Even as Digitzs, a Santa Monica, Calif. payments startup, nears the finish line of a successful $3 million equity crowdfunding round, chief executive Laura Wagner balks at the notion that raising money from the crowd is ever a simple task.
“Anybody who promises that it’s quick and easy is lying to you,” says Wagner, a serial entrepreneur, who launched Digitzs in 2015. Digitzs helps companies build payments into their platforms. Its white label API can be used for platforms such as those that process ticketing payments for sporting events, fines for city governments and tuition payments for schools.
For Wagner, raising money from accredited investors through equity crowdfunding was a logical step to help jump-start her pre-revenue company. It’s hard to get VCs to invest in pre-product, pre-revenue companies, so equity crowdfunding can be a viable option for companies that can’t rely solely on angel investors or those that want to raise seed capital in a highly efficient fashion.
However, running a successful equity crowdfunding campaign—as Digitzs has—requires substantial behind-the-scenes work and hefty capital. To effectively raise equity from the crowd, Wagner says founders will need somewhere around $50,000 to $200,000 to convince prospective investors of the company's worth. Investors don’t look at old-school business plans anymore, so you have to make sure you get noticed in other ways, she says.
“You have to look like a million bucks before you ask someone for a million bucks. Perception is everything, especially in a startup,” she says.
Startups that want to raise money from the crowd first need to do significant prep—creating things like a quality website and crowdfunding video, a 10-page deck with solid statistics and a one-page Frequently Asked Questions explainer. They also need to hire a top-notch legal firm, a public relations team and make sure there’s enough money to support the company during the six to 12 months it takes to do the initial legwork.
One major element of success is to find an established crowdfunding platform that will aggressively market the company and get its story out to thousands of investors.
“You don’t want to choose a no-name platform that’s not proven,” she says. The platform also depends largely on the industry and whether the company is targeting accredited investors or the general public, among other things.
In Digitzs' case, Crowdfunder.com was the partner of choice; it featured Digitzs in its newsletter to potential investors and garnered the payments startup more than $9 million in reservations from interested investors. As a result, Digitzs hit the No. 1 spot on the CNBC Crowdfinance 50 Index—a daily average index of the 50 largest capital commitments by private U.S. companies listed on Crowdnetic’s data platform.
Digitzs’ work didn’t end once it received online reservations. That’s when Wagner and her team put on their sales hats, emailing and calling potential investors to talk about the company and seal the deal. Typically companies “bank” about a third of the reservation amount, Wagner says.
Despite the hard work it’s taken to raise money via equity crowdfunding, Wagner is satisfied with the outcome. She encourages other entrepreneurs to do their homework before embarking on any fundraising campaign and be especially wary of vendors that make grandiose promises about their ability to help you raise money fast and with little effort. Her advice to weed out bad apples is this: “If it sounds too good to be true, it probably is.”