Equity Crowdfunding

Daniel Isenberg, Professor of Management Practice at Babson Global has written a controversial article for the Harvard Business Review titled “The Road to Crowdfunding Hell”

He builds his article around 4 main points:

1. Equity Crowdfunding is based on inappropriate extrapolations from other similar-appearing activities, such as donation crowdfunding.
2. Purchasing equity (stock) in early stage ventures is too innately complex to standardize.
3. The conduct of due diligence in the ventures raising money will render crowdfunding prohibitively expensive and thus impractical.
4. Crowds are stupid as often as not, or worse.

1. Inappropriate extrapolations
If you know you are going to get a “prize” from say Kickstarter you are going to get fairly instant gratification for your “investment”. With equity investing it is all based on hope. You hope that the founders will accept your share application, process the funds responsibly, issue you a certificate … and then be truly responsible custodians of the funds and use them to deliver on the promise they made in the communications they proffered. Equity is totally different than pledge or lending. Upfront strong risk warnings are needed and these need to be mandated by legislation. We cant have a pecuniary interest nor offer advice. To ensure offers are “fair” to both parties we have evolved to having in-house legal and the costs associated with that. Also with “hope” rather than a “prize” 3 monthly updates are necessary so the investor isn’t left in the dark as the business evolves. So yes extrapolating from the near instant gratification of a new watch strap to the hope of an exit at least 3 years down the track is a big jump that most equity based crowdfundung sites seem to have done starting out with physical layouts that all look like Kickstarter.

2. Too complex to standardise
This is a constant battle. Entrepreneurs usually dont have much of a clue about governance and responsibly raising and respecting equity capital and Investors see the glint of a quick return. However we have found through having dedicated Case Managers for each raising and a string of standardised documents and processes the burden on the individual is a bit cumbersome but certainly not light. A combination of smart computer systems and trained people have standardised the process but it has taken years to get it to where it is at.

3. Prohibitively expensive
The figures to date show that around $500,000 upwards needs to be sought in order to make the raise feasible. Below that costs take too much of the raising to make it palatable. If legislation was widened to make it more than “personal offers” to people you or the platform has contact with this figure might drop lower. At the end of the day while our platform is entrepreneur friendly internal compliance standards are essential but costly to protect investors as well as we can in this high risk area. There is a significant lifetime cost of issuing and maintaining each share in an entity that precludes small investments.

4. Crowds are stupid
Robert Cialdini‘s “Social Proof” seems to play more than a small part in equity investing. People follow what other people are doing. For that reason rigour in compliance is required. However we havent found social proof to be as contagious as pledge based crowdfunding. The reason is that the convincer needs to be a lot stronger in equity as hope is the main ingredient. We prefer listings that are further down the track, making real money and requiring growth capital. However at least half of our listings are early stage and there are seldom figures one can bank on.

To raise capital there must be 5 things.

 1) A Convincing, Compelling Story

 2) A Balanced, Passionate, Likeable Team

 3) Impressive Credibility for the Team and Story

 4) Lots of Suitable People to tell the story too

 5) Lots of Compliant Ways and Means to tell the story.

If you are seeking say $1 million by the sale of equity capital even if you score 10 out of 10 for the 5 things above investment is not going to come in in $50 and $100 lots and reach your total. Hope peppered with compliance rigour will not fuel the momentum required so although the crowds can be stupid legislation and the fear of getting a bad reputation on the internet can lesson this stupidity. Of the 176 raisings we have had 152 are still operational several have listed on stock exchanges and many have exited through trade sale. I know this is the area where you want the stats as it is where the rubber meets the road but on studies so far we would be above the typical figures bandied around for Angel investment.

Related articles

• Ahead of the JOBS Act Rush, CircleUp Launches Crowdfunding Platform (allthingsd.com)
• The Road to Crowdfunding Hell (blogs.hbr.org)

Reading Bob Gottliebsen’s article on investing in shares in Business Spectator should have got you thinking.

To an investor what does”Investing Productively” mean?

Bob picked up the theme of my talk based on a blog post on capitalunderdogs which was that investing by individuals today is predominantly driven by charts, numbers, spreadsheets and stock picking software but he went further and likened it to a casino.

“Investing Productively” can mean many things but in the context of an investors money being put to good use it means that the money an investor invests …

• Creates jobs
• Grows businesses
• Fosters innovation

• Creates jobs
• Grows businesses
• Fosters innovation

At present this $63 Billion only represents 4.7% of all the funds invested. In the “good old days” if you wanted to say build the Princess Theatre in Melbourne you would raise the funds by issuing shares. The investors would be investing their money in a project that …

• Creates jobs
• Grows businesses
• Fosters innovation

Today an investors funds are more likely to be passed to another investor who has chosen to sell out of a stock or share and invest in another.

 

If an investor invests in stocks or shares for a company raising investment via ASSOB, Wholesale Investor, AIN, Angels Networks and Private Equity and Venture Capital firms, 100 percent of the funds invested go into the entity raising capital.

