Here's another acronym for you: ECF, which is short for equity crowdfunding, is the practice of raising small amounts of capital from the public in exchange for a stake in the business. Two founders share their experience
Most startups rely on fundraising to grow. Depending on the stage at which the capital is raised, a startup could allocate the funds for reasons ranging from developing its first market-ready product to investing in talent, marketing or R&D, to expanding overseas for even greater growth.
There are various sources that startups could raise funds from, such as angel investors, venture capital firms, family offices and grants. But increasingly so, companies are exploring another option: equity crowdfunding, or ECF, to supplement their working capital requirements.
Read more: A startup founder's guide to fundraising in 2023
How does ECF work?
Crowdfunding involves raising typically small amounts of money from the public through social media or crowdfunding platforms to fund a private project or venture. ECF is similar, except that equity in the venture is also offered in exchange for capital.
According to reports, the global crowdfunding market value is expected to more than double from US$12.27 billion in 2019 to US$25.8 billion by 2026.
ECF, in particular, has become an attractive financing option for small and medium-sized businesses for reasons including the method being debt-free as well as involving a larger pool of investors, which could mean more money can be raised. But ECF isn't for every startup.
To learn more about the feasibility of ECF, we speak to Gen.T honourees Syazwan Majid of on-demand recycling platform Arus Oil and Harith Ridzuan of The Green Factory, a manufacturer of sustainable wood products, who share their insights and experience with using the method to raise funds.
What are the pros and cons of ECF?
Both founders had previously raised funds through traditional means and sources, but as their companies expands, they saw ECF as an alternative method that would allow them to connect with active users who believe in their company's goals.
Syazwan also shares that ECF is more startup-friendly. “It is cost and time-effective, and the entry requirements are not as stringent as other fundraising methods, which makes it [more] convenient.”
Harith echos this, saying that it boils down to the simplicity of the process. “Part of the appeal of an ECF is its accessibility to investors, who do not need to own a Central Depository System account to record their stock holdings and transaction history when buying or selling shares.”
For all of its advantages, Syazwan warns that raising funds through ECF has its drawbacks. “Many potential investors are unfamiliar with the method and don't comprehend it as well as they do stocks.”
“There is a lot of education and awareness that's needed when promoting your ECF campaign,” says Harith. “It is important that the platform you use is licensed by the authorities to assure investors of the authenticity of the investment.”
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