In a difficult funding environment, business owners are finding alternative ways to raise capital, including directly from their customers.
With global investment funding down 44 percent from last year, according to data from Crunchbase, business owners may want to consider offering equity to their customers in exchange for capital.
Crowdfunding is not a new funding alternative, of course, but it’s become more similar to mainstream funding in the past few years. That’s due in large part to regulatory changes created by the Jobs Act, which began allowing anyone–not just accredited investors–to purchase equity in companies starting in May of 2016.
When the act went into effect, however, exchanging equity for money wasn’t as simple a process as it sounds. Each state has its own securities regulator, so if a company is selling securities, it must comply with both federal regulations and individual state securities laws, the latter of which can vary widely from state to state.
“In 2017, when we were raising our fund, there were limited options for commercial services to help us take advantage of the Jobs Act changes, so being entrepreneurial we figured out how to do it ourselves,” says Lena Phoenix, who co-founded Broomfield, Colorado-based Xero Shoes with her husband, Steven Sashen. The founders of Xero, which sells lightweight performance recreation footwear (a seven-time Inc. 5000 honoree), say they were one of the first companies to make it work, having built a cult-like following of loyal customers since 2009.
They built a custom website where investors could get 25 shares for $100. Customers who invested were offered additional discounts, access to new product launches, and VIP customer support. To get the word out, the founders sent six email marketing campaigns to their list of 30,000 customers with links to the page. In total, the founders raised $1,024,732 in the six months the campaign was open.
“We have this really dedicated, passionate evangelical customer base, and so an equity crowdfunding raise made sense,” says Sashen.
Today, business owners can raise up to $5 million through equity crowdfunding in a 12-month period, so long as they limit the number of non-accredited investors and disclose such to the Securities and Exchange Commission (SEC). A variety of online platforms, such as StartEngine, Wefunder, and SeedInvest, can now help founders file with the SEC, set up campaign pages, and market the raises.
“Crowdfunding has changed the game for small businesses that don’t have a network of investors or have low chances to qualify for a bank loan,” says Angeli Gianchandani, professor at Pompea College of Business at the University of New Haven. “This opens the door to bring a business to the forefront and a chance to make a difference.”
Alex Steinman and Bethany Iverson are betting on such a raise to help them grow The Coven, a Minneapolis-based co-working space for women, nonbinary, and trans people. After raising $350,000 from customers back in 2018, they’re now collecting funds from customers yet again, this time for equity.
The startup has already landed $1.53 million through a set of traditional investors, and aims to raise the rest through crowdfunding platform Wefunder. Anyone can pledge for as little as $100 to become a shareholder in the company. The Coven is also offering investors additional perks for larger sums of money, including a catered dinner with The Coven’s founders at its flagship St. Paul location.
The founders hope the funds will help The Coven expand to new locations and franchises nationwide, beyond the three locations and first franchise that was announced in March. “What better solution than to turn back to our community who has been there with us since day one,” says Iverson.