Looking for Crowd-funding? Take some lessons first.

Crowd-funding is good; I have a smart-watch I got on KickStarter that I find myself evangelising everytime I’m in the pub. I feel I own a little bit of this project – now, it’s personal. In the last few weeks though, crowd-funding has been getting some stick – and people are re-thinking how crowd-funding works, or in the case of The Forking Path who raised $122,874 to create The Doom That Came To Atlantic City, maybe how it sometimes doesn’t. WIth upcoming changes to how small business in the US can reach small investors, people are talking. In an excellent post, Alex Hern writing for the New Statesman last month details how the start-up raised three-and-a-half times what they’d asked for, and brought them down a path of promising increasingly intricate benefit promises – the ‘what you get’ for investing more or earlier.

The first clue may have been when the project missed its November 2012 delivery, but it stumbled on and then in June this year, Erik Chevalier from The Forking Path said that the project was moving along but suddenly cancelled the whole project on July 23 saying “This is not an easy update to write. The short version: The project is over, the game is canceled.” Despite the companies that don’t takeoff, there are thousands that do; some will be moderately successful, some will tick by and some will be monster hits and given the low interest rates available for depositors and a certain seductive, risky glamour associated with technology and online investments, many of these businesses will find crucial capital by talking to investors directly.

In April 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law by President Obama. The Act required the SEC to create rules and issue studies on capital formation, disclosure and registration requirements. In September this year, entrepreneurs will have a new way to reach investors with private offerings – and it’s the simple magic of old fashioned advertising. Following the Title II of The JOBS Act, ‘direct’ to investor advertising will be permitted and is intended to ease the process for entrepreneurs to raise capital for their burgeoning businesses and at the heart of the plan, is the goal to increase job creation at Small and Medium Businesses in the US.

“Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and companies seeking access to capital should not be hindered by unnecessary or overly burdensome regulations.”

— SEC statement, April 2012There are around eight and a half million accredited investors in the U.S. and they fund 3% of startups or small businesses. During 2012, an estimated 260,160 angel investors invested $22.9 billion in 67,000 companies. An additional $26.5 billion was invested by venture capitalists in 3,698 companies. Making  a business idea pitch to to these individuals with capital has the potential to significantly expand the market of accredited investor small business capital – and advertising still remains a key way to get your pitch heard.

“But funding creative projects is an inherently risky thing. What can go wrong probably will, and if a creator hasn’t budgeted for that, they’re going to get burned. That doesn’t make it any nicer…but it may be a fact we all have to get used to if Kickstarter is sticking around.”

— Alex Hern : The New Statesman, 26 July 2013

Later this year  the SEC are likely to release the rules for Title III of The JOBS Act, enabling entrepreneurs to offer securities (that’s debt or shares) to unaccredited investors in exchange for investment in their early-stage companies. Good news for small business and potentially for the smaller, unaccredited investor. The extension of crowd-funding will comes with a thick book of regulations as it extends the options for funding early stage start-ups beyond. friends, the dreaded re-mortgage or angel investors. Entrepreneurs can read the official guide, toy with the idea of the inevitable advisor ‘start-up package’ and read up at a website like CareerFuel’s crowd-funding education website, and by then they may have a better idea of how to reach the small investor in a straightforward, legal way, but useful advice is needed not just for the start-up owner but alsofor the small investor.
<su_quote align=”left”>“Our money was not to fund your Board game Company but to develop “The Doom That Came to Atlantic City” I would like to see an itemized break down on what our one hundred thousand dollars bought. It sounds to me that almost no money went into development but rather your pocket. You quit your job then moved to Portland then lived off our investor money. – Post on TDTCtAC KickStarter Page”

The The Doom That Came To Atlantic City provides a cautionary tale with numerous KickStarter backers saying they have filed fraud complaints, provided each other with details to contact the media, and accusations of the project simply funding a lifestyle change for the promoter. Unaccredited investors will not have the same experience or resources of the higher net-worth individuals who make a habit, and some a living, of backing start-ups, and the small investor needs protecting, and the small businesses themselves are crucial to that protection.

Raising money is one thing, doing what you say is another, and now the funding world is watching.

External links & references

  1. Comparison of Crowd-funding sites : WIkipedia
  2. SEC Fact Sheet on lifting General Solicitation ban
  3. Career Fuel website
  4. SEC define Accredited Investors
  5. Accredited Investors : Wikipedia 
Andy O'Donoghue

Andy O'Donoghue talks about technology, some say, too much.