise more money by venture crowdfunding and reach out to millions and billions of individuals, all of whom are potential clients, rather than a limited group of banks and funds. By default, your clients in total have more money than large investors. To see the difference just think about the fact that you bring profit to your large investors because you earn money from your customers, and that revenue is significantly higher than the amount you need to repay.
2. The second advantage is the previously stated bargaining power. It’s a problem if a large million-dollar investor refuses to invest in your business. However, if a small individual investor declines to send you fifty dollars, let them go; sums like this can be substituted by other people very easily. As a result, there is no one else but you dictating the terms of the investment, so you can get higher interest rates or better equity stake that you are giving away, which is a significant advantage to you.
3. The third benefit, which is the most powerful, is getting a community of hundreds and thousands of people supporting what you’re doing. Banks are never truly interested in growing your business, funds may help this process from time to time, but their goals and principles may drastically differ from yours. Having a big circle of like-minded people will help to run community oriented business by growing your brand, providing services, building connections, or even getting new clients. This is similar to having thousands of advisers and part-time employees nurturing your business, which is an invaluable asset one can never get from banks and venture capital funds.
How do you handle thousands of investors?
You may get scared by the issue of managing such a vast number of investors and the obligation to pay dividends to them. The most frequently asked questions usually are about the process of accepting the investments and whether it’s worth turning to crowdfunding platforms, which require 5-7% of your equity. There are a few companies developing next-generation technology for investment crowdfunding, such as Stobox, that use blockchain for high-level protection, allowing you to not only collect funds but also pay dividends, conduct voting, and keep in contact with your investors in a fully digital and convenient manner. Security token offering helps to receive investments from all over the world, allowing you to perform all of the required legal enforcement checks as well as verify the identity of your customers. You will also be able to handle anything related to your crowdfunding investment partnerships with one convenient technology.
What is a security token offering?
Security token offering is a form of investment crowdfunding driven by emerging technologies. Stobox has a YouTube channel that provides free information on how to execute a security token sale, how security tokens are different from utility tokens, regulatory complexities, marketing, and a variety of organizational nuances — in short, all you need to know to run your investment crowdfunding campaign.
What businesses does it work for?
Another question you may have at this stage is whether or not your company is appropriate for a security token sale. While it is accurate that crowd financing is generally associated with startups, we have a diverse range of customers from various industries. For example, we have a 3 billion dollar luxury real estate developer and a firm that builds agriculture utilities. We’ve seen our competitors do an STO for coffee shop chains, and we’ve seen STO for gaming startups. This proves that STO as a form of fundraising can be appropriate for a variety of companies.
The most important criteria are that you have a working company with sales and clients and that you have a tried and true business plan for attracting investors. We have a video called “Should you do a security token offering as an early stage startup?” that goes into a lot more detail about the feasibility of a security token offering.
How can you do it?
The following are the three steps you must take to start your crowdfunding campaign:
1) Preparing the legal infrastructure for an offering. You’ll need an incorporated firm with an investment agreement that investors will sign as part of the investment process. When you’re making a more extensive and complicated offering, you’ll probably need some extra paperwork, such as a private placement memorandum. There will still be an obligation to contact your country’s regulators or even register your offering at the regulators of your country. For security token offerings and regulatory nuances, we have four videos on choosing jurisdictions. Stobox professionals give advice on fundraising based on the research conducted on over 20+ jurisdictions, which makes our legal and digital assets consulting more valuable than any local legal firm.
2) The technology setup. This entails releasing your securities such as shares or debt in the form of a token and developing investing websites for your clients to use. This is covered by a range of technology companies, like ourselves, who will assist you with setting up this crowdfunding portal. You can learn more about the given issue in our video.
3) Marketing of the offering. The way you sell depends on where you find yourself in the process and what is there to achieve. There are at least two varieties. One method is to avoid doing separate investment marketing and instead concentrate on marketing of the main business and main product, with investment as an additional option that you can offer your customers who would like to be your shareholders. The second choice is to start a separate ad strategy to support your business as an investment opportunity. We have videos on our channel about identifying your target audience, reaching investors, and three most common mistakes when doing an STO marketing campaign.