Crowdfund Investing For Dummies
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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.

    Crowdfund investing is an all-or-nothing method of funding. Be realistic in your expectations, or else you risk getting zero for your efforts. Don’t aim for $1 million in crowdfund investments unless you’re extremely confident that you need that much money right away, plus you have a great idea, an existing social network, and a marketing pitch that can convince a whole lot of people to believe in you.

    Your first time out of the gate, you may be better off setting your funding goal much lower so your chances of achieving it are greater.

  • The maximum investment level allowed from an individual crowdfund investor: Per regulations established by the Securities and Exchange Commission (SEC), the maximum amount differs from person to person based on the individual’s annual income or net worth.

    The statute states that each year, someone can invest “(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and (ii) 10% of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.”

    The maximum amount for any one person to contribute to a crowdfund investment project is $100,000, but the cap is much lower for people with modest incomes.

    For example, someone who earns $40,000 a year could contribute a maximum of $2,000 (which is 5 percent of his income); someone who earns $75,000 a year could contribute a maximum of $3,750 (which is also 5 percent); and someone who earns $150,000 a year could contribute a maximum of $15,000 (10 percent of his income).

    If you’re an accredited investor, keep in mind that these rules don’t necessarily apply to you unless you’re making an investment through a crowdfunding portal. In that case the maximum you can invest is $100,000.

  • An individual’s maximum participation amount is the total amount he can contribute among all crowdfund investment opportunities each year.

With these two pieces of information in mind, you need to get real. Unless you have a specific reason to believe that your friends, family members, existing customers, or other close contacts are frothing at the mouth to put money into your venture, you shouldn’t plan on many people maxing out their crowdfund investing capacity with you.

Instead, you need to estimate how much money an average investor in your crowd is likely to risk on your project. (And yes, no matter how great your idea is, this type of investment is a risk.)

What’s a reasonable expectation from each investor? Although crowdfund investing is new, the concept of crowdfunding isn’t, and history may offer some helpful clues.

Consider a specific type of crowdfunding event, such as a fundraising run or a political campaign. For donation-based platforms such as these, the average donation in recent years has been $80.

The average contribution to a local AIDS walk in recent years has been $80. The average amount donated to the last presidential campaign was $80. The average amount raised on the crowdfunding website RocketHub for an indie band was $80.

Does that mean you should just divide your total funding goal by $80 to determine your crowd size? Maybe. Say your crowdfund investing goal is $25,000; divide it by 80 to determine you need 312.5 supporters. (Good luck finding that half a person.) That number can serve as a good starting point for your crowd size.

Should you then ask your potential investors to each contribute exactly $80? Absolutely not! A concept called Pareto’s principle, which derives from crowdfunding, tells you that 80 percent of your financing will come from 20 percent of the crowd, who will make donations of $1,000 and higher.

Using the example of aiming for $25,000, you can estimate that 80 percent of that amount ($20,000) will be given to you in the form of donations of $1,000 and up. In other words, you can expect 20 or fewer investors to provide that $20,000.

If the remaining $5,000 comes to you in average investments of $80, you need about 62 people to provide that amount. (Actually, the number is 62.5, but leave that poor half-person alone.) You’re then estimating that you need 82 total investors:

Pareto Dollar Amount Number of Investors
80% $20,000 20
20% $5,000 62
100% $25,000 82

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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