Many are calling this the lost decade – facing a grim economic reality, many are reeling at the prospect of an extended downturn. But in times of turbulence come the greatest opportunities. The entrepreneurs who are able to rise to the top and capitalize on their bright ideas in this market will reap the benefits for decades to come. The problem is that while many people have ideas, few are actually able to effectively test them in the marketplace. That’s all about to change thanks to the removal of arguably the biggest barrier for the entrepreneur, raising early-stage capital. That’s why we are dedicating this Strategy Session to the entrepreneur and the newest tool to be added to his/her toolkit, crowdinvesting.
Since our inception, we have been big backers of those who devote themselves (see our first blog post The Love of Lumos) to creating real value in the economy. Being entrepreneurs ourselves, we love nothing more than working with the people who can make things happen, whether that is culturally, economically or socially. While we have soured on the ‘startup’ community a bit thanks to the more-sizzle-than-substance culture created here in North America, our love for pure entrepreneurship will never change.
For this reason, we are thrilled about the emergence of crowdinvesting as a tool for the entrepreneur. Starting in July, entrepreneurs around the world will be able to watch companies use crowdinvesting, where investors (ie. anyone) can buy equity in a startup company for as little as $10, as a way to raise seed capital. That’s because Seedrs, the first regulator-approved crowdinvesting site in the world, will open its doors to the public in the UK in July.
So what is the significance of crowdinvesting for the entrepreneur?
- you can raise seed capital for your new venture or small business quickly (realistically in between 15 and 90 days) and efficiently from your networks online
- when legalized in your geography (right now in the UK, soon to be launched in the US), you bypass ancient securities regulations; therefore, legal costs will be greatly reduced and restrictive shareholder limits will be lifted
- you get great exposure for your new product/service, build social capital and you can use crowdinvesting, or crowdfunding (where funds are raised on a donation basis), to test market demand for your venture (see the Pebble case study)
How does the process work?
While there may be certain platform-specific requirements, the following are the general requirements to launch a crowdinvesting campaign:
- video – a video will help give potential crowdinvestors a feel for the team behind the venture and what the company is all about
- business plan – founders will be required to disclose at least the basics of their business, especially the business model and how they plan to make money
- financial model – investors will want to know what their capital will be used for (projected expenses) and the founders need to know how long the capital they raise will last (revenue projections)
(Seedrs, the FSA-regulated crowdinvesting platform in the UK, does not require companies to post financial projections)
Once you have these components, and get approved to launch your campaign on the crowdinvesting platform, then the campaign is ready to go live and the real fun begins.
If the crowdfunding industry has given any indication, then many entrepreneurs seeking crowdinvesting capital will greatly underestimate the effort required to successfully raise the required funds. To successfully execute a crowdinvesting campaign (see blog post Strategies for a Successful Crowdfunding Campaign(Strategies for a Successful Crowdfunding Campaign))), the following factors need to be taken into consideration:
- valuation – how much are you valuing the company at given the amount of money you are asking for?
- capital raise – how much do you need to startup versus how much can you realistically raise from your network?
- communication strategy – what is your communication strategy during the campaign to ensure that you raise the required capital?
With crowdfunding, where the money is raised via donations, almost all successful campaigns require at least 30% of the initial capital to be raised via friends and family; therefore, it makes sense that anyone who wants to go out and raise crowdinvestment capital have a strategy to raise at least the first 30% from the 3Fs (friends, families, fools) before even launching the campaign.
Beyond that, there are a few other important factors that need to be taken into consideration:
- shareholder management – how will you manage a multitude of shareholders?
- future capital considerations – how will you ensure that you don’t over-dilute your initial crowdinvestors in future capital raises?
- legal backend – how will any legal disputes be resolved with shareholders?
Using Seedrs in the UK as an example, the company acts on behalf of the crowdinvestors as the shareholder representative to ensure that the best interests of the crowdinvestors are fully taken into consideration. They deal with all the legal backend as part of their fee (7.5% of funds raised on successful campaigns) and also own a part of the company (7.5% taken from investors) to ensure their interests are aligned with the success of the company.
And remember, crowdinvesting is an ‘all or nothing’ proposition. You either raise all of the required capital or you get nothing. Unlike crowdfunding, you cannot raise more than the amount of capital you seek, so it is important to evaluate crowdfunding (see post Strategy Sessions: Crowdfunding + The Social Enterprise) as an alternative strategy if you are an entrepreneur.
At LumosForBusiness, we have spent all of 2012 studying the crowdfunding movement. It started in January with a two-month trip to study the cultural and social dynamics behind crowdfunding in Argentina and Brazil (mycrowdfundingstudy.com). More recently, a trip was made to London (see post Finance 2.0 – Wall Street meets The Web) to talk with Seedrs and study crowdinvesting. With Obama approving the JOBS Act and the seeds planted in Ontario to bring crowdinvesting to Canada, we believe that crowdfunding/investing will become the new strategy for the entrepreneur. If you need to be convinced, just check out the recent article in The Economist.
So that is Strategy Session number two! Let us know what you think … it is a very deep topic, one that will be talked about much more in the future. Any feedback from entrepreneurs of all shapes and sizes would be appreciated.
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