Crowdfund Investing For Dummies
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The principle of crowdfund investing is based on a community of interrelated people coming together to support someone they know and trust with their money to help launch an initiative. These investors are rewarded with equity in the initiative or earned interest on a loan.

Start with friends and family

The legislation that supports crowdfund investing states that an entrepreneur (also known as an issuer), via her pitch on the funding portal, will use her online social networks as the first tier of contact for seeking investments. Given this stipulation, you’re undoubtedly going to be reaching out first to the people who know you best: your friends and family members.

Even with people you know extremely well, you’re only allowed to explain your business concept and goals and to notify them that your investment pitch is on the funding portal. You aren’t allowed to disclose details of the pitch via any means except the online portal.

In other words, you can’t call or e-mail your cousin or your former roommate and explain your investment offering (“If you invest X amount of money, you get X amount of equity”). Doing so violates the JOBS Act and can get you in serious trouble with the SEC. Always, always send people to the funding portal to find out what the investment looks like!

Don’t be shy about letting these people have a vested interest in your business or project. You may find that they provide the most honest and constructive criticism that can help you hone your ideas. You may even be able to glean certain skills from this particular crowd that can help you achieve your goals.

(Do you count any graphic designers among your friends? Computer programmers? Amateur bakers willing to taste-test version 11 of your best new cupcake recipe?)

Stretch through your social network

If your intention were simply to fund your business with help from friends and family, you wouldn’t require a crowdfund investing platform. You could probably achieve that goal with some persuasive phone calls and some old-fashioned IOUs.

A key function of crowdfund investing is to enable you to reach further into your social network contacts and drive your second- and third-degree connections to view your pitch online. Your second-degree connections are friends of friends, people you know through your friends. Third-degree connections are people your friends know who you haven’t met yet.

To get a sense of your first-, second-, and third-degree connections, log onto your LinkedIn account. (If you don’t yet have a LinkedIn account, you need to stop reading immediately and build your LinkedIn profile before doing anything else. Go!) Under Contact, go to your Network Statistics section.

What you find is a visual representation of your connections that demonstrates the power of online social networks. If you have 100 first-degree connections, for example, you likely have 20 times that number of second-degree connections. When you look at third-degree connections, you may be amazed at the number.

Although you certainly can’t predict which of your social network contacts (especially the second- and third-degree contacts) may come onboard with you, spending just a little time getting a sense of the scope of your social networks can help you gain a better picture of the crowd you’re trying to assemble.

Figure out if your network features any industry players

You may be able to adjust the estimated size of your crowd based on specific information you can glean from your social networks. As you peruse your first-, second-, and even third-tier contacts on a site like LinkedIn, note how many of these people are familiar with your industry. Search your social networks for terms related to your business (such as baker or biotech engineer).

The goal is to locate people who share similar interests as you, friend them, and introduce them to your idea (being certain to send them to your funding portal page for any specifics about your investment offering). Doing so can build your credibility, and these people may then introduce you to other contacts who can help you.

If you’re starting a tech company, for example, and your social networks are teeming with techies, you may reasonably assume that a well-constructed business model is going to attract positive attention from the industry insiders. More than even your mom and dad, your industry peers may recognize the value of what you’re proposing and be willing to risk investment.

Keep in mind the collective power of the crowd: The more industry players you have as investors, the more solid input you’ll receive for your business.

If you’re starting a company in the biomedical field and your social networks are populated mostly by people with zero background in that field, your pitch may be tougher. You may also make a reasonable assumption that you need a larger crowd.

Why? Your contacts may still be willing to roll the dice and invest, but without industry knowledge, they may not recognize the true potential of your plans and may opt to risk a bit less than the industry insiders.

Determine if you’ve got experienced investors in your crowd

This step may be a bit tougher because it requires knowing more than just a contact’s profession. But if you can take some time upfront to peruse postings on your social networks, you may discover that certain people have a track record of investing in startups or supporting entrepreneurs in other ways.

Don’t underestimate the value of locating even a handful of such people; anyone who has successfully navigated these waters before may be a prime candidate for investing in you.

Reach out to these people online. If they aren’t your first-degree connections, LinkedIn makes it easy for you to ask for introductions from your shared connections. In doing so, you’re not only socializing your idea to drive people to your online pitch but also moving that idea down the chain until you get in touch with the desired contacts.

If you’re lucky enough to spot quite a few experienced investors in your crowd, you may be looking at some great candidates for higher-level investments (which could potentially reduce your overall crowd size).

Build a database

If you take the time to get more familiar with the people in your social networks — including the second- and third-tier contacts — be sure to keep track of the industry insiders, experienced investors, and other folks who seem like the likeliest candidates for investment in your venture.

As you move toward executing your crowdfunding investing campaign, this list can help you refine your marketing efforts and ensure that you’re spending your resources (including your precious time) wisely.

About This Article

This article is from the book:

About the book authors:

Sherwood Neiss, Jason W. Best, and Zak Cassady-Dorion are the founders of Startup Exemption (developers of the crowdfund investing framework used in the 2012 JOBS Act). They deeply understand the process, rules, disclosures, and risks of capital formation from both the entrepreneur's and the investor's points of view.

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