Crowdfund Investing For Dummies
Overview
The easy way to get started in crowdfund investing
Crowdfund investing (CFI) is going to be the next big thing on Wall Street. U.S. investment banks, brokerage houses, and law firms are gearing up for the creation and regulation of new financial products that will be available to the general public starting in early 2013. The introduction of these products will revolutionize the financing of small businesses and startups for these key reasons:
- Entrepreneurs and small business owners, who have had difficulty obtaining capital through traditional means (such as bank loans and angel investors) in recent years, will have access to investors around the world through social media.
- For the first time, investors (so-called unqualified investors) will be able to purchase an equity stake in a business or new investment vehicle.
The Securities and Exchange Commission (SEC) is overseeing the creation of online portals that will allow entrepreneurs and small investors to connect. When these portals
go live in 2013, Crowdfund Investing For Dummies will be on the front line to educate business owners, other entrepreneurs, and investors alike.
Crowdfund Investing For Dummies will walk entrepreneurs and investors, like yourself, through this new investing experience, beginning with explaining how and why CFI developed and what the 2012 JOBS says about CFI.
Entrepreneurs will find out how much funding they can realistically raise through CFI; how to plan and launch a CFI campaign; how to manage the crowd after a campaign is successful; and how to work within the SEC’s regulations at every stage.
Investors will discover: the benefits and risks of CFI ;how much they can invest; how a CFI investment may fit into a broader investment portfolio; how to provide value to the business or project being funded; and how to bow out of an investment when the time is right.
Crowdfund Investing For Dummies is an indispensable resource for long time investors and novice investors alike.
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About The Author
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.
Sample Chapters
crowdfund investing for dummies
CHEAT SHEET
Crowdfund investing is a new funding opportunity for small businesses and startups that holds tremendous potential, but it's not a free-for-all. Entrepreneurs, business owners, and investors alike should know the legislative boundaries set by the JOBS Act (which opened the door to this funding resource in 2012), the risks involved in this type of funding, and the potential rewards it offers both to companies and their supporters.
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Financing
For many decades, U.S. investors have been divided into two categories: accredited and unaccredited. These designations are the same in crowdfund investing. Federal law indicates that accredited investors meet at least one of two criteria:
They have a net worth of more than $1 million (excluding their primary residence equity) either independently or with a spouse.
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As a crowdfund investor, you may have opportunities to help the company beyond providing your financial capital. Not every company that you invest in will make such requests; let the business owner drive these decisions, and don't be offended if you aren't asked to participate. If you do get a chance to add value to the company, you have to strike the right balance with your participation.
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If you miss your crowdfunding target despite all your best efforts, you’re going to be hugely disappointed. After all, failing to meet your target means that you get zero dollars for your efforts. (Crowdfund investing has an all-or-nothing provision so that investors who sign on early in the campaign don’t find themselves funding a project that’s a fraction of what was promised.
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As an issuer’s social media contacts begin to engage in a crowdfund investment offering, they may want to reach out to other people in their own social networks to share this opportunity with them. For this reason, per the JOBS Act, online funding platforms must provide ways to share links to an issuer’s campaign.
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When you make the decision to cancel your crowdfund investing project, you need to take the appropriate steps to make sure you’re compliant with the Securities and Exchange Commission (SEC). Consult an attorney who has securities experience to ensure you have guidance that is specific to your situation. The SEC’s number-one concern here is that fraud didn’t take place.
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A patent is a type of property right; it’s a document granting an inventor sole rights to an invention. It gives the holder the right, for a limited time, to exclude others from making, using, offering to sell, selling, or importing the subject matter that is within the scope of protection granted by the patent.
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How can your crowdfund investors help you market your brand in your community? Be strategic as you review your list of investors and their LinkedIn and Facebook profiles. This step is important so you know all the potential strengths and opportunities that your investors may bring to help you build your brand.
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The younger you are, the more risky you may be with your crowdfund investments. You may truly believe that nothing will go wrong. (And if anything does go awry, you’ll likely recover much faster and less painfully than an older person would.)
Young or old, you need to be aware of this fact: Crowdfund investing is high-risk investing.
Crowdfund investors always try to mitigate risk, and the best way to help them do so is to be transparent and honest in all your conversations and documents. This includes offering realistic and conservative revenue projections.
Howard Stevenson has made more than 80 angel investments and headed the Entrepreneur Management Unit at Harvard Business School for more than 25 years.
