Overfunding in Equity Crowdfunding: Positives and Pitfalls

Posted by Philip Thomas on Oct 19, 2017 1:18:26 PM

The global Equity Crowdfunding  (ECF) industry is booming. With the World Bank estimating that the ECF industry will be worth more than $93 billion worldwide by 2025, this is good news for both the businesses looking to raise capital to scale their businesses, as well as for those investors who are in search of exciting new investment opportunities. However, with all these investment dollars being pumped into the ECF ecosystem, and the market becoming increasingly accessible to all, an overfunded campaign is now an increasingly more common occurrence.

While previously businesses may have worried about reaching their original funding targets, it is now not uncommon for businesses to be in a position where they have reached 100% of their target and can choose to overfund by accepting additional investments in exchange for releasing more equity. On paper, this sounds like the ideal situation and suggests strong investor confidence in the business. Which it is, if handled correctly with the businesses asking themselves the appropriate questions before going into overfunding. In fact, in order to be prepared for this eventuality, these questions should be asked in the initial planning stages of the funding round. Preparation is key.

Can we achieve our business goals without releasing extra equity in our business? Do we wait till our next funding round to do this? Could we benefit from having additional investors that can bring their expertise and strategic connections to the table? These are some of the discussion we would expect all businesses to have before embarking on an overfunding campaign.

For investors, while an overfunded business may require more careful scrutiny on their part, overfunding can also lower the uncertainty , as well as the perceived risk level. When a business has a clear, well thought out plan for how they are going to use the funds, the risks of ending up with diluted shares can be mitigated. It is normal for early stage business that are funded by retail or angel investors to go into overfunding, which can work in an investors favour as it ensures that that the company has enough capital to carry out their plans for growth.

Earlier this year, el Grocer, a leading grocery delivery app in Dubai, successfully closed its funding round at 190% after 90 days of listing via Eureeca. Eureeca has also helped a number of other businesses go into overfunding via the platform including Homes or Houses (151%), Harir (203%), Foodlve (153%), Poupee Couture (165%), Abjjad (134%), and Ekeif (120%), to name a few.

Topics: equity crowdfunding, overfunding