The new rules for equity crowdfunding have been around for less than two years, but the inaugural Crowd Invest Summit proved that the startup community is excited about this new opportunity. The conference was held earlier this month, and I had the pleasure of sitting on a panel. The lessons I learned at the conference will give entrepreneurs some things to think about before they run out and start asking strangers on the internet for money.
First, a little background. When most people hear the word “crowdfunding”, they think of Kickstarter campaigns that raise money for new movies or video games (or potato salad) . While exciting, these campaigns are a different type of crowdfunding. On Kickstarter or GoFundMe or Indiegogo, people raise money by offering rewards, limited edition products, or special event packages. Backers of these projects don’t get any ownership stake in the business – they might just get a t-shirt or a poster. Sometimes all they get is a warm and fuzzy feeling about helping someone.
Equity crowdfunding platforms are different. On these sites, companies are selling ownership shares in their business. Before the latest rules, if you wanted to make a “public offering” of shares in your company, there were a lot of expensive hoops you had to jump through. The latest SEC rules (Regulation CF and Regulation A+ ) reduce these hoops to allow more companies to offer their shares to the public.
Even though the rules are new, an ecosystem of buyers and sellers has started to take shape. The Crowd Invest Summit was the first chance for all these players to come together in one place.
Based on figures released by the conference organizers, of the 1,500 attendees:
- 53% were business owners
- 23% were investors
- 24% were service providers
That seems like a healthy mix of all the necessary components of a thriving marketplace.
So what are the biggest takeaways from two full days of round-table discussions, fireside chats and networking mixers?
It takes money to make money
While there are claims that crowdfunding can “democratize” the startup funding process, there is still one significant barrier – it isn’t cheap.
The costs of a campaign include:
- legal fees for compliance (I have seen estimates ranging from $25k to $100k)
- accounting fees for a review or audit the financials ($3k to $10k depending on complexity)
- marketing expenses (vary widely, but you don’t want to skimp here, so expect $15k to $50k)
And that’s all before you collect a single dollar. If you are successful, the portal will collect their fees of 3% to 6% of the amount raised.
To afford all this, business owners already need to have some funding in place, and they have to be pretty confident of success. For others, it might make more sense to stick to the traditional Venture Capital or angel investor route.
Help is out there
My accounting panel included David Gosselin and Craig Denlinger – two CPAs who specialize in providing audits and reviews for companies raising money under Regulation A+ and Regulation CF. Similarly, I met attorneys, marketing professionals and other consultants who have made crowdfunding an integral (and sometimes exclusive) part of their practice. This specialization allows professionals to build services specifically for the market – and also price them appropriately. The level of expertise that already exists in this emerging market speaks to the amount of excitement that already surrounds it. And as the market grows, the level and affordability of expertise will grow with it.
Keys to success in equity crowdfunding
A lot of the early success stories in equity crowdfunding are from the real estate industry. But let’s be honest – most people are hoping for something more than an alternative to traditional REIT investing.
For true “startups”, the conference panelists kept coming back to two distinguishing characteristics of the companies that had found success:
- a compelling story (and some marketing muscle to tell it well)
- a loyal fan base (or even better, a loyal customer base).
Even in these early days of crowdfunding, it is easy to get lost in the noise. If you already have people who know and love your story, they will be the first people to invest in your story and share it with their communities. And that is where the power of the “crowd” really takes off.
So what can you do?
If you are an entrepreneur trying to get your company off the ground, you owe it to yourself to investigate all the available choices. Luckily, you have more options than ever before. But that also means there is more that you have to know.
Before you jump into anything:
- Start working on your story
- Connect with your fan base – get an idea if they might be willing to invest
- Check to see if there are any events like the Crowd Invest Summit in your area
Doing this research can help you decide if equity crowdfunding is a viable alternative for financing your business.