Monthly Archives: March 2014

Risks of Crowdfunding

Risk of Crowdfunding from The Startup Garage

Risks of Crowdfunding

Risks of Crowdfunding

When the Security and Exchange Commission (SEC) proposed new Rulings in response to Title III of the of the Jumpstart Our Business Startups Act (JOBS) in November 2013, it was great news for U.S. startups who will, starting in the spring of 2014, be able to have non-accredited investors fund their companies up to $1 million per year. This equity crowdfunding model is promising because the general public will have the opportunity to go online and make small investments (think $1,000-$5,000) through online funding portals that resemble the current donation-based crowdfunding platforms like Kickstarter. Instead of having to go to the bank or seek out venture capitalists, companies can source some of their funds directly from investors who believe in their products and ideas.

Since equity crowdfunding for non-accredited investors is not yet available in the U.S., it is hard to predict what the success rate will be for startups that participate. But information from both the new proposed rulings and data from past donation-based and equity crowdfunding efforts can give insight into potential challenges that startups may face. Below are some possible risks that businesses could face with an equity crowdfunding campaign for non-accredited investors.

Expenses

The dynamics of equity crowdfunding campaigns for non-accredited investors will be more costly and time-consuming than donation-based fundraising. For example, if a startup intends to raise over $500,000, it will have to undergo a financial audit by a Certified Public Accountant (CPA), which can cost around $25,000. This requirement may discourage small businesses from setting a campaign. It will also be necessary to hire an attorney who is familiar with the JOBS Act so she can prepare legal documents which detail the obligations and rights of the investors and company management. As of the current ruling, an initial disclosure and ongoing filings with the SEC are necessary for the non-equity investor crowdfunding process. However, this could be revised by the spring of 2014.

Unanticipated Demands

When Pebble, a company that sells smart-phone watches, used donation-based crowdsourcing on Kickstarter to raise money for their brand in 2012, they rewarded backers with watches. While the company projected it would only need about 1,000 watches to fill the demand, the campaign turned out to be wildly successful, raised over $10 million, and with 85,000 backers, Pebble management had difficulties producing inventory quickly enough. This experience shows that businesses should have the capacity to adequately fulfill their promises before entering a crowdfunding campaign. At the least, the business should not over-promise what they can give back to investors.

Your Investors

When you take part in non-accredited equity crowdfunding, you are essentially becoming a mini public company. If thousands of people invest, then you will have to respond to the demands of those people, who are not necessarily going to be business professionals. People who invest will care about their dividends, and will want your company to succeed. However, it is advisable to set up an investor services department at your company to respond to their needs, input, and requests. First-time investors may not be aware of the ramifications that come with funding.

Of course, even if a business prepares the ‘perfect’ crowdfunding campaign there is of course no guarantee that it will be successful. In any crowdfunding campaign, there remains an element of chance, and so companies risk time, energy, and money, as well as staking their reputation on the success of their bid for crowdfunding, which may impact future attempts at securing funding. For companies aiming to capture new sources of funding, potential opportunities are tempered by potential risks that should be considered.

Crowdfunding: Like Dorothy, You Too, Can Make Your Wish Come True

Opportunities of Crowdfunding from The Startup Garage

Crowdfunding: Like Dorothy, You Too, Can Make Your Wish Come True

Like Dorothy, You Too, Can Make Your Wish Come True

Fairy tales and fantasies are wonderful. In the Wizard of Oz, Dorothy only had to click her glittery heels three times to get her wish. Don’t we all wish that were possible in real life? Society would be different. Everyone would have enough to eat and live on. Yet, if you reflect on the story, Dorothy’s wish was always with her. She had to gain experience to realize that the power was within her, and that she always had the ability to go home. Today, life is much like the story of the Wizard of Oz. Life coaches tell you that all you need is to visualize what you want, that you have the power within to attain your dreams. And it is true! In the past, we might have believed that this was just a children´s story; that real life was difficult and we couldn’t ever really reach out and get that golden apple. 20 years ago, people knew that the only way to get ahead in life was simply to work long, hard grueling hours at a job you hated. There was no magic and certainly no happy ending.

