Crowdfunding is very much an exercise in self-funding. The companies that are raising funds on the crowdfunding platforms are often expected to solicit their own customers, suppliers, friends and family to become investors in the business as part of the crowdfunding process.
There is a burgeoning industry of consultants who will help companies that want to raise money on these platforms. These consultants exist because there is still far too little capital available in this market. These consultants specifically help companies compete for that capital, but the crowdfunding process is still largely hit or miss.
It seems to be common knowledge that a good social media campaign should accompany any equity offering on a crowdfunding platform. Like all advertising, a social media campaign is a “numbers” game. Its goal is to bring enough eyeballs to your offering so that all of the shares you are offering will get sold.
If eyeballs are what you need to successfully crowdfund a company, it would seem logical then that the easiest company to crowdfund might be one selling a line of lingerie. No crowdfunding consultant worth his/her fee would likely tell the company not to include its product catalog in its presentation to investors if that catalog had pictures of models wearing lingerie.
Titillation aside, lingerie companies sell products that may be easily and inexpensively sourced and which can often be sold at substantial mark-ups. But that is not what the conversation is likely to be about.
In a perfect economic world, investors would travel to the “efficient frontier” (a great name for a crowdfunding platform, in my opinion) and select investments suited to their taste for a blend of risk and reward. Illiquid shares received by crowdfunding investors will always be speculative, so reducing the risk or increasing the potential reward seems to be the obvious way for the platforms to gain the most customers.
When a crowdfunded business finally monetizes the investors’ “bet” there should be every expectation that the investors will be well compensated. Greed, not sex, should be the emotional basis for any crowdfunding investment.
The crowfunding platforms are filled with companies seeking funding for real estate projects, technology projects, electronics, toys, bio-tech, consumables, films and office applications. A prospective investor visiting a few of the larger platforms would likely find a few hundred very different offerings to consider. As the offerings attempt to distinguish themselves one against the other, there seems to be more showmanship than substance.
The classic business model for offering new securities to the market would have them underwritten by an investment bank or brokerage firm. This model works for the companies that are being funded because they get funded. It is also exceedingly profitable for the investment banks.
Investors in an underwritten offering can expect to get a reasonably investigated, intelligently structured investment into which someone at the investment bank, independent of the company, has given some time, thought and analysis. The value added to a funding transaction by an investment bank is the judgment that they bring to the transaction. Investors who may know nothing about the company seeking funds will invest if they have relied upon the bank’s judgment in the past and made money.
I was only able to find one crowdfunding platform that even attempted to offer this type of assistance to companies that were listing on it. Only one platform that seems to see what everyone else is missing.
I should not have to tell you that many of the companies that are currently seeking funding on the crowdfunding platforms are very weak. Even companies which have a “cool” new product created by a great team of engineers will often employ no one with the experience to effectively get the product to market.
There are many start-ups on these platforms that are not yet in business. Someone independent of the company issuing its shares still needs to ask the question: “can you get this to market, on time, sell it and make a profit?” In the crowdfunding marketplace, at least up until now, no one really asks this question because no one considers it their job to do so.
Sooner or later, the platforms will likely realize that they are in the business of selling equity shares to investors and step up. Goldman Sacks is also in that same business and makes a lot of money doing it. As billions of dollars find their way to these platforms in the next few years, there will be a lot of money to be made as the crowdfunding industry matures.
The crowdfunding industry will have matured, in my opinion, when the social media messages change direction. Eventually, the current outgoing “please buy my offering” messages will be replaced by the incoming ”I wonder what the ‘Efficient Frontier’ crowdfunding platform is offering this week?”
Looking back ten years from now, will any of the crowdfunding platforms now operating be able to boast that “97% of the companies funded on our platform in the last 10 years are still operating” or anything close? Certainly the platforms should realize that this type of track record would draw a lot of new investors to their offerings and encourage loyalty from the investors that they already have.
Crowdfunding success or failure should never really be determined by sexy catalogs or the size of your social media campaign. The cream should always rise to the top. The crowdfunding market is new and growing rapidly. All that it needs to succeed is an infusion of a little judgment and some common sense.