The Perils of a “One-Stop-Shop” Approach to Equity Crowdfunding
Equity crowdfunding can be an incredibly powerful tool to raise growth capital, tap into your existing community, or even IPO, but it can also be a complex process. Whether conducting a Reg Cf, Reg A+, or a Reg D 506(c), the range of service providers required for a successful raise can be intimidating.?
While some companies claim to be able to do it all by offering a “one-stop-shop” approach to equity crowdfunding,? it is ultimately not in the issuer's best interest in the end. But before we dive into that, a little background.
The Service Providers
Depending on the type of equity crowdfunding exemption you are raising under, you will likely need to engage the following service providers in order to have a successful and compliant crowdfund:?
With a large number of service providers needed, and each responsible for its own complex and important tasks, there is tremendous value in choosing the best available option for each.?
Why not simplify it?
The simple answer - it’s rare to see high-quality generalists. If you think about different complex processes in business, the best of the best are always focused on one thing, and being the best at that one thing.?
There are a number of different examples we can draw on, even within the list of service providers we listed.?
For something as seemingly simple as marketing, there are always experts even within that focus area: content marketing, SEO, PR, paid advertising, etc.?
Looking at legal professionals, there are different specialists (corporate, litigation, HR, real estate, etc.), and the same can be said for broker-dealers, where licenses are typically limited only to specific types of capital raises or services.?
However, for the best example, you only need to look a little down the road from private capital raising to the complex process of an IPO. If you’re going to be taking your company public, much like in the online capital raising industry, you’ll need legal counsel, an underwriter, a transfer agent, an EDGAR agent, and investor relations.?
For a process that is as old as the public markets itself (Fun fact: the first IPO was Dutch East India Company's public offering of stock in 1604), there have always been and will always be experts for each function. There is no one-stop shop due to the complex nature of IPOs and also for compliance reasons.?
And just because equity crowdfunding is relatively new (starting in 2012), there is no reason to expect it will develop differently. In fact, given the similarities in function and partners, one expects it to follow a similar path.?
But let’s dive into the details.?
What are the real pitfalls??
We already touched on this above, but given its importance, we want to reiterate it for emphasis. The best players in any industry are always focused on doing one thing exceptionally well, and one thing only.?
The innovation that occurs in any given field moves at incredible rates these days. If a company is not laser-focused on being the absolute best and delivering the highest quality service possible, they have already lost. Their competition will be eating their lunch if they haven’t already.?
The reality is, a “one-stop-shop” company will not be able to be a true expert in each respective field, and that’s before considering that there are seemingly competing motives (ex. Broker-Dealer vs. Marketing).??
The second point is equally straightforward. Companies or founders looking to raise capital are often putting their company on the line in one way or another, and they need to be in a position to maximize their likelihood of success and make smart business decisions.?
Going with a one-stop-stop increases the risk of failure given that these companies by definition lack capability or expertise in one or more areas of their business.?
An issuer will also struggle to fix what isn't working (i.e. replace one of the "services" with ease). Even if two out of three services from the "one-stop-shop" are working well, you will be forced to stick with all of them or risk facing steep break fees, or at best sour an important working relationship.
Further, issuers are not able to be as opportunistic - inevitably deals with different service providers will have to be passed up on as the “one-stop-shop” won’t want you doing business with its competitors, even if it’s the right choice for your company.?
Finally, there is also a lack of incentive for a "one-stop-shop" to truly try and exceed expectations when they know you are locked into their services due to the high costs of switching. This also reduces your overall negotiating power as well.?
Savvy founders want to work with the best partners (it’s likely how they became the best companies) - and that is where a “Best-of-Breed” approach comes in.?
The Value of the “Best-of-Breed” Approach?
When you work with a company that is focused exclusively on being the best at one thing, they inevitably become subject matter experts.?
They are constantly working to remain the best at what they do because that is all they have.?This can create a layer of comfort by knowing that the service provider only doing one thing has a high chance of being exceptional at it, otherwise, they would have been outcompeted.?
And if you’re new to online capital raising and worried about finding the right partners, just look to the “best” subject matter expert in their respective field to refer you to the other “best” subject matter experts. They are likely close partners and can work well together.?
In short: don’t settle for anything less than the best for your online capital raise. Make sure you get the growth capital you need to thrive.?
Capital Raising Online: Equity Crowdfunding (regulation financings) are the new frontier of capital raising and they are digital-first and democratizing early-stage investing for the masses. Every month we discuss the ever-changing regulation financing industry as it continues to expand. From important developments to critical considerations and insights, we provide an experienced perspective on the industry.?
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