That’s all changing now! Never was there a time when a person could feel more empowered than now. Today, we are all in control of our own creativity, thoughts and ideas, and of our own financial future. Never has it been easier for anyone from any educational background, of any ethnicity and from any country, to start a new business project. “What? How?” you ask. Business projects, no matter what the size, take money…and a lot of it. “How can I, a person that has to carefully budget all expenses, fund a new startup? you think. The answer is really quite simple. A new funding source called crowdfunding can help anyone find the financial resources to complete any creative business project, whatever it might be.

Crowdfunding Defined

Crowdfunding offers financial resources to any creative soul with a great idea. All you have to do is pitch your idea to thousands of Internet users. In turn, they offer small donations or investment into your project, thereby helping you get your overall funding goal, and ultimately get your project off the ground.

Is It Really as Easy as That?

No, it´s not easy as pie, but it is very feasible. You do have to work at creating an outstanding project. You have to present your project in an intense, but very professional way. You have to be honest and authentic. You have to present your project quickly and get audiences motivated to help you. Now, doing all of this may seem easy, but as with everything, easy is hard to create. But even so, it is a much more effective way of funding an idea, project or business…and if you do it right, well, you get the capital you need to start your business project.

How to Make a Really Effective Crowdfunding Project?

Before you even start, you need to keep your objective clearly in mind. If your goal is to raise eight thousand dollars, you always have to keep that goal in mind. This way you can make adjustments, market and promote as much as you need to get to that focused goal.

While keeping your ultimate goal in mind is certainly very important, and the place to start your project, you still have to do a little more work. You need to plan your project out, and it is the initial planning that will make your project a complete success, or a complete failure. . .

Analyze the Data

This is the place you need to spend the largest portion of your time. Before you think of the amount of money you want to raise, you first have to analyze other similar projects that other people have listed on crowdfunding sites. Look at the amount of money they have asked for. Ask yourself, “How many of these people have reached their goal? What is the general amount that often gets reached?” What amounts are those that are harder to reach? How much do you estimate you can get from friends and family?” There are tools out there that help analyze crowdfunding data to get the analytical data that can help set your project ahead in the game. Use these tools to determine the amount you can safely expect to reach. This goal, of course, is dependent on your project, the number of friends and family you can get involved and the value of your product or service.

The Disadvantages of Crowdfunding

Disadvantages of Crowdfunding from The Startup Garage

The Disadvantages of Crowdfunding

Crowdfunding is a great alternative to traditional early stage funding strategies. It comes with its fair share of advantages and disadvantages. As an entrepreneur, it is important to look at both sides when deciding whether or not crowdfunding is right for your venture and should consider the following reasons.

1. All or Nothing: Most crowdfunding platforms use the “all or nothing” model, which means even if you are a dollar short of your target you will end up with nothing. Entrepreneurs need to make sure they have the correct goal amount.

2. Negative Impact on Reputation and Future Financing Options: Once your campaign is over, it continues to stay on the crowdfunding platform used. Everyone can see if your campaign failed, and it can put your reputation on the line for future projects. This is especially true if you are planning to pitch to any when pitching to any sophisticated investors. They will definitely be aware if you failed and may use that as a reason enough to not invest in your business.

3. Speed: You need to make sure your business does not have a lengthy R&D cycle and your product needs to be ready within months of the end of your campaign. Backers want to be part of the success and do not want to have to wait years to receive their pledged reward. There also may be times when your business requires a rapid infusion of cash and cannot wait the allotted time for the crowdfunding campaign to finish.

4. Reward Time and Money: Every so often, entrepreneurs will add in extra rewards as it gets closer to the end of the allotted time of the campaign. Some rewards can cost extra money and time. Sometimes entrepreneurs forget to factor in these additional costs into the original goal, so even if you do reach your target, it is possible you may not have enough left over time or money, after giving out rewards, for your original campaign. Rewards need to be considered very carefully.

