Estimating the Funds to be Raised for Your Equity Crowdfunding Campaign
Two years ago, when Title III of the JOBS Act was signed into law, the concept of money access for all emerging growth companies was about to be revolutionized. Beforehand, if business founders didn’t qualify for traditional funding, there were little to no options at hand to assist them in bringing their ideas to life. Today, as we enthusiastically await for the Title III’s final regulations to be enacted, we anticipate an explosion between eager non-accredited investors and passionate entrepreneurs. Once this occurs, startups will be allowed to raise up to an appealing $1 million within a 12 month period. When planning your crowdfunding campaign, you might be tempted to ask yourself: “Why should I go for less?” How much do I really need? In this article, we’ll help you make a truthful estimate of the funds your startup calls for to be ready for launch.
Why Settle for Just One Slice of the Pie?
The intention of the legal framework supporting non-accredited-based crowdfunding is to provide early-stage business fertile soil for breeding. The $1 million limit prompts business owners to practice extreme care in calculating the amount of money to be raised via their crowdfunding campaign. Lean startup methodology is the ground that the framework’s pioneers laid it on, as it looks out for the interests of both investors and entrepreneurs. Raising more capital than can be effectively used may diminish the investors’ return of investment while unnecessarily diluting ownership. In addition, the framework defines an all-or-nothing provision that says that if the business owner doesn’t reach the targeted amount of money through the crowdfunding campaign, the offering gets nothing. This creates a perfect reason to calculate your financial needs honestly and accurately. Plus, reaching your first target nearly ensures the success of your future campaigns. To approximate how much money you really need for your startup, you need to:
And by specific we mean to the dollar. You may have a vague idea about how much money you need to get your business off the ground, but it’s essential to break that idea into tiny bits in order to calculate exactly how each dollar will be used. As a general rule, the younger the business, the larger the outside funding amount you’ll be soliciting. And since every company has different cash needs, there is no magical formula for calculating the sum of money to be raised. The pre-revenue stage of your business is the most insecure, so you want to be as clear as possible when estimating the type of costs your startup needs. A typical landscape of a new company’s costs consists of:
– Research costs: expenses related to the tasks that help you get acquainted with the market. Aim for acquiring in-depth knowledge about the operating industry before leaping into it.
– Business costs: these can be generated from labor, product/service costs, consultant fees, rent, utilities and administrative costs. As careful as you try to be, hidden costs are a hazard so this sector really prompts you to get into details.
– Advertising costs: these will be based on how you choose to market your products/services. This is your chance to spend your money in a smart way. There will always be room for directing your funds towards promoting your merchandise, so you have to approach marketing costs strategically.
– Legal fees: you can approximate these fees by inquiring lawyers with experience in your business sector. Your investors will be sure to check that someone has your back (and implicitly, theirs) from a legal standpoint.
– Bookkeeping and accounting fees: these will result from the preparation of your startup’s taxes. The accountant ensures the accuracy of the reports submitted to the SEC and IRS, mandatory for all crowdfund investing solicitors.
– Compliance expenses: costs to acquire the prospective business license or permit.
– Crowdfund investing costs: payments owed such as the success fee paid to the funding portal that hosts your offering.
The U.S. Small Business Administration also provides a useful startup expense categorization here.
The non-accredited investments industry is expected to surpass the $30 billion venture capitalism industry that, until now, has been reserved for a few healthy investors. Promising numbers, right? With access to such a large pool of investors, it’s mandatory to prove that your awesome business idea is complete by having your approach to crowdfunding figured out. Be as precise as possible when calculating how much money you need to launch your startup and include an ICE fund for expenses in your target amount that will most likely pop out of nowhere as you go along. Settle for a modest amount for now and you will gain credibility with each milestone reached, therefore improving your chances of getting a bigger slice of the pie on your next crowdfunding campaign.
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