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Make no mistake: Crowdfund investments are high risk. On average, 50 percent of new companies fail within their first year, so these investments should be only a small part of your overall financial portfolio. If you're completely risk averse, you have no business investing in small, private companies at all. If, however, you can tolerate volatility and risk in a small portion of your portfolio for the sake of potentially receiving some significant financial returns, a crowdfund investment may make sense.
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Chances are, you have at least one social network already. If you don’t, you need to create one before you can attempt crowdfund investing. And if you do, now is the time to make your network(s) as robust as possible.
Consider the example of LinkedIn, the social network for the business world. (It was started by one of the most connected business people in Silicon Valley, Reid Hoffman, who was constantly asked to make introductions to his contacts.
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The people who can fill your future needs should occupy your company’s ecosystem, which is your Circle of 50. You want to try to anticipate needs you’ll have in the near and distant future.
For example, at some point, you may need strategic help with your patent portfolio developing a family of patents. As your startup grows, you’ll eventually need to have audited financials.
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Raising money is hard work. Your success depends on your network and crowdfunding strategy. You simply must build relationships and connections with contacts who will be interested in investing in your company.
Building a robust, deep, and wide network must start before your campaign on a crowdfund investing platform launches.
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Facebook, Twitter, and LinkedIn plus public relations combine into a social media marketing effort designed to get the word out to potential investors. Author and social business stylist Jennifer Abernethy is one of the top 50 social media marketing leaders in the United States (according to Social Media Marketing Magazine) and understands how to build a social media marketing strategic plan.
Crowdfund investing, which takes place online (and could easily allow someone from Alabama to invest in an Arizona company), has the opportunity to promote locavesting. If an investor approaches crowdfund opportunities with the goal of strengthening her home community, she can provide financial support to her hometown businesses in ways that were never before possible.
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When you’re creating a business plan for your crowdfund investing opportunity, you have to determine what results you’re aiming for. In the case of a brand-new or very young business, chances are, those results center around growth markers: increased sales, an expanding customer base, and so on.
Unfortunately, what you envision when you’re in the planning stages isn’t always the best result when your business is actually up and running.
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You need to apply some common-sense tactics to avoid being swept up in your crowdfund investing enthusiasm. You need to protect yourself from making bad decisions, and you have the means to do so if you just slow down, employ your gray matter, and take some additional steps.
Make sure you actually understand the business or project.
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During your crowdfund investing campaign, you used all the communication tools at your disposal to express your need for capital. When the campaign is complete and the capital is in hand, you must continue to find and use tools and services to communicate in scalable ways with your investors.
You’re trying to build a business, and you just raised money.
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Grassroots marketing for your crowdfund investments involves organizing and motivating volunteers to engage in personal or local outreach. It requires that you develop relationships with other stakeholders or representatives to make them enthusiastic about the entrepreneur’s product or service so that they become advocates, spreading the word about it and becoming an additional sales force.
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So, you’ve got an idea to start an organic farm in your community to sell vegetables to your local restaurants and spur the farm-to-table movement. What’s next? Don’t go out and start planting! First, find out if this idea is a smart one.
Ask key questions
To determine if you’ve got a solid business idea, you need to understand the market dynamics.
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Protecting any words and images you create to promote your crowdfund investment business requires copyrights and/or trademarks. The familiar symbol © indicates that a copyright has been secured, and ® denotes a trademark. Copyrights protect books, songs, photographs, and other original works of authorship. And a trademark protects your logo.
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After you make it through a full year in business (with crowdfund investors onboard to boot!), you get to create an annual report that reflects what you’ve accomplished. If you’re familiar with the slick products generated by Fortune 500 companies, fear not: Your annual report doesn’t need to be anything that fancy.
Crowdfund investing is a new funding opportunity for small businesses and startups that holds tremendous potential, but it's not a free-for-all. Entrepreneurs, business owners, and investors alike should know the legislative boundaries set by the JOBS Act (which opened the door to this funding resource in 2012), the risks involved in this type of funding, and the potential rewards it offers both to companies and their supporters.
Before you take any action to start a crowdfund investing campaign or to invest in such a campaign, you should read the most up-to-date information you can find about industry regulations. The SEC website is the best place to start, and you can also visit the website for the Crowdfunding Professional Association, an industry trade organization.
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You should never put more than 10 percent of your financial portfolio into crowdfund investments. (You may even consider something closer to the 5 percent range.) This limit is wise even if more than 10 percent of your portfolio is allocated to high-risk stocks.
