Whether you’re an attorney, cpa, broker, operational or other consultant, strategist, valuation consultant, teacher, or worker in a company with potential, and you know nothing or next-to-nothing about investment crowdfunding, this primer is meant for you.
Where to begin? You have. Yet before reading further on this page, here’s what I ask. Go back and thoroughly read each of the 1st posts (including going to and reading the links) for each of Investors, Entrepreneurs, and Case Study. Then take a little time to give the whole process some thought from the standpoint of investors, entrepreneurs, other advisors, and, lastly, your own.
WARNING: If you do it right, you’ll spend several hours or more, so come back here if and when you’re done with each of those. You will then be ready to proceed.
You Are An Advisor
Your clients–or those you work for–depend on your abilities: to know, to understand, to screen, to consider and to provide valuable advice. Your and their success may depend on it.
So How Do I Think About Crowdfunding?
In many ways. It can be a tool, a threat, a useless diversion, or strategy or tactic to be considered and employed and, if used successfully, a differentiator amongst failure, survival, and sustainable success. It can be other things.
What Is Your Role?
It’s a heck of lot more valuable to weigh in on a subject once you understand it and the role, challenges, and prisms of others involved. Having done the suggested reading and thinking, you now clearly appreciate that investment crowdfunding is not a ready-made off-the-shelf solution for most businesses. To the contrary, the majority at least of businesses won’t or won’t be able to use it. So your question for you is this:
How might Investment Crowdfunding be useful to you, those dependent upon you,and/or those who you may choose to help?
Make a list –right now– of the ways you can think of in each category and cross-reference those with those individuals or businesses who might benefit and how. Then either contact them now with a note, tweet, or message–or set a time to do so.
If you can think of no one, consider your biases. Because if crowdfunding can’t help anyone you know directly, surely there are those who should be aware of it as a potential threat and perhaps you can think of ways to morph the threat(s) into opportunities.
Your Own Business
One of my first jobs was working in a shoe repair store. I replaced soles and heels and sewed, on a foot-pedal Singer sewing machine shoes and leather products using nylon thread. The shoemaker I learned from wasn’t the proverbial shoemaker whose children went barefoot; he first ensured he and his family had shoes and that they were properly maintained.
So it should be with you. Consider, again, how you and your family might benefit–and if useful investigate further and take action if warranted.
Your Client’s Or Employer’s Business
While having elements of each, investment Crowdfunding is neither Huxley’s Brave New World nor King Gillette’s World Corporation. Its ultimate value (whether to each person, business, country or the world) doesn’t have a ready parallel (or big data set from which to draw stochastic variable inferences). It’s a set of rules to be used over the internet to access capital.
Consider it a new game (though it is anything but) and within its boundaries, you really do have the opportunity to create and implement realistic scenarios for its use which could provide immense benefits in the right situations. (For those that are set on rote applications of what works–it can be used effectively by you because that is how most businesses will use it on most of the portals and, if that works for you and your clients, great!)
You’ll need to determine the situations when raising up to $100k without cpa reviewed statements may make sense, and when more might make sense.
First, Some Data
Investment crowdfunding has now been used in the UK for about 5 years. According to its pre-eminent CF (crowdfunding) site, the average raise was about 270,000 British Pounds ($1 equals 1.46 British Pounds), or about $400k, with an average of about 189 investors per offering with an average investment of about $2,000 per investor.
It remains to be seen what the U.S. crowdfunding averages might turn out to be, yet that seems a useful starting point. The average U.S. worker makes about $33k per year and could make an or a total of crowdfund investments per year of $2,000. U.S.
Angel investors have historically invested in about 2.5 companies as they have had both a financial and emotional and time invested interest in the success of such companies. Many financial advisors will urge diversification over five to ten crowdfund investment. I’d guess that the average crowdfund investor will end up investing in five or fewer crowdfund companies per year–if they spend the time needed to review the various offerings and not succumb to quick-picks (which no financial advisor would ever recommend).
Low Hanging Fruit
Having gotten this far, you’ve already screened out the majority of businesses and entrepreneurs. So the challenge might be finding the ones which seem best for considering or preparing for investment crowdfunding. This part is a combination of data, emotions, judgment, art, and luck.
Optimally, the business is growing and likely will continue to grow. It has the right leader (and one who can recognize when others more skilled might be needed). It likely has a desirable product niche and market, with loyal customers, suppliers, and workers. It, and its leadership, has a track record of being able to adapt and be financially prudent–and they’re driven to provide needed products and services.
The Hidden Obstacles: Greed And Over-Optimism
The multiplication effect of these two obstacles dooms many businesses and might be particularly acute for those seeking crowdfunding. Business owners customarily significantly overvalue their companies. Their optimism, while a catalyst with a placebo effect, is frequently an exploding judgment landmine. To have a successful offering requires not just a good, if not sexy, story with appeal. Essential is a very, very high prospect of investors both getting their money back (preserving capital) AND receiving a fair investment return on their risk of hard-earned money.
Many advisers try to maximize a client’s return (e.g. by advising paying the lowest instead of fair salaries); it sometimes works very effectively (though morally wrong) for a while. Paying fairly with both negative and positive incentives (and preventing most free-riding) is the better strategy.
While money may be a commodity, investors are not. The design of the investors’ rights should require much thought. It’s in investors’ interests to ensure that, when bad periods happen, management and other owners still have motivation to act in all owners’ interests.
Each business plan should take into account a targeted investor exit point–or be figuring a way for long term dividends while still providing a way for investor exits, if other than through a sale of the business, which won’t impact the business operations and prospects.
Sustainable Business And Ownership Design And Operation Is Key
Too little thought is frequently given to the right balance of investors’, management’s, and founders’ interests. Most all companies are not silicon valley success stories.
Silicon valley and other similar rote documents (Tech Stars, Y Combinator, Wilson Sosini term sheets, NLCFA docs),while readily available were meant for a typical trajectory with a given class of investors and founders. Such documents (even with modifications) while offering cost of preparation advantages have long term drawbacks–be careful.
Solid operations–and necessary people, IP, and capital resources–are critical for business success and investor returns. Over-reliance on leverage, and not having sufficient cash reserves, frequently is a cause for muddled operations (due to inability to obtain then needed resources). A reserve should always be built into any plan.
Your Knowledge, Training, And Experience May Be Key
Businesses succeed or fail for many reasons. You know many. Investment Crowdfunding is a new and evolving landscape. With these readings, your skill sets, and a little reflection, you now have a fairly good idea where and how it might have utility for you, your family and friends, and your clients. There’s no question that you can now use this information for good, building upon what you’ve learned.