Now that the legal barriers have been removed to allow non-accredited investors to participate in equity crowdfunding initiatives in Georgia, we should address the practical roadblocks that are keeping people out of the market. A recent article in the Harvard Business Review addressed some of these areas and ways to prevent financing bottlenecks.
Plenty of small business owners invest months leading up to the launch of an equity crowdfunding campaign. But the work does not end with a successful raise: Maintaining effective ongoing communication with investors, customers and stakeholders long after the campaign has ended can not only prevent legal headaches, but can also become a competitive advantage.
Want to know whether or not a proposed business investment is sound? Look no further than its Value Proposition. A VP is the starting point for potential issuers in developing equity crowdfunding campaigns that has a significant influence on their success or failure. Simply put, if the VP isn’t clear and compelling enough, investors will look elsewhere for better returns for their dollars.
Former President Ronald Reagan called them the “forgotten heroes of America”: small business owners who make up a startling majority of job creators, employers and exporters. But these local, home-grown companies often meet huge financial challenges as they try to get their businesses off the ground. From legal advice to proper underwriting, entrepreneurs are facing many challenges raising the equity they need to make their American dream come true. That’s where crowdfunding may help. Simply put, the promise of crowdfunding can help small business, and small business drives the American economy.
Georgia and Kansas may have led the way in Crowdfunding and Securities Exemptions (CASE) legislation, but many other states are quickly seeing the advantages and passing similar legislation of their own.
After all, crowdfunding promises job creation and economic improvement at the state level. And because any astute politician can see the logic in keeping jobs and business taxes in state.
“I keep six honest serving-men: (They taught me all I knew);
Their names are What and Why and When, And How and Where and Who.”
— Rudyard Kipling, The Elephant’s Child
The Five W’s and How are well known by news reporters, but the checklist can be useful in other situations. Nearly every day I get questions from non-accredited investors about crowdfunding. “I want to get involved,” they say. “But give me some pointers.” So, in the interest of answering their queries and making it all-round easier for me, here’s my Business Evaluation Primer for non-accredited investors, who are interested in crowdfunding capital growth opportunities. I’m using Kipling’s checklist (and between you and me, we’re just following the same rules that the guys who raise money for a living follow).
At Northstar Consulting, we look for situations where capital sought will help the business owner successfully fund a project or social cause or take their company to the next level and materially increase its value. In the case of companies looking to ‘tap the crowd’ for debt or equity, this means the potential for high growth, a strong market position, and a sustainable competitive advantage.
Currently, Georgia based businesses can raise capital (up to $1 million per year) from other Georgia residents in intrastate transactions. Equity crowdfunding is legal in Georgia. Yes, legal. The Invest Georgia Exemption is not the JOBS Act. It’s better than the JOBS Act. On December 8, 2011, the Georgia State Securities Division promulgated new rules known as the Invest Georgia Exemption (IGE). This legislation will open the door to many funding platforms like Georgia based Sterling Funder, Rebirth Financial, SparkMarket, and URUUT, which are similar to Kickstarter, along with perhaps thousands of businesses who have been hoping to participate in this new alternative financing opportunity.
Several clients have asked us what they can do now to prepare to ‘tap the crowd’, and our basic cornerstone advice hasn’t changed materially from what investors look for in early stage businesses. Several of the most important factors that will strengthen a company’s position:
The two biggest misconceptions about crowdfunding we hear are, “Is there a quick and easy success formula?” (NO, it does not exist; we’re still learning what works and what doesn’t), and, “Since we don’t have to use banks and investment funds to fund our business, it’s FREE isn’t it”? (NO, there is a cost to learn how to create, manage, and successfully execute a crowdfunding initiative, although the cost can vary significantly with the type of campaign, i.e., reward and donation campaigns are cheapest, and the amount of money required launching a $1 million dollar equity offering under IGE is much less than ever before.)
On October 12, 2013, the Georgia Crowdfunding Association (GCA), The Richards School of Business at the University of West Georgia (UWG), and Carroll Tomorrow will host a full day of seminars, workshops and networking opportunities to help the entire Georgia Crowdfunding ecosystem connect and learn more about the dynamics of Crowdfunding. I would urge anyone interested in how Crowdfunding really works to attend this unique, hands-on learning opportunity. Visit www.crowdwest.org to learn more and register today.