And if you and your financial advisor have determined that your allocation to high-risk stocks should be even lower (5 percent, for example), you don’t want your crowdfund investments to push you over that limit.
The chances of your crowdfund-invested company getting an IPO are extremely small — minuscule, in fact. An IPO occurs when a company goes public — it lists its shares with a stock exchange for the general public to be able to purchase. IPOs can be the exit of all exits. They’re what some investors dream of when they invest in startup companies.
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Can crowdfund investing reduce the necessity of relying on credit cards? Very possibly — if you can plan far enough ahead to anticipate your upcoming expenses and spot future opportunities for growth before they’re in your face and begging for cash. Whereas credit cards are quick fixes that often wreak long-term financial havoc, crowdfund investment campaigns demand longer-term planning and commitment.
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Should you look to crowdfund investing to completely replace your need for bank loans? Probably not, even if you opt for a debt-based crowdfund investment structure. Instead, your goal may be to seek a combination of both types of financing (in addition to self-funding and any other financial resources you can muster).
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You can rally your online crowd to conquer your own part of the world. Crowdsourcing and crowdfunding are about connecting people at a local level to create businesses that will benefit communities. Although the world is operating more and more as one global community through social media, people rely on local communities for bare necessities.
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Before you dig deeper into what crowdfund investing is and how you can tap into it for supporting a new venture or a small business, you should have some sense of how it differs from the types of funding that have previously been available to businesses.
Self-funding
Self-funding your business differs significantly from getting crowdfund investing support.
If you haven’t been scared you away from crowdfund investing yet, that means you probably have some tolerance for financial risk. How much tolerance? That’s a question only you can answer (ideally with guidance from a financial advisor).
Creating an investment portfolio that meets your needs demands first assessing your level of risk tolerance.
A common perk for owning stock in a company (via crowdfund investing or otherwise) is having the right to dividends. Dividends do not (usually) diminish the amount of stock that you own. Instead, they’re a reward based on the amount of equity you own; you’re given a certain percentage of the money in the dividend pool.
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Free labor for a business is a wonderful thing. If you’re in the pre-revenue stage of developing a crowdfund investing business, free labor may be the only thing keeping you moving forward! As you get ready to start a crowdfund investing campaign, you should definitely try to recruit some free labor so you can maximize the campaign’s effects without needing to work twice as many hours as you already do.
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You must always show gratitude to your crowdfund investors. Thank them honestly, sincerely, and repeatedly. Your investors are part of your team, and you want them to feel connected with you and with each other. Many investors come to the table with much more than money; they bring talents and skills that can mean the difference between your failure and success.
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Pivot is a buzzword these days, sort of like re-engineering and business disruption. If you pivot — if you change the core of your business — you absolutely must share the news with your investors. You definitely don’t want a fundamental shift in your business to be a secret from the people supplying the cash.
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The only reason to launch a crowdfund investing campaign is to raise money for your business. If you’re looking for publicity and aren’t serious about raising the money, don’t put your idea on a crowdfund investing platform. There are plenty of better ways to get publicity:
Create a group of videos and try and get them to go viral.
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One of the powerful things about crowdfund investing is that it enables you to turn your investors into your most passionate consumers. Have you ever made an investment in a public company that sells a product or service that you love? Sometimes the product or service may be the primary reason for the investment.
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In addition to promoting the specific product or service being created by your crowdfund investment, you may find that you want to promote the company itself to other potential investors. Can you do so without breaking the law?
If the business is still raising capital, the entrepreneur or owner is very restricted regarding how he can market the investment opportunity.
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When the subject is crowdfund investing, you need to ask yourself why you’re investing in the first place. What are your end goals? What is your time horizon? Do you need to earn a certain percentage on your investments within a year? Five years? Twenty years?
“Begin with the end in mind.” This truism holds for many aspects of life.
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The premise of crowdfund investing is that you put your money into ventures run by people you know and trust — or by people who have a secondary connection to you. What does a secondary connection look like?
If people you know and trust have a connection with — and faith in — the people running the investment campaign, you have a secondary connection.
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A board of advisors doesn’t supervise you or your crowdfund investing business. Instead, it’s a group of individuals — the smartest, most well-connected people you can find — who can become your biggest supporters and advocates. These are people with 500+ high-quality LinkedIn connections who are willing and able to make introductions to those people to help you get connected.
