The answer here is highly variable and depends largely on 5 elements:
1. How interesting is the company/issuer?
- This impacts the raise significantly – for example, an exciting electric vehicle manufacturer might expect to see a lower cost of capital compared to a less exciting company such as a flooring company or a car wash chain (the latter two examples being actual companies that approached Funded)
2. How much operational progress is the issuer making?
- During a raise, the operational progress of the business is one of the key drivers of share sales. Businesses that are growing and communicating that growth to prospective investors will typically do far better than say an early-stage company that is pre-revenue and does not have any meaningful operations taking place on a week-to-week or month-to-month basis.
3. Does the issuer have an existing member base to leverage?
- This can be a big factor in the raise as well – say a company comes to us with a member base of 20,000 active users that we can market to. These already loyal brand advocates will likely become some of your first investors as they are already familiar with your brand. And the best part; there is no meaningful additional expense to market to these existing members.
4. What type of offering is it (i.e. Reg A vs Reg D) and what are the terms of the offering (i.e. minimum investment size)?
- The structure of the offering itself can also have a big impact on the cost of capital. Generally speaking, Reg D offerings will see a lower cost of capital than a Reg A; largely due to the investment minimums being much higher (and the cost to acquire accredited leads costing only slightly more than non-accredited leads).
5. Does the funding portal that is being used have a built-in member base that can be leveraged?
- Choosing a funding portal with a built-in existing member base that your raise will be exposed to can definitely become a nice catalyst for investments. This is especially true for first-time issuers with no existing member base, this can provide a big advantage.
- When selecting your funding portal, have this discussion with the portal and make sure you are clear on the size of their member base and if/how they are willing to expose your offering to their members
First Time Reg A Issuer Example
A common scenario I see to give you a firmer answer – I’ll have a company come to me looking to do their first Reg A offering and they will have no existing member base of the business the leverage. In this instance, I would tell the issuer to prepare for a total cost of capital that could reach 20-25%. In other words, the issuer is getting back $4-5 for every $1 they spend.