Leveraging Crowdfunding to Fund Your Climate Business
If you’ve read our Insights before, you probably already know that you don’t have to rely on VCs to fund your climate startup. Using crowdfunding can be a powerful tool for some early-stage companies, offering founders a chance to raise capital and build brand awareness at the same time. But what does this innovative type of financing look like in practice, and what should you know before embarking on this path?
Franz Hochstrasser is CEO and co-founder of Raise Green, a community investment platform which works exclusively with climate entrepreneurs and clean energy developers. We chatted with him to learn more about the nuts and bolts of raising a community round, the best practices on marketing a raise, and how founders can convince their customers to take the leap to becoming investors.
A typical crowdfunding raise
Before getting into the particulars of your raise, figure out which community investment platform is the best fit for your company. Raise Green, for example, works with both nonprofits, who can raise debt for clean energy project finance via Raise Green, and businesses, who can sell virtually any type of security across debt and equity financing.
Like many other crowdfunding platforms (WeFunder, Republic, etc), Raise Green will start the process by running background checks to confirm your eligibility, which may include a review of your financials, or - if you’re raising more than $1.2m - a financial audit from a third party accountant.
Once you’ve cleared these hurdles, you’ll write an offering page for the website, containing all the information potential investors need to know. In most cases, you’ll work closely with the platform's team of experts to craft your own terms for your offering. You’ll also fill out a Form C - an offering memorandum that goes into detail about your business model; your use of proceeds; your directors, officers, and beneficial owners; and your financial status. When that’s filed with the SEC, your offering can go live.
You can raise up to $5M per company per year via crowdfunding. The average raise on Raise Green takes between 30 and 60 days, but no matter how quickly it’s filled, your raise has to be live for a minimum of 21 days across any RegCF offering. It’ll then take about a week and a half to close the money out, settle all the trades, send the paperwork out to investors, and transfer the investors over to your company. No matter what community investment platform you work with, you can expect to go through a compliance process, as much of the experience is regulated by the SEC.
Upfront and backend costs
When raising a community round, you’ll encounter fees that are different from those typically associated with other types of funding. Raise Green, for example, typically charges a $1,000 listing fee and somewhere between 1.5% to 7% fee of your total raise if you’re successful - so if you raise $100,000, they might take between $1,500 to $7,000 when the raise closes. But they also have the flexibility to take a security stake in exchange for a discount. In those cases, Raise Green takes a smaller percentage upfront, and a larger portion in the form of the same class and type of security that's being sold in the offering - meaning, for example, if you’ve agreed to a 1% security stake and your company sells $100k of debt, you would issue $101k of debt notes and a $1,000 chunk of the notes would be issued to Raise Green, who’ll subsequently get paid out over time like the other investors. At the end of an offering there are often some additional nominal transaction fees that get charged at closing to cover things like wire transfers and credit card fees. Other crowdfunding platforms on the market differ, and may come with higher costs, so do your homework and make sure you scrutinize their fee structures.
You should also be prepared for other costs that’ll arise along the way. While most crowd platforms play a role in helping to market your company, it’s your responsibility to get the word out and attract investors, and doing it thoroughly can consume a huge amount of your time, money, and resources. How much exactly will depend on how far along your business is in its marketing journey, the size of your network and reach, and what time and effort you’re willing to invest.
Combining crowdfunding with VC funding
Crowdfunding can either replace or complement VC funding. They work well together: harnessing crowdfunding’s potential to boost awareness and grow your potential customer base gives you something to showcase in pitch meetings, bolstering your chances of securing VC funding. If you decide to combine these two sources of capital, it’s best to raise institutional VC capital first to establish a price, and then set the terms of the community round. Or if you’re raising on a SAFE or Convertible Note you can offer the same terms to VCs and the crowd to demonstrate public fundraising momentum on your community round while you pitch VCs privately. It’s important to get solid legal guidance and work with a knowledgeable Funding Portal team on managing the compliance and securities law implications of doing both at once.
The pillars of a successful community round
Hook your customers with a story
Crowdfunding works particularly well for founders who are used to advertising their brand to everyday customers - not just institutional investors or VCs. This broad base of people - many of whom may never have invested in anything before - need to be engaged with your story and excited about the impact you’ll make on our planet. If you do it right, an effective crowdinvesting campaign can be a double whammy to generate more business and consumer customers while you raise money at the same time.
Your prospective investors' interests may differ - some might be looking for concrete figures on the carbon reduction potential of your technology, while others will be looking at whether your values align with theirs. Bottom line, they’ll all be looking for a strong and convincing narrative. To help you garner trust and persuade your customers to invest, find ways to tell your company’s story in an honest and straightforward way as part of your campaign - say, in a video speaking direct to camera.
A marketing strategy that pays off
Getting the word out to thousands of potential investors - whether your tactics include paid ads, PR, or social media - requires some serious marketing chops and can come with a hefty price tag of sweat equity or spend. If your business already has a fine-tuned marketing set-up, you're going to be leagues ahead of those that haven't figured this out. Even better if you already have relationships with reporters, or you can weave a strong narrative to get your story placed in different outlets.
But if you haven’t yet invested much effort in the marketing side of your business, expect this to take time (if you have the capacity in-house) or money (if you’re bringing in contractors or hiring new staff). Depending on how much you’re raising, you should expect to spend between 2-5% of the total amount on marketing.
Hustle, hustle, hustle
In crowdfunding, you aren’t trying to net one big fish, but thousands of little fish. Anyone you’re talking to - whether it’s the person you’re buying your groceries from or your Uber driver - might be a potential investor, so always be prepared to give your elevator pitch at the drop of a hat. Meanwhile, make sure you’re engaging all your networks, whether that be on social media, your local community, or friends and family.
Franz Hochstrasser is CEO and Co-founder of Raise Green, the climate investment platform democratizing sustainable finance, and winner of the 2022 Impact Investing Platform of the Year from Environmental Finance Magazine. He has been working at the intersection of policy, climate change, environmental and social issues for more than a decade. Prior to graduating from Yale School of the Environment with a focus on sustainable finance, clean energy and business in 2018, Franz served eight years in the Obama Administration. Franz holds a Masters of Environmental Management from Yale University; Bachelor of Arts in Linguistics and a Bachelor of Arts in Politics from the University of California, Santa Cruz.