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Before you envision specific faces in your crowd of investors, you want to get a sense of how many faces (and wallets) you need. With crowdfund investing, you have to make some rough calculations to determine the number of investors you’re likely to need.
You need to consider a couple pieces of information en route to estimating the size of your crowd:
How much money you’re trying to raise through crowdfund investing: If you haven’t already done so, try to determine at least an estimate of your crowdfund investing goal.
No matter what crowdfunding source you use for your business, you have to be careful with your spending and try to make it last. But when you add equity or debt investors into the mix — people who expect to see a return on their money and expect you to use their money very prudently — the financial pressure increases.
Spend time early on (ideally, before you invest) considering the best way for you to exit your crowdfund investments. When buying stocks or bonds of publically traded companies, you have what’s referred to as a liquid market for these investments because of the stock markets like NASDAQ and the New York Stock Exchange — places where willing buyers and sellers meet.
With the advent of crowdfund investing, you have the classic two-sided market problem: How do you match demand and supply? How do you help businesses that need funding find willing investors who are looking to make investments in Main Street businesses or startups?
Prior to the passage of the JOBS Act in 2012, making such connections was difficult or even impossible.
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Crowdfund investing doesn’t compete with or replace the need for professional private money. Crowdfund investment campaigns have funding caps that are significantly lower than most venture capital and private equity investments. Instead, crowdfund investing runs parallel to private money, funneling funds to types of businesses that previously didn’t stand a chance of receiving private support.
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Self-funding your business differs from getting crowdfund investing support in a major way — one involves your own wallet, and the other involves a whole bunch of other wallets.
Credit: ©iStockphoto.com/perets
With that technical explanation out of the way, here’s how crowdfund investing changes your need to self-fund your business: It doesn’t.
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Crowdfund investing is possible because of the passage of the JOBS Act. So, what exactly did the JOBS Act legislation change in the U.S. financial regulatory system? And how do these changes stand to benefit business owners and investors?
Promoting emerging growth companies
The JOBS Act created a new category of companies called emerging growth companies (EGCs) and gives small, growing companies a five-year window in which to become fully compliant with accounting regulations.
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If you’re an unaccredited investor, you can’t invest every dime you’ve got in crowdfund investment campaigns. (An unaccredited investor has a net worth less than $1 million excluding primary residence, and hasn’t earned more than $200,000 for each of the past two years.) Doing so would be a nightmare for your portfolio (you’d be doing the opposite of diversifying), and it also wouldn’t be legal.
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Business customers and crowdfund investors can now visit an online review site and write anything they want about their customer experience, your product, or your service. Bad publicity used to mean photos of you in handcuffs on the front page of a newspaper. That still qualifies as very bad publicity, but many other (more subtle) forms of bad publicity exist today.
If you plan to offer an equity offering via crowdfund investing, you have to calculate your valuation. Valuation is a topic covered in depth in many academic books and college courses. Why is valuation important? Without knowing how much your business is worth, you can’t know how much its equity is worth.
You don’t want to inflate your valuation in an effort to impress potential investors.
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One of the most valuable networking tools you can use is an infographic. Kelly Hoey of WIM says she wouldn’t have been so successful without diverse relationships. The figure shows her infographic indicating the relationship to organizations and people critical for the success of her organization.
Credit: Women Innovate Mobile network map 2012
You can use Post-it notes on the wall, a mind-mapping program, or a free infographic program, but get it down.
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The JOBS Act distinguishes between two types of crowdfund investment platforms: online funding portals and broker-dealers. Here’s why: Prior to the legalization of crowdfund investing, anyone seeking to raise capital needed to do so under the guidance of a broker-dealer.
Broker-dealers are individuals or businesses registered with agencies including the Financial Industry Regulatory Authority (FINRA) and North American Securities Administrators Association (NASAA).
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If you decide that you want to put a small portion of your investment portfolio into one or several small businesses and startups, a number of crowdfund investing platforms (websites) are available to help you make the best decisions possible. You want to take a lesson from angel investors and venture capitalists and invest small amounts in a number of companies.
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After you successfully raise your funding through crowdfund investing and start your company, you have a timeline that you’ve set for your company with goals that you want to stick to. But along the way, many things come up that you didn’t plan on — that’s completely normal. Some of these things may be good, and some of them take a lot more time and money than you expect.
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.
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When establishing a crowdfund investing business, you must get specific about your target market. Defining who your customers will be is critical. Have you ever heard the phrase “It’s impossible to boil the ocean”? It’s a great metaphor for why finding and focusing on your target market is important.