The JOBS act, enacted into law by President Obama in April will have a profound impact on many investors and small businesses in the US during 2013 and beyond. For years in Europe, small businesses have been able to “tap the crowd” to help raise mon
ey for projects, finance short term opportunities or raise money for social or environmental causes from everyday people. The “crowdfunding” phenomenon is not new; people have come together to pool resources to achieve a common goal many times before. In 1885, Joseph Pulitzer and his newspaper The World raised $102,000 (approximately $2.3 million today) from over 120,000 donors in less than 5 months to help finish the construction of the pedestal for the Statue of Liberty. While France had donated the statue itself, the US government ran out of money to finish the project (sounds familiar), and Pulitzer used his paper to raise the balance of the funding with most of the contributions coming from everyday people contributing one dollar or less.
According to a recent article in Forbes magazine, one of the most important aspect of the JOBS Act will be to lift the ban on how businesses can solicit or advertise for investment capital. Currently, private businesses are prohibited from advertising for investors. In reality, high growth well deserved businesses spend months attempting to raise money to fund growth through a complex, inefficient and costly process in which they can introduce their business only to accredited investors. The JOBS Act changes all that by allowing the free flow of information between small businesses and potential investors. Non-accredited investors will now be able to gain access to company offerings they couldn’t participate in before, and companies will be able to leverage their networks of suppliers and customers to help provide capital for their use. More importantly, the cost and time required to raise capital will be reduced.
The JOBS Act will accelerate the entrepreneur spirit, and small businesses will find innovative ways to unlock new ways to “tap the crowd” to fund small business opportunities and hopefully create more jobs. While the SEC still hasn’t clarified all the rules regarding general solicitation for funds, many new internet portals have launched platforms hoping to become an electronic exchange platform between these small businesses and investors for a fee.
Most small business owners I talk with have heard the term “crowdfunding” but don’t understand how they might benefit from it. We are working with a few clients to improve the odds of getting funded by studying successful crowdfunding business models and developing a methodology to manage the process. We’ve discovered that there is much involved to prepare for success in 2013; it not as simple as filling out forms, gathering information from accountants and engaging attorneys to create the necessary paperwork.
At the end of the day, while crowdfunding isn’t a silver bullet solution to re-start economic growth, some elements of the program may be successfully executed by start-ups, small businesses and even mid-size businesses. After all, I don’t see the banks coming to the rescue of small business anytime soon and the current equity funding process is not meaningfully impacting this segment of the business ecosystem either.
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The JOBS act, enacted into law by President Obama in April will have a profound impact on many investors and small businesses in the US during 2013 and beyond. For years in Europe, small businesses have been able to “tap the crowd” to help raise money for projects, finance short term opportunities or raise money for social or environmental causes from everyday people. The “crowdfunding” phenomenon is not new; people have come together to pool resources to achieve a common goal many times before. In 1885, Joseph Pulitzer and his newspaper The World raised $102,000 (approximately $2.3 million today) from over 120,000 donors in less than 5 months to help finish the construction of the pedestal for the Statue of Liberty. While France had donated the statue itself, the US government ran out of money to finish the project (sounds familiar), and Pulitzer used his paper to raise the balance of the funding with most of the contributions coming from everyday people contributing one dollar or less.
According to a recent article in Forbes magazine, one of the most important aspect of the JOBS Act will be to lift the ban on how businesses can solicit or advertise for investment capital. Currently, private businesses are prohibited from advertising for investors. In reality, high growth well deserved businesses spend months attempting to raise money to fund growth through a complex, inefficient and costly process in which they can introduce their business only to accredited investors. The JOBS Act changes all that by allowing the free flow of information between small businesses and potential investors. Non-accredited investors will now be able to gain access to company offerings they couldn’t participate in before, and companies will be able to leverage their networks of suppliers and customers to help provide capital for their use. More importantly, the cost and time required to raise capital will be reduced.
