Equity Crowdfunding – What the Crowd Expects

As the crowdfunding industry moves from rewards programs to equity offerings companies that are seeking funding will need to step up their game. Investors will not receive your product at a discount. They will have very different expectations.

When you make a debt or equity offering for your company on a crowdfunding portal you are asking investors to help you to fulfill your dreams with their money. That is perfectly fine and in many ways is a process that is at the very core of the capital markets.

What do investors expect in return? If you have not asked that question and if you are not prepared to answer it, raising debt or equity capital in the crowdfunding market may be more difficult than you think.

Investors invest their money to make money. It may sound obvious until you realize that for crowdfunding investors it is very unlikely that it will happen. Most crowdfunding investors will lose their money.

Even if you are successful and profitable for many years crowdfunding investors will not be able to cash out of their investment in your company until you sell the company. That is one reason that many investors will select investments that pay dividends (preferred shares) or interest (debt offerings).

Your investors will be prepared to lose the money that they are giving to you. They know that all crowdfunded investments are speculative. They know that the best deals are likely to be scooped up by angel investors or venture capitalists. They know that despite your best intentions and best efforts most new businesses fail.

For smaller companies that want to use a crowdfunding portal for financing I cannot over emphasize the importance of being able to demonstrate to investors that your company can succeed. At the very least, you should be able to show investors that you have put the pieces into place to give your company a fighting chance.

Equity crowdfunding can be expensive and cutting corners can lead to problems and a campaign that does not get you the funds that you need. You are going to need an experienced securities attorney to prepare your disclosure documents and to guide you through the regulations. You are going to pay a portal for the privilege of listing your offering and you are going to need to fund the marketing effort to reach out to potential investors. If you are going to spend this money to reach investors, your offering needs to be strong.

Remarkably, many of the experts in the crowdfunding arena have never raised any significant amount of money from investors. Many cannot, themselves, tell a good deal from a bad deal. They certainly cannot gauge whether your offering will be well received by investors.

I have reviewed business plans and pitch decks from dozens of companies that want to raise funds through crowdfunding. From an investor’s point of view, many of these offerings are weak. Many people do not seem to appreciate that having a great idea or product is not the same as having a great business.

Equity crowdfunding will necessarily tap into a pool of investors who have had experience in the mainstream financial markets. If you expect them to invest in your business, you should be prepared to demonstrate at least the following:

1) That you understand your business, not just your product. Investors appreciate that you want to tell them that your product will sell millions of units, cure disease or become a ubiquitous part of everyday life. What they really want to know is about your business. Show them not only that people will want to buy your product but that you can produce it profitably, deliver it efficiently and sustain both.

2) That you will follow the rules. The most common abuse in the private securities market is that the marketing materials accompanying the offering are not complete or balanced. The sales pitch frequently exaggerates the positives to the exclusion of the negatives. If the video that accompanies your offering shows people saying things about your business that are very different from the disclosures in your official prospectus, you have a problem.

3) That you can tell investors what you really intend to do with their money. Vague statements in your prospectus that allocate funds for “research and development” or for “general corporate purposes” do not encourage investment. Specific details help investors to better gauge your business.

4) That you will spend investors’ money wisely. Hewlett and Packard, Jobs and Wozniak started out in garages. Why do you need an expensive  loft with a cappuccino machine and foosball? Make money first, buy toys later.

5) That you will allocate some money for reserves. The last thing that either you or your investors want is for you to run out of money just before you get to the finish line. You should plan for problems, delays and contingencies because they will happen.

6) That you have a full management team. Investors know that 4 techies and a CFO do not make a company. It starts with people with experience in the industry in which you will be operating. Investors like to see a marketing director with real experience selling similar products and a lawyer to help with contracts, problems and problem avoidance. If you are not yet ready for a full time marketing director or general counsel, at least have someone with marketing or legal experience on your board of directors.

7) That you have good, experienced and active advisers and directors. Frequently companies seeking investment dress up their board of directors with people with good resumes. Investors want to see a board with the experience to give you the advice that you will need. The same is true for your corporate attorney and accountants. However, if these people are not available to actually help you, then they do not belong on your board.

8) That you have a supply chain in place. It is fine if all you have is a prototype at this point, but if you expect to sell 100,000 units in the first year, please be ready to tell investors that you know where you will get those units and what they will cost.

9) That you know your competition. A formal market research report is preferable but if you plan to market a new toy, you should at least be able to say that you have been going to the New York toy show for a few years to see what other people are offering and that you have spent hours at Toys-R- Us or similar toy stores looking at other products.

10) That you are making realistic projections. Do not tell investors that 100 million consumers might buy your product. Tell them how many units you might reasonably procure and sell. Investors like to know that you know what it will take for your company to break even. Talk about astronomical profits after that.

11) That you have taken steps to protect investors and the company. If your product or design is patent-able, apply for a patent. If you are raising money from the public without Directors & Officers’ insurance you are just plain foolish.

12) That you have some skin in the game. Before crowdfunding the only option for people seeking to fund their small business was the Small Business Administration (SBA). The SBA requires collateral for the loans that they make. Usually the company owners or their family pledge the family home to get the funds. Sweat equity is fine, but if you, your family and friends do not have enough faith in your success to have put their hands into their pockets to get you started, why should investors?

This list is by no means inclusive. If you really want to raise capital from investors, your offering needs to be strong and you need to give investors what they want and expect.

If you would like to know how investors are likely to view your offering my partner and I will be happy to review the offering before you put it out on a portal. We will give you the benefit of our combined 85 years of experience raising money and dealing with investors.

We will charge you a ridiculously small amount for a detailed point by point written report, telling you how to make your offering stronger and how to make it stand out from other companies seeking the same funds from investors. We offer feedback, perspective and some constructive criticism that you will not find elsewhere. Call us when you decide to make an equity offering on a crowdfunding portal. We will save you time, money and disappointment.

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