When you start a business, the funds available to use for marketing your company to drive sales are limited (always, no matter how much you raise through crowdfund investing or any other means).
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You may need to cancel a crowdfund investing project immediately post-funding, you may decide that you need to stop your campaign midstream. If that happens, here’s what you need to do:
Find out the funding portal’s policies and procedures for removing a campaign prior to its completion.
Follow all procedures as they’re outlined by the SEC.
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When you’re ready to pledge your funds to a crowdfund investing campaign, you log onto the online funding portal that supports this particular campaign. Here are the steps you’ll most likely take next:
Register with the portal.
You’ll provide your name and preferred contact information
Take the investor quiz.
If you get the opportunity to refocus on your startup or your plans for growing your business, you must be able to communicate with your former and new potential crowdfund investors why you’re worth the investment risk. Raising money in a new campaign will be a challenge — very likely harder than the first time around.
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You need to target your fundraising efforts to sources that are the best fit. Think about what your business is offering from a product, service, and investment perspective. Think about where you are now and what type of financing option would have the most appeal to the type of investors you’re seeking.
Also, as you think about your growth trajectory, consider how many rounds of funding you think you’ll need over the next few years to reach your growth goals.
Even even though you missed your crowdfunding target, you likely still believe that your idea is a great one, and you want to keep pursuing it. Validate your beliefs with others to determine where the disconnect exists between what you believe and what others see and believe about your company, product, or service.
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Even if you’re experiencing problems, your crowdfund investors can handle the turbulence as long as you’re honest and forthright. Whereas a typical stockholder may pull out of a company at the first sign of trouble, a crowdfund investor is much more likely to stay on your side and help push you forward — as long as you give her the chance to understand what’s happening.
If you want to raise money via crowdfund investing, you must grasp the statutory requirements set forth in the JOBS Act. Here are the key provisions that affect how small businesses and entrepreneurs can use this funding opportunity:
Funding is limited to $1 million per year. This limit for crowdfund investing allows for sufficient seed money or early-stage investment for most businesses, while avoiding the unintended consequence of having larger organizations use this asset class as an ATM.
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A company wants to grow, so it runs a campaign to raise the necessary capital via crowdfund investing. What exactly will it do with the money being raised? The question is obvious, but you have to make sure you get a concrete answer.
Look at the campaign proposal and how much the company wants to raise. Carefully review its plans for using the funding.
You’ll need to do a bit of independent research and reading to find out what your rights are as a crowdfund investor in a specific company’s campaign. For starters, your rights depend on whether you invest in debt or equity.
If you’re an equity investor, your rights largely depend on the type of stock you purchase, such as common stock or preferred stock.
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Crowdfund investing occurs online, via SEC-regulated and FINRA-registered crowdfund investing platforms. The online solicitation of potential crowdfund investors takes place primarily via social media to individuals who are known by the issuer. Although some crowdfund investors put money into people or companies they don’t know well, most money that’s raised from crowdfund investment comes from individuals the issuer (the entrepreneur or business owner) is already connected with.
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Outbound communication is the kind that you initiate; it’s not communication solely in response to questions, demands, or emergencies. Your goal in creating an outbound communication plan is to make it scalable.
Think of it this way: If your communication plan were a mountain, could you climb it? If it’s too tall or steep or rocky (the communication plan is too demanding and overly ambitious), you won’t scale it.
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Whether you choose a funding portal or a broker-dealer to support your crowdfund investment campaign, that entity must be registered with FINRA. What else are you looking for from an online portal? Following are the services recommended as you decide which organization to work with to raise money via crowdfunding.
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A merger or acquisition is another common way for a crowdfund investor to have an exit. It occurs when a company combines forces with another company (merger) or when a company gets bought out by a larger company (acquisition). These deals can be structured in many ways.
Usually, when a company is bought out, investors are given cash or stock — or a combination of both — as compensation.
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The best thing you can do is let the entrepreneur or business owner of your crowdfund investment know what your strengths are and where you can provide value. Be a resource for this person to tap into when and how she sees fit. By participating in this manner, you’re walking that tightrope between providing value and becoming a nuisance.
One of the big differences between crowdfund investing and regular stock investing is that if you’re part of a crowd, you have actual contact with the business owner. If a crowdfund investment campaign is successful and the owner receives the full funding, he likely will set up a forum for communication with investors.
