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How crowdfunding can be a lifeline for cash-strapped startups right now, according to millionaire investor and 'Shark Tank' judge Kevin O'Leary

  • In a time of heightened uncertainty, many startups are wondering if it's the right time to raise capital.
  • "Shark Tank" judge and millionaire investor Kevin O'Leary said equity crowdfunding will take on an important role that venture capital can't fill right now. 
  • Equity crowdfunding gives customers the opportunity to invest in a company they're already supporting.
  • Visit Business Insider's homepage for more stories.

In a time of heightened uncertainty, skyrocketing unemployment, and plummeting revenues, many startups are wondering if it's the right time to raise capital. 

According to Kevin O'Leary, great companies that are growing always need money. In a webinar with StartEngine CEO, Howard Marks, the "Shark Tank" judge said equity crowdfunding will have to pick up the baton from venture capital firms. 

"You can't even get a meeting with those guys right now," O'Leary said. "This is no different from what happened in 2007 and 2008 when Kickstarter and Indiegogo were born out of necessity." 

Marks said there's been an increase in investors on StartEngine since March 1, 2020. "It's completely the opposite with VCs," he said, comparing it to the rates of VC investments between 2001 and 2010, which took a hit during the dotcom bubble and Great Recession. "We're much more resilient as a funding mechanism than the VCs were." 

A University of Alberta study found that past successes and failures can shape future crowdfunding campaigns. An over-funded or under-funded campaign can encourage individuals to invest in similar entrepreneurial endeavours, according to the study.

O'Leary gave three reasons now is the best time for startups to turn to equity crowdfunding.

It builds direct relationships with customers.

One advantage of crowdfunding is that it gets customers to back a company they already believe in. O'Leary used a company he owns stake in to make his case. 

Love Pop Cards makes laser-cut three-dimensional cards and lost 50% of sales in 14 days. So the company shifted to making paper flower bouquets for Mother's Day. "That was designed in 24 hours and we're doing $2 million in sales every 48 hours," he said. 

The company sells direct to consumers, rather than through Amazon or another third-party seller. That allows Love Pop Cards to collect customer data and form direct relationships. "Every single one of these is sold direct," he said. "It's no different for investing."  

Getting VC investment is a larger concentrated fund, rather than several smaller funds from individuals with a connection to your brand. 

"I think the new normal for companies like this one is to know their investor, to have a direct relationship with their own constituents. The people who buy these flowers should own a piece of the company," he said. 

Create value within your customer base.

Crowdfunding is also a chance to use your social media to build your business, O'Leary said. Your user base and followers often become your first advocates and investors. "That's to me the most appealing aspect of this," he said. 

Having your customers double as equity partners creates a long-term bond that could generate more revenue. "It's so unique, that model just doesn't exist anywhere else," he said. 

That purchasing power from shareholders adds value to equity crowdfunding. "There's a market price to debt or equity that is more expensive than it was nine weeks ago," he said. "The one thing that nobody's priced into the market yet is what's the value of selling equity to customers."

High-growth is key.

To return to O'Leary's initial point: a company has to be growing for equity crowdfunding to work best. "Sales is everything," he said. Those sales tell you what customers want and prove to investors that they want to buy more.

"The best time to go into crowdfunding is after you've proven the demand of your product and you can show the merit of your product to others that want to invest in it," he said. 

Though it's riskier, concept companies without sales can still find their own success. "If the concept is so different and unique and compelling, you can still use the crowd to fund it, you just have to reflect that in your evaluation," he said. 

Since founders maintain control with crowdfunding, they have an obligation to give their investors a good deal. "You want them to come at your second, third, and fourth rounds," he said. 

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