5. Quality of Feedback: A huge advantage to pitching to sophisticated investors is the amount and quality of feedback you receive. They can give you advice not only on your business or product, but on the actual business model. Since crowdfunding typically involves peers and members of the community, if you even get feedback on your campaign it might lack the expertise you need to improve your business model.

6. Not For Large Investments: It can be very challenging to raise the amount of money needed for larger ventures requiring millions of dollars. If you have a successful campaign, it means you were able to raise a small amount of money from a large amount of investors. Depending on your project, crowdfunding is not always the most adequate funding strategy.

7. Less Appeal For Business To Business Products: Crowdfunding in itself lets you know that you are leveraging your products to the crowd, or the consumer. The crowd represents your peers and people of the community who are looking for the next best thing to help solve their day to day problems. Unless your idea is something that is meaningful or cool to the public, it is not likely the sufficient amount of funds will be raised for your venture.

Pros of Crowdfunding

Pros of Crowdfunding from The Startup Garage

Pros of Crowdfunding

The Pros of Crowdfunding

There are several strategies to receive funding in the early stages of a startup. With these strategies come both advantages and disadvantages. With the rise of crowdfunding as means to obtaining capital, it is important to see just how beneficial using this approach can be for venture.

1. Access to Capital: Crowdfunding is a great alternative from the usual early stage financing strategies. It allows you to raise capital without acquiring debt or having to give up any equity.

2. Free Press: Most crowdfunding is done via crowdfunding website. This alone allows your campaign to be seen by hundreds of investors who want to protect their investment by creating online popularity through social media and other online channels. Successful crowdfunding campaigns can potentially attract future investments from traditional channels and attention from media outlets.

3. Source of Feedback and Brainstorming: Whether or not your campaign is successful, you will receive feedback. If people are responding positively to it and invest, then it is likely it will do well. If you end up not meeting your goal, then you know there is some tweaking that needs to be done. Either way, your campaign will allow you to engage the crowd and receive comments, feedback, and ideas. Since this feedback is coming directly from your peers, it is extremely valuable and can help you attempt to perfect your idea.

4. Speed of Response: Most crowdfunding campaigns are online and typically on a month long timescale. This gives you the ability to raise money quickly without having to go through any loan or pitching processes.

5. Marketing/ Serves as a marketing tool: Crowdfunding its self serves as a form of marketing. It is a way to introduce your mission and vision to the market. Interest and awareness is created from the very beginning of your project, so when your product is ready your peers will be there waiting. Crowdfunding is a free and easy way to reach numerous channels and pushes you to build up your social media networks and use all of your contacts. Your contacts are important as they have the ability to share and spread the word to their connections, giving your campaign the opportunity to engage more supporters and grow a larger audience.

6. Less risk: Starting a company is a risk within itself. It comes with its own set of challenges and unforeseen expenses, on top of the necessity of finding sufficient funding. Crowdfunding allows you to avoid the risk involved when taking a loan or giving up equity since investments are donation based.

7. Gives proof of concept: Crowdfunding gives you the market validation needed in the next stages of funding. Showing future investors that you had a successful crowdfunding campaign confirms to them your venture’s credibility and potential for even more success.

8. Introduces prospective to loyal customers: A good crowdfunding campaign shares the product or idea, as well as, the message and purpose behind it. People will not invest in your business unless they care about message, and those who do invest early on are likely to be loyal customers and long term supporters. These early adopters should been seen as a valuable networking opportunity since they are the ones who believe in your success and help spread the word without any reciprocation.

9. Easier than traditional funding processes: Crowdfunding lets you bypass the long application process for getting a loan and the process of finding sophisticated investors in the early funding stages. To prepare for a crowdfunding campaign, all you need to do is figure out the online platform that fits best for your venture, share your purpose and message, create a video, and establish some appealing rewards. Many third party portals will help you set up your campaign, so you do not have to worry about doing it on your own.

