Successful crowdfunding campaigns typically start with a carefully coordinated promotional campaign. But those can be costly.

Just ask CrowdfundX, an ad agency at the forefront of the budding online equity crowdfunding industry.

“When you are talking about raising millions of dollars from the crowd, it is not easy and it is not cheap,” said Darren Marble, the firm’s chief executive. “You’re not going to be successful raising $10 million on a shoestring budget.”

The West L.A. ad agency spends an average of $250,000 per crowdfunding effort on advertising campaigns and pitching journalists on the allure of a client’s online stock offering. The firm takes a cut of that amount as part or all of its fee, said Marble, though he declined to disclose the percentage.

CrowdfundX has run marketing for more than 100 crowdfunding campaigns over the last three years, including 12 equity crowdfunding efforts in the past 12 months. Most notably, the company marketed the campaign of Phoenix automotive startup Elio Motors, which raised $17 million in the largest equity crowdfunding campaign to date.

Though some online fundraising efforts fail, use of an agency has become an indispensable and growing factor, said Vincent Bradley, chief executive of online crowdfunding platform FlashFunders of Santa Monica.

“There are three things that are important for the success of a crowdfunding campaign: The first most important thing is the quality of the product; second is quality of the crowdfunding agency; and then the quality of the platform,” he said. “Agencies are pivotal to the success of a crowdfunding campaign.”

CrowdfundX stumbled into its niche in 2013, said Marble, after the firm’s first iteration as a social networking and distribution portal for filmmakers didn’t pan out.

“We failed into this business,” he said. “At the suggestion of an investor, we pivoted into an agency.”

The company initially ran marketing campaigns for rewards-based crowdfunding efforts on Kickstarter and Indiegogo. The firm switched its focus when the Securities and Exchange Commission approved Title IV of the Jobs Act last year, which opened the door to unaccredited investors.

The 15-employee firm has raised $300,000 in capital from angel investors such as James Ackerman, former chief executive of Documentary Channel, and Steve Johnson, ex-chief investment officer of Apple Inc.’s asset management fund Braeburn Capital. The company is seeking an undisclosed amount of outside financing to speed up growth, said Marble, noting the agency is profitable, with revenue of $1 million last year. He projected that number to double or triple this year.

Because the public knows so little about crowdfunding, much of the agency’s efforts are focused on drawing people into stock offerings by teaching them about the fundraising method, said Marble.

Crowd payments

CrowdfundX gathers interested investors mostly through paid advertising on social media, which involves a multistep process. First, the campaign is advertised to a wide array of users on Facebook. The social media firm then generates a more targeted pool of users that might be interested in the campaign based on the demographic info of people who clicked on the first set of ads. That group is then shown an ad, too. Anyone who clicks on the sponsored Facebook posts is directed to a landing page where they can enter their name and email address, which is later used to contact them directly.

“By the time the issuer is authorized to crowdfund, they have tens of thousands, if not hundreds of thousands, of prospective investors who have been groomed,” said Marble.

Based on his experience, he said companies that succeed in online equity crowdfunding typically share a number of traits. For starters, they’ve already raised $3 million or more from traditional funding sources, generate $2 million or more in annual sales, have at least 5,000 customers, 10 or more employees, and 10,000 social media followers across all channels. He also noted that adoring customers make for the best crowdfunding investors.

“People don’t invest in these companies because they are interested in trading stocks,” added Ron Miller, chief executive of Santa Monica crowdfunding platform StartEngine. “It’s because of passion and emotion.”

But that doesn’t mean that anything goes, cautioned Marble, because crowdfunding remains a highly regulated industry.

“You could be disqualified by saying the wrong thing, taking the wrong approach,” he said, adding that stock issuers are legally liable for their tactics.

CrowdfundX works with a securities law firm as an extra level of precaution.

In addition to taking a cut of the upfront fee, CrowdfundX also offers to perform services in exchange for stock in a client or warrants to buy shares at a later date.

The firm hopes to take bigger equity stakes in the companies it works with in the future, said Marble. The agency bought warrants in Elio when it helped the firm crowdfund in February. Later, Elio listed on the OTC marketplace at $14 a share. The company’s share price closed on Sept. 14 at nearly $20 a share. Marble did not say the price at which his company bought the warrants.

“We need to take paper for these deals,” he said. “Due to the fact that we have limited competition we are on the receiving end of a lot of deal flow. We are very lucky to be in this position.”

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