QUESTION: What do you get when you mix a recession-induced tight market, eCommerce’s growth and popularity, digital money’s acceptance and tools, and the recent JOBS Act, with fertile entrepreneurial environments like the San Francisco Bay Area? The answer, of course, is CROWDFUNDING!
Stanton Chase recently co-hosted a CROWDFUNDING event at Dominican University of California with the Dominican’s School of Business and Leadership, The CEO Club, the North Bay Leadership Council, and Venture Greenhouse, a new business incubator. The CEO Club, founded by Paul Herrerias in 2003, provided the speakers. On deck was a panel of experts discussing CrowdFunding and its implications for CEOs, Entrepreneurs, Nonprofits, and Business Owners looking for donations, loans, or equity sources.
THE PANEL consisted of Moderator and Coach Michael Lipson, PE-investor Stu Reddick, and Rally,org Co-Founder Nick Warsaw. Lipson is an Executive Coach & Strategic Consultant to CEOs who has worked with or coached founders of over 100 startups over the last 20 years in the San Francisco area. During the discussion, he worked the crowd expertly, posing questions to the panelists Stu Reddick, co-founder of Mindful Investors, and Nick Warsaw, co-founder of Rally.org. Reddick traditionally invests in established companies yet is also funding a startup CROWDFUNDING website himself. Warsaw has seen the development of one of the world’s most successful CROWDFUNDING sites to date from the inside and learned many of the challenges and hurdles from hands-on experience.
THE AUDIENCE consisted of members of Paul Herrerias’ CEO Club, the North Bay Leadership Council, Dominican University’s School of Business and Leadership, the Venture Greenhouse, and the COO Forum’s Marin Chapter.
CROWDFUNDERS TODAY: Let’s look at the three major CrowdFunders today who are looking for either a donation, a loan, or an investment of capital.
THREE CROWDFUNDING ACTIVITIES:
DONATIONS: Nonprofits and Individuals with Causes, looking for DONATIONS, i.e.:
- Charities raising money for a campaign.
- Students looking for help paying their tuition
- Communities funding a service project.
- Popular sites for raising donations include Rally.com, Indiegogo, Kickstarter, Crowdfunder, RocketHub, Crowdrise, appbackr & Quirky
LOANS: Enterprises looking for LOANS or advances
- These could be outright traditional loans with written notes and interest rates, or simple transaction such as pre-purchasing of goods or services promised by the recipient of these funds.
- An example given was a farmer in the MidWest borrowing money at a competitive interest rate to bring his crops to market and repaying the loan 3-6 months later. Lenders were mostly consumers in the area who knew of him and benefited from his produce being in the food supply chain including their local markets.
- Another local example was the City of Oakland, who raised money to put solar energy systems on their buildings with money lent by local citizens and businesses.
- Popular sites for raising borrowed funds include Crowdfunder, SoMoLend, Funding Circle, Kiva & Lending Club.
EQUITY: Entrepreneurs seeking EQUITY capital.
- Currently this is only available for accredited investors.
- Congress is approving of this type of fund raising via rules set out in the new JOBS Act.
- Most sites cannot actually conclude deals until the SEC has issued their rules governing these online transactions.
- Many entrepreneurs and professional investors are lining up to own these CrowdFuding sites…though only a handful are operative today over 8,000 such sites have been registered.
- Examples of Equity-focused sites include Angel List, CircleUp, ASSOB, EarlyShares, FundedbyMe, MicroVentures, OurCrowd & Quirky
Though Rally.org raised millions of dollars online for their own capital, few campaigns are for hundreds of millions of dollars. In fact, most are under $100,000 and the average Crowdfunded loan commitment is under $1,000…thus the term “micro-lending” is frequently used with Crowdfunding.
HOW TO RUN A SUCCESSFUL ONLINE CAMPAIGN: Does the adage “Build it and they will come” reflect today’s reality in CrowdFunding? No! Our panelists suggested these Do’s and Don’ts of running a successful campaign on a CrowdFunding site, including:
- Get to know your prospects and customize your message to them. The S.E.C. mandates funds get to know their customers, beyond just asking if they are accredited investors. Stay aware of evolving marketplace trends and your prospective customers. For example, many urban youth do not want to ever own a car (thanks to our Green culture, public transit, bike sharing, ZIP Car, UBER, Google Car, and other social and technical innovations).
- Work to engage your traditional membership or customer base, trade associations, and industry affiliations. Try to “prime the pump” by getting these audiences involved and supporting your campaign.
- Run a parallel traditional fund development campaign: Hope that your CrowdFunding effort works, and work like it won’t. Use traditional avenues as well and find ways to link them.
- Keep it fresh: Work multiple channels simultaneously to support the digital campaign, and keep them all current.
- Advertise: Drive website traffic yourself, develop online buzz, and reward those who participate and refer their friends.
RAISING EQUITY: Entrepreneurs in the room wanted to know “How do we raise capital via CrowdFunding sites? And “Which sites should we use?” With the passage of the U.S. Jobs Act, websites are now an approved channel for raising equity capital. The government was thinking this would stimulate more small business growth and jobs. So far CrowdFunding sites can only accept investments from Accredited Investors. However, over 8,000 websites have been registered in anticipation of the time when these sites can be used to market equity investment opportunities to the masses. Website owners are awaiting clarity from the SEC on compliance requirements before they can market to unaccredited investors. Until then websites are limited to communicating with their own membership lists or lists of accredited investors, thus only a handful of these 8,000 sites have actually launched…the rest await the gold rush!
OWNING A CROWDFUNDING SITE: The appeal in owning a CrowdFunding site lies in the upfront fees and carrying charges that CrowdFunds can charge for raising equity online. The dangers and challenges for these CrowdFunding sites lie in marketplace competition, risk of bad press or fines, and reputation assaults in a rapid-communication world of digital audiences, to name a few. The stakes are high in this “frontier” of digital fundraising.
Our panel’s Solutions to these risks and uncertainties might be found, as in most new industries, in future regulatory definitions and clarifications, self-policing activities, online rating systems by consumers, or other activities not yet envisioned by the panelists or audience members.
SUCCESSFUL CROWDFUNDING SITES: As the owner of a campaign, what makes for an effective web site for my campaign’s success? Answers volunteered by the panelists and experienced audience members, for donations, loans, or equity capital included:
- INTENT – Be clear, specific, and tangible
- CONTENT – Create a great site that is engaging
- TRAFFIC – Draw eyes to your site
- SENSITIVITY – Know your audience and speak to their needs today
- BALANCE – Provide both objective and subjective motivations and content
- URGENCY – Create a sense of urgency with deadlines and rewards.
- Causes seeking Charitable donations have found a welcome friend on the internet: CrowdFunding. Anyone can do it!
- Micro-Lending is growing up…with larger amounts being funded daily on Crowdfunding sites. Astute borrowers are taking pains to build a great site and support it with traditional marketing.
- Equity CrowdFunding is here now for accredited investors…and soon for the general public. Soon, equity investing in deals will be less like a private club and more like an open market.