10. Presale Opportunity: Your campaign gives you the chance to sell your product before it is launched into the market. It is a way to measure and analyze consumer reception and the market to decide whether to continue on with your idea or go in a different direction.

11. Free!! One of the biggest benefits is if you are using an all or nothing platform and if your campaign is not successful, there is absolutely no penalty and set up is free.

Crowdfunding is a great way for entrepreneurs to showcase their ideas, products, and other business ventures, while receiving funding and growing awareness. It is a feasible and affordable process where the audience can give validation or bring new ideas to the table.

Is Crowdfunding Right For You?

Crowdfunding Fit from The Startup Garage

Is Crowdfunding Right For You?

Is Crowdfunding Right For You?

Crowdfunding is a marketing tool that engages customers and promotes brand awareness. Crowdfunding is when a group of people collectively finance the efforts of individuals, organizations, or businesses. Popular donation-based crowdfunding websites like Kickstarter and Indiegogo ask the public to sponsor featured projects within limited time frames, and in return, individual backers are thanked with prizes or rewards such as campaign t-shirts. Equity-based crowdfunding sites like Wefunder offer accredited investors the ability to fund startups in exchange for equity. With new legislation, non-accredited investors will also soon be able to help finance startups through equity crowdfunding platforms. Crowdfunding has provided new options for funding startups, which has been traditionally done through more established financial avenues.

Crowdfunding is a hot topic now because in October 2013 the Rulings of Title III of the the Jumpstart Our Business Startup (JOBS) Act, were moved on by the U.S. Securities and Exchange Commission (SEC) to allow companies to raise up to $1 million a year through equity-based crowdfunding by non-accredited investors. These rulings will be voted into effect by the SEC in the spring of 2014, and at that point your friends, family, or customers who have under $100,000 in annual income or net worth can invest up to $2,000 of their income or 5% of their net worth a year into startups through equity-based crowdfunding. People who have over $100,000 in annual income or net worth can invest up to 10% of their income or net worth per year.

Businesses and organizations that are positioned for crowdfunding success have the following characteristics:

  1. A Solid Business Plan: Investors want to know all the details of a business before they fund it. In the case of equity crowdfunding, companies should have a Certified Public Accountant and attorney who are familiar with the JOBS Act and their business.
  2. An Established Fan Base: An active social media following is necessary to generate buzz around a crowdfunding campaign. When a business is popular, people are more likely to support and believe in the company.
  3. A Realistic Fundraising Goal: People want to invest in initiatives that will succeed. If the crowdfunding campaign is a final push to raise money for a project that is close to completion, people will likely be inspired to help financially seal the deal.
  4. A Team: A business with a team of employees will appeal to backers who want to contribute to a growing business. In addition to increasing the perceived value of the company, a team will help with the daily tasks associated with the campaign, for example answering emails, talking to the press and attending events.
  5. An Innovative Subject Matter: If the campaign features an exciting topic or new concept it will pique investors’ interest. Wowing the target audience will help spread word of mouth and could propel the campaign video to viral status.

Before jumping on the crowdfunding bandwagon it is essential to do some 360°planning. First, identify the best crowdfunding portal for your business, whether it be equity-based or donation-based, so it will best reach the target audience. Planning the pitch video, images, copy and content for the campaign is also a priority, as compelling messages will inspire greater participation. Ideally the crowdfunding effort will be part of a larger integrated marketing campaign that engages the media, features events and other social initiatives.

Donation-based crowd funding and equity-based crowdfunding are viable ways to raise capital and generate interest in funders and customers. Crowdfunding deserves serious consideration as to whether it is appropriate for your business.

7 Tips to a Successful Crowdfunding Campaign

Tips for a Successful Crowdfunding Campaign from The Startup Garage

7 Tips to a Successful Crowdfunding Campaign

Tips to a Successful Crowdfunding Campaign

Crowdfunding can be an effective tool in the early stages of fundraising for your startup. However, if not done correctly, you can easily fall into the category of failed projects. Use the tips we have provided to help guide you to a successful campaign.

