Blog 18: CROWD FUNDING 103
I had written my first article on Crowd Funding in Blogs 101 & 102 and have since been baptized in the program with the successful campaign launch of my first client, who is now on the Crowd as of 9/18/17.
This was an exercise in gathering a BODY OF KNOWLEDGE that took six months to conclude with a successful launch including the original Business Model, which my client had previously conceived based on matching pre-qualified auto-service repair shops through an (APP) with car owners on a budget, who have a car problem (like needing new brakes).
We will withhold the name of the company until we have complete clearance to accept investor funds; however, the path with which to have achieved this moment was and will be through the State of Minnesota's special Crowd Funding program exclusive to startup and existing businesses in the State, the funds of which will also be raised and used exclusively in the State within a program titled MNVEST, which is the blanket umbrella under which pre-approved PORTAL operators operate to launch Crowd Funding campaigns.
Believe me, my client and my firm started out as neophytes and ended up with, not only, a good working knowledge of the system, but also, who all the players and their vital roles and contributions.
We chose, after many interviews, Dave Duccini’s PORTAL (SILICON PRAIRIE), who operates the most sophisticated PORTAL we think is available and from which we actually launched as referenced above.
There is so much that went into this launch from developing the Business Model to researching the CROWD FUNDING options and learning who the players are and their role as well as making the ultimate PORTAL operator selection from which to launch the campaign.
There are many areas of concern to work through before a launch, including but not limited to, a public business plan, video, power point, financial projections as well as stock distribution formulas in what amounts to a limited public offering if the fund raising involves an equity platform.
If you remember from my previous Blogs, there are many platform versions ranging from EQUITY, to DEBT to CHARITY et al with each having its own compliance issues.
My firm is also working with two other clients to market and launch CROWD FUNDING campaigns, one will be a DEBT TO EQUITY platform and the other a CHARITABLE contribution 501c3 campaign. The good news is we now have some experience with these campaigns to start new programs for our client’s.
We will be announcing the details of the campaign within the next several weeks, so STAND BY for the opportunity.
In the interim here are some observations gained from our experiences:
FOR THE CROWD FUNDING COMPANY
1. Hire an experienced Crowd Funding consultant the cost is well worth the time saving to go to market. Also, hiring a quality videographer for the Crowd Funding video, which is a MUST is much better than you doing it on your cell phone.
2. Crowd Funding can be a daunting painful journey without having a guide to navigate you through the maze of issues involved to launch.
3. If you elect to do an EQUITY launch, remember that it is essentially a private placement and investors are weary of the risk since 3 out of five startups fail so you will need an army of friends and network contacts to accomplish your goals.
4. Crowdfunding is a very involved process (certainly more interactive than dealing with a bank) and unless you can dedicate the time to respond to questions and speak to potential investors on an almost daily basis through the forum, don't bother.
5. Openness is key. People will ask you questions - it's all transparent and online so you need to be ready for an active process. Look out for platforms that help you to prepare your answers if you're unsure.
6. At the end of the process your business should be all the better for it. Your idea will have been thoroughly examined and picked over by potential investors - try to see this as a positive process because it will most likely improve your overall end product.
7. Do the work. Make sure you have carried out in-depth research before you pitch your idea. Anticipate as many questions as possible, include them in your pitch, and use plain English not jargon.
8. People buy into a team or personality. Try and be as engaging and personable as possible - people do expect you to have a passion for what you do.
9. When all is said and done, go back and reread my Blogs 101 & 102.
FOR THE INVESTOR/STOCK HOLDER
1. While you may receive a share of a business or project, dividends are rare and your investment could be diluted if more shares are issued.
2. You must also take a long-term view to any returns - it can take a while before start-ups begin making the big bucks and investors should not expect instant returns on equity investments. Your stake will only become worth something when the business floats on the stock market, in which case it will have enjoyed many years of success, or if management has a buy back stake from investors.
3. Most crowdfunds are illiquid, meaning it can be difficult, or even impossible, to claim back money invested or have it converted back into cash - an issue to bear in mind if you are thinking of taking the equity route. There is no secondary market to sell your shares or crowdfunding investment.
4. Alternatively, lending money through debt crowdfunding - or peer-to-peer lending - gives the option of regular income. There may also be the prospect of dividend returns and some projects will pledge to return ongoing profits to investors and even offer a convertible note to convert their note to equity, which is great for the debt holder.
5. In general, more ideas get financial support today than can possibly return capital so investors are advised not to risk more than they can stand to lose.
6. Unfortunately, where money is changing hands – and especially where it is all done online – there is a risk of fraud, so investors and donators should take care to protect themselves.
7. Make sure you sufficiently understand the business or project, how and when you might get a return, whether you will receive an equity share in the business or a regular dividend or interest payment, and the risks involved before investing in a crowdfund.
8. Have you thought about tax breaks? Some platforms allow you to search for companies signed up to the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Schemes (EIS).
9. Find out how your money is protected if the business, project or even the crowdfunding platform collapses – in particular, check whether the business has appropriate cash reserves or even insurance supporting it if it fails.
10. Invest in what you know. If you work in IT or the food industry, for example, you can use your expertise to help make better informed decisions for those specific industries.
11. You might want to consider lending money to a company rather than buying a share, in which case risks may be lower, as will returns (don't forget crowdfunding does not necessarily equal start-ups).
12. Do your research: Read through forum threads and work out what people are saying about a business model and ask your own questions.
I believe with the publishing of Blogs 101, 102 and now 103 the Crowd funding candidate or investor will be better equipped to make prudent decisions to go forward.
You can even call me for some limited, no obligation HELP!
Ronald Mitchellette & Associates