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Your website will be linked to your crowdfunding portal. Your website should reflect all the things you emphasize in your video pitch and can offer more details about your product or service, your business strategy, the milestones you seek to achieve, and so on. You can use text, photos, additional videos, graphics, a blog, and more to get your points across.
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In the private market, securities (either debt or equity) tend to be illiquid (meaning harder to sell) because there may not be an established market for those securities. As a result, when you commit to crowdfund investing, you must think differently about how and when you hope to get your money back and/or see a return on your investments.
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Creating a video to pitch your idea to potential crowdfund investors isn’t optional; it’s essential. Video is by far the fastest growing part of the web because it engages people more than flat text.
Before thinking about your own video, watch 10 to 20 videos that were part of a successful campaign on both perks-based and equity/debt-based crowdfund investing sites.
If you’ve seen the movie The Social Network, you understand the need to protect your intellectual property. Before you set out on your crowdfund investing campaign, you should clearly understand some risks that may differ from those you face when raising money through other means. You can minimize the risks to your intellectual property in several ways:
Don’t tell anyone about it.
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If you’ve seen the movie The Social Network, you understand the need to protect your intellectual property. When using crowdfund investing strategies, you need to protect yourself and your business. You can do so in several ways:
Don’t tell anyone about it. This strategy is foolproof, but it means that you can’t run a crowdfund investing campaign.
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At some point after your initial crowdfund investing campaign has succeeded, you’ll likely find yourself thinking about tapping into this funding source again. You don’t want to do so too quickly; starting a new campaign a month after the first one ended demonstrates a serious lack of financial planning and likely won’t result in a repeat success.
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You should be able to locate the meat of the business model on the same funding portal where you find the crowdfund investment's pitch video. The entrepreneur or business owner should provide the equivalent of an executive summary from a business plan, which contains about three pages of information on the entrepreneur, her team, her competitors, and the business model.
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A quality video for your crowdfund investing pitch starts with a script. A script doesn’t need to spell out every word you’re going to say; instead, it should act as a guide for all the points you need to hit on in your video.
To reduce your stress, you don’t even need to think of it as a script; think of it as answering a few questions that a friend is asking you about your business.
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Encourage other crowdfund investors to follow your lead, but only if you’re setting a good example. It’s important to understand that the entrepreneur or business owner may be new at communicating with investors.
If people start giving tons of advice or making demands on the entrepreneur, he may have a very difficult time figuring out how to deal with the crowd (on top of trying to deal with his business plan and financing and everything else involved in getting a business off the ground).
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On occasion, you may be asked to serve on a board of advisors for a new crowdfund investment. This entity is different from a board of directors, which must represent the rights and interests of the stockholders and can take actions on their behalf as prescribed by the bylaws of the company. A board of advisors has no formal authority over the company or the CEO.
When you establish the parameters for crowdfund investment in your business or project, you may determine that you don’t want to bother with tiny investments. You don’t want people buying into your venture for $1 or $5, for example, because you could run yourself ragged trying to meet the needs and answer the questions of hundreds or thousands of equity investors.
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Success in life is based on who you know as much as on what you know. As a crowdfund investor in a small company, providing knowledge and introductions can be very helpful if done in the right way, and when the entrepreneur asks.
Part of the reason that you’ve invested in a small private company may be your desire to feel more connected to your investments.
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One of the biggest risks in crowdfund investing is failing to understand the value of equity. Sharing the wealth is important, but you need to be judicious in how you do it. First and foremost, never give up control of your business. Simply put, never give up more than 50 percent of your equity when raising capital through crowdfund investing.
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When shopping for a crowdfunding portal, you must consider several things, including how much the online platform will cost and whether it has any limitations that will impede your efforts.
Anticipate the cost
Expect that whatever funding portal you choose will, at a minimum, charge you a flat fee for registration and for conducting a background check on you.
The minute you start thinking about investing in a company through crowdfund investing, you assume responsibility to help watch for fraud. The power of the crowd — which includes you! — is precisely what makes crowdfund investing so great.
Historically, fraud has taken place one on one. In other words, one person (such as a crooked financial advisor) dupes one other person (such as a single investor).
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This information is provided in conjunction with Doug Ellenoff of Ellenoff, Grossman & Schole (EGS). Consider EGS the leading crowdfunding law firm. They have over 30 years of experience working with startups, small businesses, and capital raising.