1. Pitch a Product or Service That Will Interest Consumers– If this sounds obvious, it’s because it is, but also necessary to understand. You are pitching to the crowd, so it is important that what you are selling is something they want or need. Consumer products will have more success than business to business campaigns.

2. Tell An Appealing Story– With crowdfunding, backers are going to be more interested in your story than the facts. Although facts are important for credibility, stories sell. Share any personal stories like obstacles you were faced with along the way, if any major life or career event was the reason you created the campaign, or why the problem you are solving is important to everyone. You can also talk about your venture’s vision and mission. You want to create a connection with your audience and show you are passionate about your project. The tone friendly and personal to keep the crowd engaged. This will prove your genuine  and keep you from sounding desperate for backing.

3. Keep Your Backers Updated– Keep your backers updated as often as you can. Let them know your plan and progress. This can be done through social media or email. Send thank-you emails to investors and there are any questions or feedback respond quickly and encourage conversation and engagement. It is a good idea to tailor engagement to your specific business. Backers deserve to know what is going on with the product they invested in, even when the campaign is over.

4. Be Transparent about Costs– In order for potential backers to understand why you are asking for the amount of money you are asking for, you must be transparent about how you are going to spend it. If investors do not have experience in the field your venture is in, then they likely do not know what it takes to create your product. Letting them know exactly where their money is going will assure them that you are not spending it on unnecessary items.

5. Add a Buffer– Most businesses fail due to lack of funds. You want to factor in any possible unforeseen costs into your campaign’s target amount.

6. Provide a Valuable Incentive- You want to make sure the reward you are offering is enough of an incentive for people to back your project. Ask friends, family members, and even the fans themselves for what they would want as a reward. It can be easy to come up with cheap or even free options. These can be buying rewards in bulk, a Skype date with influencers, a free download, a right in naming something in the project etc. You want to make sure whatever your reward is that it brings value to the backer, and that it is delivered within the amount of time you say it will be.

7. Be Smart with Your Promotion– Tap into your personal connections and social networks to get the ball rolling on your campaign. Ask friends, family, and followers to share your project to expand your network and help circulate your message.

Nourishing Your Crowdfunding Community

Nourishing Your Crowdfunding Community from The Startup Garage

Nourishing Your Crowdfunding Community

Nourishing Your Crowdfunding Community

While crowdfunding campaigns last for a finite amount of time, they have the potential to generate long-lasting communities of people who will support your business. Whether the campaign met its fundraising goal or not, try to stay in contact with and continue to deepen your relationship with backers. It is important to maintain and develop relationships with your community by making supporters feel valued, acknowledged, and involved. People who invested in the business are likely to be emotionally invested, and will be curious to learn about how the company is doing. Here are some tips on how to engage the crowdfunding community after the campaign is over:

Give a Proper Thank You

Send your backers a thank you email bursting with gratitude to make them feel recognized and appreciated. If you make a thank you video where you call out names of your backers, it will make them feel super special. Send a personalized and elaborate thank you to the people who invested the most in your business – or better yet, name your next product after them.

Even if the campaign was not fully backed, remember to traffic the language of gratitude on social media sites and in emails. It will show that your supporters that the people behind the business are gracious, even if the crowdfunding results were not ideal.

No matter what the outcome of your campaign, host an after party. Have your friends, family, local backers and employees join together to celebrate. You deserve it.

Dividends

With equity-based crowdfunding, investors own part of the company which means that they will be loyal to it and care about it more so than had they made a one time donation. Investors should give rewarding dividends and provide regular financial updates. Dividends will serve as a reminders to your investors that they made a smart decision to finance your in the company, and will keep your business at the top of their minds.

Engage the Community

Send out regular updates via email on your company status, new initiatives and events. Backers will want to see progress; they are rooting for your company. Show investors that their funding efforts are paying off, but also remain honest about what is going on behind the scenes. Keep the dialogue, images and videos real so that they can truly understand where they put their money.