The JOBS Act will accelerate the entrepreneur spirit, and small businesses will find innovative ways to unlock new ways to “tap the crowd” to fund small business opportunities and hopefully create more jobs. While the SEC still hasn’t clarified all the rules regarding general solicitation for funds, many new internet portals have launched platforms hoping to become an electronic exchange platform between these small businesses and investors for a fee.
Most small business owners I talk with have heard the term “crowdfunding” but don’t understand how they might benefit from it. We are working with a few clients to improve the odds of getting funded by studying successful crowdfunding business models and developing a methodology to manage the process. We’ve discovered that there is much involved to prepare for success in 2013; it not as simple as filling out forms, gathering information from accountants and engaging attorneys to create the necessary paperwork.
At the end of the day, while crowdfunding isn’t a silver bullet solution to re-start economic growth, some elements of the program may be successfully executed by start-ups, small businesses and even mid-size businesses. After all, I don’t see the banks coming to the rescue of small business anytime soon and the current equity funding process is not meaningfully impacting this segment of the business ecosystem either.
What do you think?
Path:
I’ve been impressed by research done by Ohio State’s Fisher College of Business and GE Capital’s 2011 National Middle Market Summit. If the US Middle Market (defined as companies with revenues between ten million and one billion in revenues) were a country, they would rank 4th in the world behind Japan in comparison to the world’s largest economies with over $3.8 trillion in private sector GDP.
Moreover, the “Invisible Middle” had an astonishing 82% survival rate during the last recession in the face of an unprecedented credit crisis, sharply increasing commodity prices and sweeping regulatory changes that have haunted their larger competitors. Since the majority of these businesses are privately held, it’s harder to compare their internal financial performance metrics but the facts are clear; these companies represent the real growth engine of the US economy. Surviving middle market companies added more than two million jobs from 2007-2010, even as larger companies shed nearly four million jobs. The “Invisible Middle” serves as community pillars, providing stable employment and acting as responsible corporate citizens.
So what’s driving the growth behind these companies? Since most “Invisible Middle” CEO’s were not MBA’s from the best business schools or had decades of training in preparation to lead companies like Microsoft or General Electric, what explains their phenomenal performance against their larger peers during the last recession? While there are several factors that have driven growth, the most impressive to me is developing new markets and channels for their business and effective operational efficiencies that result in exceptional profit margins
Still, access to capital needed remains one of the biggest challenges to these companies. 55% of the companies reporting stated that they did not have sufficient access to capital markets to realize the potential they felt was achievable. Recently, I’ve helped form a group in the metro Atlanta area to improve visibility of these well-deserved companies and efforts are underway to bring them together with super angels, venture funds and other capital sources to try and connect them with the funding we feel will immediately help create jobs and improve the economy in Atlanta, the state of Georgia and the country.
We’re looking for companies with truly outstanding stories to tell and capital investors interested in helping shape solutions for growth. Please feel free to reach out to me if you have ideas or would like to contribute to our efforts. It’s time we create some visibility for the “Invisible Middle.”
Kennesaw GA- August 30,2012.
The International Center for Innovation in Technologies (ICIT) Keynote Speaker Series continues on Thursday August 30 with a presentation titled “Growth Through Change and Innovation” featuring Donald Amoroso, PhD., ICIT’s Executive Director, Gene Wright, Managing Partner NorthStar Consulting and Roger Reak Managing Director for StratAlli as the event’s Keynote speakers.
Dr. Amoroso will host the event at Kennesaw State University’s Center Room 400 located just off Campus at Chastain Road and I-75 from 5:00-7:00PM on Thursday August 30th with a reception following.
Gene Wright will speak on the topic “The Invisible Middle”, the 200,000 US businesses with revenues between 10 million and one billion representing over 33% of private sector growth. During the last recession, these firms grew and prospered compared to the composite Fortune 500 companies in the US. Wright will discuss what factors drove that growth and more importantly, the challenges these executives face during the next decade.
The event is sponsored by ICIT and there is no cost to attend, but attendance is by invitation only. if you would like to attend, please contact either Gene Wright ggwright@nstarconsulting.biz or ICIT directly at icit@kennesaw.edu for more information and meeting logistics.