BLOG 15: CROWD FUNDING 101
I have been raising money for clients, including myself, for over 40 years, either as an entrepreneur starting my own business, working for lenders as a New Business Development Officer, buying and eventually selling a bank and retiring, only to restart again as a Business Consultant with 40 years of experience, 20 years ago, and still working.
My firm MITCHELLETTE & ASSOCIATES, LLC (www.mitchelletteandassociates.com) has been coaching its clients on real life solutions to both simple and complex business issues from startup capital to survival and growth financing and ultimately exit strategies.
We also specialize in finding investment opportunities for our investors, all of which means that we use all forms of CAPITAL FORMATION, not the least of which is the new kid on the block-CROWD FUNDING, the Internet version of the infamous B & M “Dog & Pony” show.
Most of our Clients are either looking for a merger partner or an acquisition candidate and ironically many visit with us as STARTUPS looking for capital to launch their dream, which usually requires SEED money to finance PROOF OF CONCEPT of their invention or business idea, which is usually a difficult process to convince a potential investor to invest their money in an unproven concept forcing the Startup to seek funds from family and friends until the creation of State sponsored Crowd Funding programs, like the one just launched in January of this year in the State of Minnesota.
This State sponsored program (MNvest.com) is a "God Send" for the beginning entrepreneurs as it offers many different forms for raising capital from Equity and Debt to Social platforms delivered through PORTALS, which can be best described as the launching pad for a Startup. These local State Sponsored Crowd Funding PORTALS are indigenous to the State in which they were created for the purpose of raising money within the state to finance Start-ups and/or grow and keep existing businesses within the State so these businesses are not tempted to leave the State.
These Portals are owned and operated by State approved/certified owners, who will tutor the Startup in the requirements to launch a successful campaign as there are some basic requirements needed; such as, a Professionally Prepared Business Plan (my firm specializes in preparing such plans), Video, Power Point presentation and the offering itself, which could be any one of the following Including legal compliance documentation required to meet local, state and federal securities regulations (SEC).
1. Equity Crowd Funding. This is just like it says. The Company decides to sell part of it’s stock to investor(s) in exchange for their financial contribution. This approach is fraught with problems not the least of which is:
• Company Valuation?
• Percent of ownership?
• Local, State & Federal securities law, including qualified investor tests?
Note: People invest in an opportunity in exchange for equity. Money is exchanged for a share in the business, project or venture. As with other types of shares if it is successful the value goes up. If not, the value goes down and you could lose your money completely.
Example Other Related Sites include: www.banktothefuture.com, www.crowdbnk.com, www.crowdcube.com, www.gambitious.com, www.microgenius.org.uk, www.crowdmission.com and www.seedrs.com.
2. Debt Crowd Funding: This method is the one I prefer to recommend to my clients since it is essentially an Interest Bearing note or loan from the public, which has to be paid back in a given length of time and in many cases (I prefer) with a conversion option to the company’s stock, again in a specific length of time.
This approach gives the Note Holder (optional investor) their Interest Income and, though not RISK FREE, it does tend to minimize the Risk, since the company is obligated to pay the principal and interest back on the date decided upon or the Note Holder can convert their loan to equity, which is the choice of the Note Holder, especially if the Note Holder likes the progress of the company to whom they lent the money.
This method of raising money has other names; such as, peer-to-peer lending or lend-to-save; nevertheless, whatever name you call this approach it allows for the lending of money while bypassing traditional banks, who most probably will not lend money under the traditional banking mind-set as usually the company searching for money is a Start-UP with no collateral or history to qualify for a loan without a qualified guarantor.
3. Exchange Funding: This kind of Crown Funding is basically the company exchanging their product or service that in and of itself has value for a financial contribution like a former would-be client of mine who was offering his exclusive artistically designed Pen and Pencil set in a beautiful gift box valued at $350.00 retail, to contributors for their various levels of contributions, like a $1000 contribution earns the contributor a $100 credit on the SET and for a $2000 contribution the contributor would receive a free gift SET
4. Social Funding: This is where crowd-sourced money is donated for many different causes that have a social impact and the entity seeking the crowd-sourced money is usually a 501c3 Charity with a specific cause that a contributor endorses and is rewarded by doing social good.
Since most capital searches involve various risks; the entity looking for capital usually has to provide extra incentives for FIRST-IN investors; such as, extra stock for more ownership or other privileges associated with the investment. So, up until recently and still continuing are the common approaches to raising mone as referenced above but this approach is becoming somewhat antiquated as EMAIL BLAST, SOCIAL MEDIA SITES, BLOGS, UTUBE and now CROWD FUNDING is becoming the medium of choice, especially for Start-ups.
Bottom line, raising money on the Internet through a Crowd Funding Campaign is only as good as the Network of the company trying to raise the money. If the company does not have an extensive email list to whom the campaign is aimed, the chances of success are limited; thus I would pre-qualify any Portal owner/operator as too whether they have compiled a list of qualified investors to add to the Company’s list.
First, for Minnesota entrepreneurs go to www.MNvest.com or to your states domain site and search for State Funded programs, which may include their own Crowd Funding program, like that of Minnesota.
Then do all your research, which ultimately will give you the information you need to make the best decision you can on selecting a Portal owner/operator for your campaign.
OK, this brief Crowd Funding tutor is intended to help educate the reader as a general explanation of the programs available and will be followed in my next Blog, which will address CROWD FUNDING REGULATIONS.
RONALD MITCHELLETTE & ASSOCIATES, LLC
2730 West Lake St., Ste.905
Minneapolis, MN. 55416
Direct: 612 715 9217
Office: 612 925 8333
Fax: 612 925 8320
www.barnesandnoble.com (Search Box Enter "Entrepreneurial Decision Making")