Survey The Community

An online survey is a fast, inexpensive, and easy tool that can help you to better understand your target audience. If you have the email addresses of your backers you can utilize this research method to gain insights that could propel your business to the next level.

Social Media Mix

Use Instagram, Twitter, Facebook, Google+, and blogs to thank and stay connected with your target audience. Post unique and engaging content on each site to keep fans engaged. Host a contest or post a creative video to generate buzz. Ideally your social media efforts will encourage members of the community to have an ongoing dialogue that will keep them excited about your brand.

People invest businesses when they want them to succeed. By its very nature crowdfunding creates a community of funders who all want a project to excel, and therefore they are likely to become loyal to the business. They may also discuss their investments with friends and family which will generate word of mouth, buzz, and potentially create brand evangelists. Crowdfunding often creates high brand awareness during the campaign, but after it is all over, it is the company’s job and in the company’s interest to keep the community alive.

Crowdfunding & The JOBS Act

Crowdfunding and the JOBS Act from The Startup Garage

Crowdfunding & The JOBS Act

Crowdfunding & The JOBS Act

In April 2012 President Obama signed the Jumpstart Our Business Startup Act (JOBS Act) with the aim of promoting small business funding by loosening securities regulations. The JOBS Act has made some of the greatest changes to securities law in the 80 years since the original Securities Act of 1933. This rang particularly true in October 2013, when the U.S. Securities and Exchange Commission (SEC) proposed new rules in response to Title III of the JOBS Act. This Title will pend for 90 days, comments will be reviewed and voted on, and the final rules are projected to be announced in spring 2014. As of now, the proposed rulings will allow for non-accredited individuals to invest in private companies through online portals. It should be noted that Title II of the JOBS Act has already allowed for accredited investors to crowdfund online. In sum, the Act allows small businesses to ask the public for financial support, so they do not have to turn to traditional funding from venture capital firms and large financial institutions.
 

The Investors

Title III of the JOBS Act will help to level the investor playing field because it allows non-accredited investors to participate in equity crowdfunding. Currently only accredited investors, or those who have a net worth of over $1 million or have earned over $200,000 within the past two years, can invest online. The catch is that non-accredited investors will be limited, annually, on how much they can invest in businesses. People who have either $100,000 in annual income or net worth can invest up to 10% of their annual income or net worth in crowdfunded projects. Those with under $100,000 in annual income and net worth can invest $2,000 or 5% of their income or net worth. The cap on investors will take place over the period of a year, and securities purchased through equity crowdfunding portals must be held for year. The SEC will require that funders complete investor education before backing a business. Investors will expect dividends and fair return on investment.
 

Online Portals

Equity crowdfunding will take place through online portals or broker-dealers that are registered with the SEC or FINRA (Financial Industry Regulatory Authority). One can only imagine that these new intermediaries will resemble portals like Amazon, where companies sell deals to the public. It is projected that funding portals will be industry specific, so there is an opportunity for new equity-based crowdfunding websites to emerge in different markets. Already, websites like WeFund are offering equity based crowdfunding to accredited investors.
 

Business Implications

Under the law, businesses will only be able to raise $1 million in crowdfunding investments per year. A business that chooses to participate in equity crowdfunding must disclose the business plan, stakeholders, ownership structure and how the raised capital will be used. Depending on the investment goal, financial statements may have to be reviewed or audited. Thus, if raising over $100,000, it is important to hire a good Certified Public Accountant who is familiar with the business and the JOBS Act.

The spring of 2014 promises a new exciting time for startups because the investor playing field will become more democratized and less elite. As of now it is estimated that only 8 million people in the U.S. are accredited investors and only a tiny percent of them invest startups. Once non-accredited investors can participate there will be vastly more opportunities for entrepreneurs to reach out for funding. It will alleviate small business owners of having to turn to traditional funding from venture capitalists and banks, and instead allow them to reach out to the public at large.