Pros and Cons of Crowdfunding
Crowdfunding ok there's a big warning sign there I'm going to talk about the pros first, I think crowdfunding for not just donations or selling the first version of the product is over the next ten and twenty years going to be an important way for entrepreneurs to raise capital for their businesses now what's different between using crowdfunding platforms for raising equity capital versus donation capital equity again is selling a slice of your business selling securities. The sec is concerned that when you sell securities, there is an expectation among people who participate that they're going to get their money back one day and hopefully at a profit they're concerned about fraud where crowdfunding sites attract scam artists and there are lots of scam artists out there, and they're worried that through crowdfunding platforms it will on ly mushroom and unsophisticated investors are going to be taken advantage of and that ambitious entrepreneurs or desperate entrepreneurs are going to m...
ake and published statements about where their company stands or where it's going or how much money they're going to make is going to be wildly overstated. They don't want chaos, so they have been dialing back and creating rules and there are some new rules that will be coming out this year that help make it more clear on what entrepreneurs can and can't do a crowdfunding sites but here's where it is today and again this only relates to selling security's on the existing platforms that are out there you must as the entrepreneur I have documentation that you are investors, meet accredited standards when you go to an angel investment club that have been around for years and years did entrepreneurs have to ask them now? Did angels have to give that to the entrepreneurs their tax returns or this's? No, because there was a presumption that to be in a club um the club took care of it. The club's member rules kind of weeded out people who really didn't belong but take this responsibility seriously. You don't want somebody who can't afford to lose money in your business, it is the pathway to paying, and by the way, veces certainly are looking very carefully. Did they want to invest in a business where maybe some misrepresentations may have been made by the entrepreneur early on? No, because who's going to be the deep pocket, the vcs, not you veces, so take some caution some other rules that may change when the new rules are issued audited financial statements that is a big expense, depending on the complexity or business, an audit could be fifteen thousand or could be fifty thousand dollars annual. So what I'm saying is these are nasty gouaches, there are some opportunities I know darn well that most angels invest locally that's the fastest way to get checks crowdfunding platforms may open up new opportunities to raise cash for businesses we're not there yet the rules have not been laid out yet. About two months ago I had a great hour long phone call with an sec commissioner if you don't follow the rules, you as an entrepreneur could be labeled as a bad actor or have violated securities and exchange rules that tag will follow you for your entire career. You may drop out as being a great candidate for public company board thought people who violate sec rules do you think you're going to get an s b a loan now? I tried to drill down with the commissioner and say tell me what's the fine or penalty for somebody to totally disregard the rules and he wouldn't tell me, he said it's going to be bad? It said tell me the dollar amount well, they haven't worked that out yet I couldn't nail him and say, if you do this, this is the bad thing that will happen to you. All I'm saying is if frauds involved you maybe personally liable you want to follow the rules you want to pay attention to the rules and know that the crowdfunding platforms are vehicles ultimately you are the top dog you are responsible for taking in money from people who belong investing in your business I'd rather have you turn away a twenty thousand dollars check then taking a check from something somebody you know can't afford to lose it and that is empowerment that's good karma and I'm going to respect that attitude other angels who've been around the block to worry about this that some of their money that may come from a club may be added on to some other investors that come from other sources the smarter angels are asking more questions about this to make sure you're following the rules and not taking money and where you shouldn't sometimes you have to say no to the check and this may be the platform where you have to do more and say no to money more gouaches technologist gosh this is what scares me somebody who publishes the inner details of potentially patentable technologies once you publish you lose rights in europe you must file first first first file first in the united states we have a one year grace period but why take that risk? Why tell everybody you're secret sauce before you file a provisional or a full patent application? Why take that risk? But yet first time entrepreneurs will think they must disclose everything I'm not so worried about the angel investment club I am very worried about putting it up on the web for all to see and read and learn about before you filed this patent applications guess what when he sees come in and do do our due diligence we want to make sure you're not doing anything that undermines the potential of creating that massive firepower of value by just making a couple of mistakes too many shareholders could become an issue if you are an s corporation remember only a hundred shareholders there are certain limitations if you have over a thousand shareholders you may put yourself and your company into other additional filing obligations with the sec before you go this route learn more about it ken your company taken international investors depends on your business structure right so watch out especially if you're an s corporation some documents you need to succeed we've started to touch on some of this for angel investment clubs um and just outreached angels go to the fifty questions first you will need an executive summary to get into most clubs but I say have the business plan ready to go there is nothing that kills deal momentum faster than an awesome idea an awesome entrepreneur who just presents an awe inspiring presentation makes me hungry to learn more we've got your executive summary which maybe one to five pages maybe two to five pages and then I say hey can I see your projections can I see your business plan no no no no I haven't had time to do that yet okay you mean you haven't done projections and how do you know how much to raise from may how do you know the dollar amount that you need hello this's why say sometimes even though a club may say all we need is the executive summary to a little bit more be ready so if we're engaged and asking you questions you can say here here here and show off how prepared you are minimum two year projections tell me what know how you're going to spend money and work through the details that your use of proceeds will get you to a point of value do some research on your competition even if you don't build out a full blown business plan do a little bit more than that one page on your slide deck no your competitors know where they stand they may be collaborative partners or strategic partners for you no I'm I'm going to be asking about it audience it's your turn do we have time for this one second way are running short on time but anything they'd like to contribute at this point I want to know what is the number really one reason why entrepreneurs failed to raise money from angels my view number one reason why you end up with nothing pardon asked the wrong amount yeah that's usually how you lose money and investors lose money you're not even at the table yet where you don't even get the cash good reason on my answer anyone else here's my answer you stop you stopped asking here's howard schultz terrific guy in his book um he described what it took to raise money from angels around the pacific northwest. He solicited and sat down for coffee with two hundred forty two different people and he got nose from two hundred and seventeen he heard no one's going to pay the hot for that what do you mean this I don't think you can do that and he wasn't even looking to become the starbucks said it is today a great innovator he had a much smaller idea of what he thought his coffee concept would become, but he got twenty five yeses people don't raise cash when they stop asking for cash they stopped at the first no so when people complain to me and say I can't raise cash for my business I asked how many people did you pitch well know wow, maybe one zero we're not coming to you you have to come to us if you could do this I know you can sell your products and services I know you will find those customers so when somebody says susan when should I say uncle? When should I give up? Do you want to know my pat? Answer two hundred forty three that's what I say you can stop after you hit two hundred forty three but I want you to beat howard I want you to raise that first round of capital in fewer than two hundred and forty two beat howard. Let that be your milestone benchmark. If he did that, can you person you know you are entering into a landscape where angel investing is so more popular than it was twenty years ago? Now various crowdfunding now their incubators, club state agencies that want this tow happen your road should be easier than howard's road, but he didn't stop. He didn't let two hundred seventeen naysayers say, I can't do this wow nose can create new opportunities every know now knows what you're out to do. Twenty five people said, yes, don't stop until you reach that right dollar amount. Why give up on your dream so easily? Gosh, you're giving up too easily by one or two nose and maybe it's a little better targeting that you need, I say, don't stop until you get the yeses. You're all too smart, your dreams, you great ideas here and out there, I know it. Don't give up on yourself.
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