 

While these organisations and affiliations continue to primarily reinforce the opportunity that shares and stocks were originally issued for this is not so for the majority of shares transacted through stock exchanges.As Bob said  ”For the last century or so stock exchanges have conducted that capital raising function, but these days stock exchanges have been turned into massive casino-style trading houses where capital raising is less than 5 per cent of what they do.”

 

Stock exchanges need to re-evaluate their place in the business development value chain as with the way the Internet has changed the paradigms for industries that were “going to last forever” they may find the need for their services in the future being grouped and legislated within the category of gambling and speculation.

 

Stock exchanges evolved due to the inability to easily connect investors that wanted to buy or sell. Same with 78′s, LP’s, CD’s and DVD’s. People needed to physically visit an outlet to obtain there latest release. Not any more. Music aficionados can now buy direct from the artist.

If any of you have attended my capital raising seminars over the years you will have experienced the strong shift towards obtaining investors through people discovered during “Discovery Sessions”.

Discovery sessions are intensive sessions where followers of the business, founders or technology can be uncovered. Crowdfunding is leading the way here and in effect ASSOB Capital Raisings are successfully because they gather, engage and count followers of the business, founders or technology very successfully.

Read more here: Followers: Raising Capital of $1.5m through 304 followers worth $4804

While some businesses seeking funds get a lucky break and one investor may take out the first round of say $300,000 in one go normally it is a more measured process. Usually it is friends, fans and followers of the business that take the first few parcels, then as time goes on the more professional investors enter the fray.

Loved this article from StartupSmart

Six degrees of investor separation

That fringe moment at the end of each meeting. Maybe as you open the car door to go. “Look I’ll get back to you” they say…. but “You should really meet X”.

Recognising that signal is worth gold!

OK so maybe they feel guilty that they cant invest in your business. You are probably best to swallow and mumble “Some will, Some won’t, So what” (then amplify your hearing and wait). That fringe comment, usually coming from guilt, as you say your goodbyes, could lead to your next investor.

“Look I’ll get back to you” they say…. but “You should really meet X”.

Thats why I like this article, it has chosen a moment most people miss. Uncovering these moments is an integral part of every ASSOB “Discovery Session”.

Today’s startups look to …

• have a shorter life
• require less funds than previously
• be more transparent with google, as past and future stakeholders can be checked out
• have found that private equity from platforms like ASSOB and Angelsoft are often a better match than venture capitalists
• will have more rather than fewer individual investors.

More details on startups at the Capital Underdogs blog.

Related articles

• Angel Investors and the Golden Rules, Part I of V (briancorkhumancapital.com)

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This week I shared the stage with the Green Leader Bob Brown at the 10th Australian Sustainability Awards.

Ethical Investment was why everyone was there apart from the excellent menu which featured organically grown fare.

Paddy Manning a journalist with the Sydney Morning Herald reported well on it, picking up on my phrase “It takes passion to invest”. Read the Article here.

Or read my full blog post here.

Had a great visit to Scottsdale Arizona in mid October to join 450 others at Jeff Walker’s Product Launch Formula Workshop. I’ve reported on the business side of things here.

It was a great venue with three very intense days. What was special was that the majority of people were experienced with using the Product Launch Formula and willingly sharing the successes they had had.

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Capital Underdogs are businesses that need capital or private investors (private equity) and havent been able to find it.

My blog at CaptialUnderdogs.com has plenty of valuable advice for businesses in this situation.

From reading and deciding upon hundreds of Capital Raising Applications I see Venture Funding as based around 7 stages …

1) Evaluating – Could the business raise capital
2) Preparing – Getting the business Investor Ready
3) Discovery – Finding information to support the capital raising
4) Building – Getting the story, events, credibility and lists straight
5) Telling – Spreading the story far and wide
6) Collecting – Receiving and distributing the money
7) Delivering – Fulfilling the promises made during fundraising

For the second stage “Preparing – Getting the business Investor Ready”

I’ve just written a blog post on the topic.

Enjoy!

Dharmesh Shah, Chief Technology Officer & Founder of HubSpot wrote a blog post where he reflected his experience to produce 9 Quick Tips Learned While Raising $33 Million In Venture Capital.

I thought I would take a slightly different approach and rewrite these relative to my experience at the Australian Small Scale Offerings Board. At ASSOB we are a step or two before Venture Capitalists get involved. Some do in some matters but it is mostly Private Equity investors.

You can read my post entry here.

Was “Australia Day” here yesterday and I got thinking about how so many ventures are dependant upon funding from friends, family and fans to get to the next level.

Many people say friends, family and fools.

Which got me thinking. How can someone with a business opportunity needing early stage funding from private equity or investors prepare themselves better. On my “Capital Underdog” Blog I added a new entry which I believe should be invaluable for someone seeking to raise funds from friends, family and fans.

Read it here!