They’re sponsors of the Crowdfunding Professional Association (CfPA), speakers at most events on crowdfunding, and representatives of the industry in front of the SEC, as well as at Financial Industry Regulatory Authority (FINRA) meetings.
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In your business plan and in your crowdfund investment campaign pitch, you told the crowd what you needed to do, when you needed to do it, and how you were going to do it. Those are your milestones. Summarize them into bullet points and put them on a piece of paper.
In his book Mastering the Rockefeller Habits (Gazelles, Inc.
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While you’re trying to grow your networks for crowdfund investing, remember that other companies are doing the same thing. If a company helps you out, make sure to respond in kind.
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Online sharing occurs when you repost something that someone else has posted. People usually post things because they want them to be shared; they want as many people as possible to see what they have to say.
Financing
Unfortunately, people do break laws. In the case of a startup or growing business like a crowdfund investment, you may find out that the entrepreneur or business owner is doing one of these things:
Soliciting investments on the phone or by e-mail instead of via the online funding portal
Paying an employee under the table
Cooking the books (fudging the company’s financial reports) in some other way, whether big or small
When an entrepreneur or business owner breaks the law, he puts not only himself but also your investment at risk.
Financing
Although crowdfund investing is not an economic cure-all, it can be an important part of the solution. It allows significant numbers of citizens to make modest investments in high-growth and/or Main Street businesses. Following are ten reasons why crowdfund investing is already becoming, or will become, a trending topic in financial industries and entrepreneurial ecosystems around the world.
Financing
There are many business beneficiaries of crowdfund investing. The obvious beneficiaries are the businesses receiving the capital, but equity- and debt-based crowdfund investing has created a brand-new industry, and many people will make a lot of money from it.
The types of businesses most likely to benefit from crowdfund investing are startups, small businesses (including technology companies, bricks-and-mortar retail shops, and service companies), and anyone else who doesn’t easily qualify for traditional financing.
Financing
When the stock market crashed in October 1929, public confidence in the markets collapsed. Investors large and small, as well as the banks that had loaned to them, lost great sums of money in the ensuing Great Depression. For the economy to recover, the public’s faith in the capital markets needed to be restored, so Congress held hearings to identify the problems and search for solutions.
Financing
Crowdfund investing is an entirely new industry and an entirely new asset class for investors to evaluate. It represents the beginning of Web 3.0, where the social web (or Web 2.0) combines with businesses raising capital.
It creates a new way for businesses to get seed funding or growth capital, and it will generate an entirely new ecosystem of businesses, business models, processes, and strategies that can be used in starting or growing a business.
The U.S. government has placed limits on the amount that you can put into any crowdfund investments. The U.S. government doesn’t often tell people what they can and cannot spend their money on. However, when it comes to buying stocks in private companies, the government makes an exception. Consider what prompted these investment limits.
Financing
This statistic bears repeating: On average, 50 percent of investments in early-stage companies fail. So, the risks of crowdfund investment seem pretty clear: You can lose some or all of your money.
Among the failures, 50 percent of early-stage companies run out of cash before they can succeed. The other 50 percent of failures suffer from poor management decisions, poor hiring decisions, poor use of funds, and so on.
Financing
Many new small businesses can’t secure bank loans. That’s always been the case, and it’s become even more difficult since 2008. Banks require security for their loans and, in most cases, want to see two different ways that a business owner can repay them. (They want a backup plan in case Plan A doesn’t pan out — if sales or revenues are lower than expected, for example.
Financing
The pitch video that the entrepreneur or small business owner creates is your window into his crowdfund investing business concept and plan. You can find this video by visiting the particular online funding platform that is hosting this person’s investment campaign. You should view funding pitch videos only on SEC-approved crowdfund investing sites.
Financing
On average, 50 percent of investments in early-stage companies fail. So, the risks of crowdfund investment seem pretty clear: You can lose some or all of your money.
Among the failures, 50 percent of early-stage companies run out of cash before they can succeed. The other 50 percent of failures suffer from poor management decisions, poor hiring decisions, poor use of funds, and so on.
In the context of business finance, an incubator has nothing to do with hatching eggs. It’s an office space where startup companies are helped to grow by providing them guidance and counsel in a controlled environment until they’re ready to hatch.
In recent years, there has been an explosion of incubators around the United States, many of them sponsored by venture capital groups.
By seeking crowdfunding for a project or new business, you’re embarking on a process that may last for many years. Over those years, you’ll be building and maintaining relationships not only with your customers but also with your investors. Your customers may expect nothing more than a good product or service in exchange for their money, but investors are different.
