When raising capital through crowdfund investing (CFI), investors usually come from 1, 2 and 3 degrees out from the company. Especially companies seeking early stage funding.
A new word to describe this way of seeking funds or investing from investors is called Crowdfunding. These contacts 1, 2 and 3 degrees out from a company can be a lot of people. If you are on Linkedin you can see 3 degrees represents millions of people.
You won’t know them all but if you are working on a particular project you can reach out to them via Linkedin and get to know them so they become people that you have a relationship with that is more than a random “connect” click.
Unlike pledging (donating) and lending, “investing” crowdfunding is heavily regulated as it falls within the domain of securities regulations. More of that in Part Four though.
If it was possible to easily sell equity in your business by crowdfunding there are a few things you need to consider.
The amount people invest in a Crowdfunding campaign seems to average around $50 to $100. This means that if you want to raise between $100,000 to say $2 million you have to gather a lot of followers at these investment levels. ($100,000 equals maybe 1500 investors and $2 million equals maybe 30,000 investors)
This smaller amount will also mean you will have to put considerable time into publicity and promotion. It simply may not be worth the effort.
The majority of Offer Documents and Information Memorandums we receive at ASSOB are “product focussed”. That means pages and pages of information, graphs and images about the product and service. To get a decent amount of money people need to read about what the investment opportunity is. Investors need to know how you make money, what sort of team and management expertise you have, and at least some financial projections.
While a crowdfunding platform may manage the mechanics of raising the capital when it comes to the paper work involved in investing in shares that will be up to the issuer of the shares. Share applications have to be received complete with ID info, share registry updated, share certificates prepared and mailed plus the obligations of keeping a few hundred or few thousand shareholders informed according to the Corporations or Companies regulations.
As the person seeking investors via crowdfunding will be the one populating the crowdfunding site and communicating to prospective investors they may not have the skills or information to communicate what needs to be communicated. Sometimes a business plan, detailed use of funds, investor presentation, or even an executive summary may be needed by those wanting to look further in to the investment. In ASSOB capital raisings we emphasise an important trilogy. The Use of Funds, Purpose of Capital Raising/Funds and the Expenditure of Funds must be congruent. Basically the promises you made when you sought the funds match what you did with them.
While the initial crowdfunding investors (CFI) may be friends, family and followers the larger investors you need may not be part of your crowd. Within a successful capital raising the crowd investing will be made up of many affinity groups. You cant rely on the “right type” of investor to magically find you. You need to widen the context of “your crowd” to match your capital raising and funding expectations.
Crowdfunding investors may be investing in shares for the first time. They may not understand that a high percentage of startup investments provide no return, and they must be prepared to lose their money. This risk must be clearly communicated.
Two aspects here. Firstly you are telling the world about a business opportunity that you may be bettet to keep a secret until you have customers and traction. Secondly the nature of the crowdfunding process doesnt usually allow for protection of your company’s IP by non-disclosure documents and similar.
So while you may envy the successes people are having on Kickstarter, Pozible, Crowdcube.com, IndieGoGo, ProFounder.com and rockethub.com and you need to consider the points above to see if it is for you.
Part One of a Four Part series. Paul Niederer is CEO of the Capital Raising Platform ASSOB. This series continues in Part Two. ASSOB is a CrowdFund Investor platform that has raised $130 million for businesses to date and always has around 60 companies in various stages of raising capital.
- The History & Evolution of Crowdfunding (mashable.com)