The 'Shark Tank' investor suggests that equity crowdfunding can help serve as a lifeline for struggling but still viable businesses.
Shark Tank's Kevin O'Leary wants startups needing capital during the coronavirus pandemic to know that they have a model to turn to: equity crowdfunding.
The financing mechanism that allows individuals and groups of investors to fund startups in exchange for equity should be in your toolkit, suggests O'Leary. "This is probably the most viable opportunity there is for raising capital given an environment that is in shock right now," adds O'Leary, who notes that venture funding has largely dried up.
Equity crowdfunding, rather, has stood up during difficult times. The model got a lift during the credit crisis, after the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012. The law loosened SEC regulations on small businesses to make it easier for them to fundraise, such as by allowing greater access to crowdfunding. Previously, equity stakes in non-public companies were only available to accredited investors i.e. those who earn more than $200,000 a year or hold more than $1 million in assets.
O'Leary isn't just a fan of crowdfunding. On March 31, the Shark announced he's joining the Los Angeles-based equity crowdfunding platform StartEngine, as a strategic partner. He'll offer advice to StartEngine's entrepreneurial community of more than 235,000 investors, who have backed more than 325 companies with $135 million since 2014, according to the company. O'Leary, who says he will encourage his portfolio companies to raise funding through StartEngine, is also a shareholder and paid spokesperson for the business.
While the advice for landing funding on equity crowdfunding largely remains the same that is, you need to understand what makes your company special and why you're the best person to run it O'Leary has some other suggestions on how to cut through the noise and ensure your company lands the money it needs. Here are his top tips:
Value your company appropriately
When valuing a company, O'Leary echoed the same advice he gives to entrepreneurs on Shark Tank: "Don't be a pig, leave some for your shareholders to benefit from," he says. O'Leary is typically the first investor on Shark Tank to question a founder's valuation and warns entrepreneurs using equity crowdfunding of over-valuing their startups. He believes the raise is a partnership between the founders and investors, and that entrepreneurs should make it enticing for people to contribute more capital down the road.
"You have to be cognizant of what the valuation means in terms of what you're asking for and what you're going to get," he adds.
Be honest with your community
Throughout the process, founders should be honest with their investors and consumers, says O'Leary. For example, entrepreneurs should get in front of issues such as a product failing or lagging customer service. "Honest founders take the heat, tell it like it is, and ask for a chance to fix it," says O'Leary. "Every entrepreneur goes through this, but honesty is the difference between success and failure."
Explain your standing in the pandemic
Entrepreneurs struggling due to the pandemic still have an opportunity to raise capital on StartEngine, says O'Leary. The key, he says, is to do a good job explaining why now is an opportune time for those outside the company to invest in your startup and to map out how additional funding will help you succeed. And be sure to open the opportunity up to customers, who may already be significant brand advocates, he adds. "The game-changer of crowdfunding is that it provides a direct relationship between startups and their customers," says O'Leary?
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