Editor’s note: Jason Best and Sherwood Neiss spearheaded the efforts to legalize crowdfunding and helped author the JOBS Act. They founded Crowdfund Capital Advisors and are currently co-authoring Crowdfund Investing for Dummies.
The concept of crowdfunding to launch and grow your business may seem like a dream come true—reduced cost of capital, access to new pools of investors, the community opening their arms and wallets— all giving your business a shot to make it big. While crowdfunding (both donation and equity based) offers amazing opportunities, it also brings fiduciary responsibilities, commitments of time, reporting requirements and the potential to let down the people who mean most to you in the world if the unforeseen happens and failure occurs.
As the authors of the Startup Exemption Framework that made debt- and equity- based crowdfund investing legal, we take the responsibility of educating entrepreneurs and investors extremely seriously. Anyone that has been in the private equity or entrepreneurial community long enough knows how hard it is to raise capital, whether that is from your professional investors or from friends and family. We want to ensure that people crowdfund responsibly—which is why we will be contributing updates, data and advice to TechCrunch readers in the coming months.
- Don’t Force People to Drink your Kool-Aid
Whether you are launching a donation-based campaign on Kickstarter for a new gismo or are preparing your online and offline networks for your new software company’s equity campaign launch—DON’T BE ‘THAT GUY.’ We have all heard him –the one that talks endlessly about his company and dreams and takes it personally if people don’t kick in to meet his Kickstarter goal. Business opportunities come and go, and if you push people too hard for dollars, you may see more people go in your life. While you have to get your networks ready, do so tactfully and legally. If people are not interested don’t keep pushing, as you never know their reasons for not kicking in. A better approach is to engage with your network before asking for money—see if they would be willing to evaluate your business plan or critic your pitch idea. Engage them, have them mentor you—people want to feel like they are helping and giving back. Also by asking people for their advice and help before asking them for money, you are also ensuring that you will overcome their personal objections when it does come time to ask for funding.
- The Impact of Failure on Those Close to You
Above all we advise entrepreneurs to never allow people to invest more than they would be comfortable losing. While no one ever wants to believe their idea could fail the reality is that, according to the SBA, 50 % of business fail within the first five years. While we believe crowdfunding will reduce those rates—as the SBA attributes 65% of all failures to a lack of capital. If failure does occur, you are going to need your friends and family to support you. While there are provisions that limit the amount of funds an unaccredited investor with a net worth under $100,000 can invest to $2,000 per year (or 5% of their annual income or net worth, whichever is greater), do you really want your uncle putting himself in a bind to fund your business?
- Plan Ahead to Avoid Investor Dread
Could you imagine adding an extra 10 hours a week of email management to your schedule? For crowdfunded companies that do not plan and execute properly, this can become their new reality. As novice investors can often require additional calls and emails, investor relations can quickly become distracting and overwhelming. Before you know it, your business could suffer… leading to even more calls and emails.
When you use crowdfunding to fund your business, you need to plan for ongoing communication with your donors and investors and set their expectations early and often about how you will communicate with them. Think about how you can create scalable ways to communicate. Is it a quick email update? Does your crowdfunding platform have online IR services that you can use? What will your cadence of communication be? Are you planning on using a publicity firm to help you manage the communication? If so, you need them to provide a plan before you launch your campaign.
Create a private group using Google, Facebook and/or LinkedIn groups to communicate with members. Set expectations up front on when updates will be given and never miss a deadline. The main point is that you need to be prepared to give regular updates—continuing to set and meet expectations regarding communication.
- Don’t Sweep Dirt Under the Rug
Communicating openly is critical. While publicizing achievements, new product developments, media coverage and good news is a must. You will also want to share issues or problems that may negatively affect the company with your investors. It is always better to be the one breaking the bad news. Most investors understand that hiccups occur, deadlines get missed, and circumstances can require a pivot to new opportunities—the key is to openly communicate and maintain communication during the good times and bad.
- Be in the Know
While the JOBS Act laid out general guidelines, the specific regulations crowdfunding companies will have to follow are still being written. All the same fundamentals for starting a business remain unchanged for crowdfunders. Start now to prepare to ensure that you will be ready in 2013, when equity and debt based crowdfunding becomes legal. Many of these steps will need to be completed now in order to be compliant and fully prepared.
There are a great deal of resources online that can help, sites like the Crowdfund Regulatory Intermediary Advocates(CFIRA) and the Crowdfunding Professional Association (CfPA), offer updates and training as well as conferences that will prepare companies to succeed in crowdfunding and stay within the confines of the laws.
As an entrepreneur, you certainly have a clear vision for your business, but this vision needs to be communicated to others. Investors need to be confident in your ability to create measurable value, especially if you do not have an existing track record of successful startups already under your belt. Show them why your business is worth funding and be ready to listen, when they give you advice. By spending a bit of time in preparation and communicating clearly with your investors in scalable ways—you can harness the power of the crowd and not be overwhelmed by it.