Crowdfunding, The New Alternative For Fund Raising
You are probably aware crowdfunding through platforms like Kickstarter where backers of the company pledge small amounts of money so the company can get their product completed. For their contributions, they get a promise of being one of the first people to get the new product or maybe a T-shirt for small amounts of money.
Now, there is a new alternative. As a small business owner, you can sell shares of your business via an exclusive website called a portal to a crowd of investors. Investment crowdfunding is similar to Kickstarter, but the backers get real stock instead of items like T-shirts.
We asked the crowdfunding firm of Silicon Prairie Platform & Portal (sppx.io) to explain the latest information on crowdfunding.
Here how investment crowd funding came to be, how businesses are using it to raise capital, and some of its benefits. For example, instead of seeking significant investments from angel investors or venture capitalists, you can collect smaller investments from many people.
While not “new” as you or I would perceive it, in the financial world, it is. The JOBS Act of 2012 paved the way for State Legislation like MNvest in Minnesota to function as an exemption from Federal SEC regulations. Mnvest allows Minnesota companies to raise money from the public, by issuing stock or selling debt, to any investor in Minnesota. The issuer can also promote the offer publicly via an approved website called a portal. Mnvest came into law in 2016. Not all states have adopted portals yet. Of those that do, they also have their own rules and exemptions.
Raising funds through crowdfunding means small businesses can issue shares using this format instead of the traditional IPO that you would see on wall street. The JOBS Act moved the regulations from the SEC to the State’s Department of Commerce.
One of the very early examples of crowdfunding was by Joseph Pulitzer for the Statue of Liberty. He needed to raise $100,000 to continue construction. In an article published in New York’s World newspaper, he promised to post anyone’s name in the paper no matter what amount they contributed. This crowdfunding method was a huge success and allowed for construction to resume.
Everything changed with the stock market crash in 1929. Because of the market crash, new regulations were born, such as the Securities Act of 1933. This Securities Act put an end to investment crowdfunding. The Securities Act also required that securities be registered with the SEC rather than with the states. This SEC registration also added burdensome requirements for extensive information to be provided if a business wanted to sell securities. This securities act also puts an end to average people being able to invest in companies not registered with the SEC.
The JOBS Act was created to jump-start small businesses and encourage investing that had not been allowed in the past. Now that we know how investment crowdfunding came to be, we can talk about how it is becoming an essential tool for fundraising.
Crowdfunding Requires Marketing and Financing Efforts
One of the most critical aspects of crowdfunding that separates it from traditional methods of raising capital is that it involves as much of a marketing effort as a financing effort. Many people tend to underestimate the need for an active marketing campaign when pursuing the path of crowdfunding. When using crowdfunding, it is essential to ensure your team is 100% on board.
Investment Crowdfunding is not a quick fix for your cash-flow. Instead, it is a sustained effort over time to convert your social capital into financial capital. Therefore, your team must all agree to sustain their energy until you reach your goals!
When running a crowdfunding campaign, it is essential to know that it will not manage itself. You must assign a project manager and delegate tasks appropriately. After completing the business plan and legal documents, expect to budget about 80+ hours for marketing your offering over about three months. Most of this work is done in the planning stage and includes setting goals, performing research, creating a compelling story, developing a brand such as logos and diagrams, and more.
Your responsibility when seeking investment is to explain to investors why their money will grow with you. They do not want to pay off your bad-debts or hire you to chase your dreams. You must show them you have an investable business and that you are the right one to succeed.
Investors care about when they will break even. They do not care how perfect your product is because some investors may never use it. Investors have many places they can “put their money to work.” It is essential to show them why their money has a bright future with you but also protect your reputation by having a plausible plan to fulfill those promises.
A significant advantage to crowdfunding is that you can assemble a crowd of regular people who can invest for a multitude of reasons, not just good-looking financials. However, it is much easier if your investors believe in your financials.
For your campaign to be successful, you will need to ask a lot of people if they are interested in participating. Most campaign companies are surprised by the mix of supporters they get to fund their campaign. Many targets you think are an “easy-yes” will never show up, and paradoxically random supporters can “come out of the woodwork” with money. Therefore, it is essential to socialize your offering very broadly and often. Let go of the bias that you “know” who will participate. Instead, handle your campaign scientifically by inviting all the people.