Financing
First and foremost, crowdfund investors expect you to focus on your business, so you don’t have to spend five or ten hours a week on communication. Instead, take one hour per week to scan e-mails that investors have sent you and look for common themes of questions or issues.
Create a spreadsheet so that each week, you can quickly jot down the top five (or even two or three) questions/issues/concerns/successes of that week that you heard about from investors.
Financing
A monthly or quarterly review sent to your crowdfund investors should be an opportunity for you to look at your long-term goals (which, for a small business, may extend out a quarter, six months, or a full year — but probably no further). Use this monthly/quarterly communication to talk about the progress you made toward those long-term goals.
Financing
Curation is a practice used by some donation-based crowdfunding platforms that promotes some crowdfunding campaigns over others. An example would be Kickstarter’s “Campaigns We Love” e-mails that draw attention to particular campaigns and increase their ability to raise capital. This practice is allowed on donation (or perks-based) crowdfunding platforms because individuals are giving money away and not expecting a financial return.
Financing
From the perspective of the federal Small Business Administration (SBA), a small business generally has fewer than 500 employees for manufacturing businesses and less than $7 million in annual receipts for most nonmanufacturing businesses. But from the crowdfund investing perspective, a small business probably earns less than $1 million in revenue and has fewer than five employees.
Startups seem sexy. When you think about a startup, you may envision a bunch of high-tech college kids camped out in a fraternity house or apartment, coding away, living on beer and pizza, and figuring out how to change the world and get rich in the process. In reality, startups emerge from every part of a community, from chambers of commerce to incubators to kitchen tables.
Financing
A crowdfund investor acts differently from the typical stock investor because of the relationship he has with the entrepreneur. After all, how often does a stockholder actually know the company founder, receive direct communication from that person, and have the chance to invest in a company from day one (or at least very early in the company’s life)?
Financing
As a crowdfund investor, you must hold your company stock for a minimum of one year. (If you hold a company’s debt instead, you may or may not be subject to the same holding period.) The SEC doesn’t want you (or anyone else) buying a stock in a company and then immediately trying to inflate its worth.
For example, say that you buy equity in a company via a crowdfund investing campaign.
Financing
When you meet your funding target, all your hard work finally translates into the dollars you need to turn your ideas into real products or services. But because you’re potentially receiving small dollar amounts from lots of different investors, how do you actually get the cash into your hands? The type of funding platform you use for your crowdfund investment campaign determines how you receive your money:
Online funding portal: Most likely, you registered with an SEC-approved online funding portal that exclusively hosts crowdfund investment campaigns.
Financing
Your first step to making a crowdfund investing pitch is to consolidate your business plan into an attention-grabbing one-sentence headline. Sound hard? It doesn’t have to be.
Before you try to write the headline, sum up your aspirations and inspirations in a paragraph. You don’t need to share this paragraph with anyone, so don’t get frozen at this step.
Financing
Okay, so the excitement of hitting your crowdfunding target has subsided a bit, the cash is in the bank, and you’ve reached out to your crowd to thank them for believing in you. What comes next?
First, take a deep breath and remind yourself that you’ve already proven you can do a great job. (If you were a lousy manager or communicator, or if you had a weak vision, the crowd wouldn’t have funded you.
Financing
A 12-month holding period exists on the shares you sell to equity investors during your crowdfund investing campaign. As the 12-month period comes to an end, make sure that you’re ready for it. Investors will be reevaluating your company and the progress you’ve made. At around the ten-month mark, you should start getting solid data together to show your progress and the ROI you’ve created for your investors.
Financing
Establishing trust adds significant credibility to your crowdfund investing deal, but how do you establish trust with strangers? Angel investor Jean Hammond says, “No one writes a check the size that will buy a small house unless they know you, like you, and trust you.” Jean has 20 active investments; one of her first was an early bet on Zipcar.
To promote your business idea, you have to be prepared to talk to people, such as your current customers, to explain that they can learn about your crowdfunding campaign at the broker-dealer or crowdfunding platform website that you choose. However, the JOBS Act forbids you from requesting investments directly.
Financing
If you want to exit your crowdfund investment after the first year, you can. No chain tethers you to the entrepreneur or business owner after this point. Here are your options:
Selling on the secondary market: A secondary market is akin to one of the public exchanges, like NASDAQ, that exists for buying and selling public company stocks.
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