How To Raise Investment Cash from the Crowd
By Peter H. Diamandis M.D. on May 08, 2013
In this blog, I recount my interview Chance Barnett, founder of Crowdfunder, on how to raise investment cash from the crowd to fund your startup.
Raising investment money is hard work. As someone who's started over 15 companies, I know how much time it can take to raise funds for new ventures. I have spent 80 percent to 90 percent of my time raising money -- and I'm not alone, as any entrepreneur will tell you. Crowd funding sites such as Kickstarter help get you advanced sales, giving you upfront working cash, but they don't allow you to sell equity in your company. Enter new U.S. legislation (the JOBS Act) and a new crop of crowd-enabled companies that do just that -- allow you to sell the crowd equity investments in your for-profit company.
Chance Barnett provided me with some background on the creation of his newest company, Crowdfunder, and he offered his advice to entrepreneurs who might use crowd funding as a mechanism to fund their dreams.
Finding a way around the byzantine nature of raising money for new ventures was the inspiration for Crowdfunder, Chance told me. "You can be a great entrepreneur. You can have great sales and marketing skills. You can have technical skills. You can have leadership skills. Somehow that leads you to believe that you're going to be a fantastic fundraiser, but that is not always the case. Fundraising requires its own set of special sales skills. Investors think very differently than entrepreneurs and if you don't speak that language, you could have a huge education ahead of you," he said.
To help reinvent the old school methods of raising capital, Chance and Crowdfunder's team, along with a group of entrepreneurs, worked successfully to advocate for the passage of the JOBS Act, which President Obama signed into law last April. The JOBS Act (JOBS is short for Jumpstart Our Business Startups) is meant to ease securities regulations on investing in companies. This should permit people who are not what the SEC calls "qualified investors," that is, wealthy people with more than $1 million in the bank or an income of over $200,000, to put their money more easily into new companies. This would make available a much larger number of investors to back small for-profit startups.
"My focus is on entrepreneurship, on helping people build great companies," Chance said. "There's an entire other side of the equation here, which is: 'How do you create good opportunities and outcomes for investors?' That's one of the pieces that's very new and radical and going to be different about this new crowd-funding 2.0 world," Chance said.
For the so-called unaccredited investors, new opportunities will emerge for participating in the creation of companies. The new crowd-funding universe allows power of the crowd to conduct a multidimensional analysis of the players and their ideas and come up with an opinion effectively. So mom-and-pop investors can have a say in entrepreneurialism. They can make small bets on a company as an entrepreneur and enjoy the fun ride of that and potentially some huge upsides, but not need to invest a lot of money to do so.
"That's where I think mom and pop not only can get involved but will also benefit," Chance said. "What is probably a better idea is that they see potential signals of quality about who a company is or who the founders are based on other people who do know them or a third-party connection endorsing that person. And once that's happened, then I think they'll be better off investing in people they know and investing in neighborhoods and the types of businesses that they know," he said.
"There's a more personal and emotional set of decisions that people make around investing," Chance said. "Not only that they might care about the founder or the service or the brand but there might be impact along with that. That's something we're really excited about helping accelerate: this notion that with $1,000 you can invest in a long-term, sustainable, for-profit social enterprise and not only invest for profit but invest to help accelerate some purpose or impact," Chance said.
Chance offers three pieces of advice for entrepreneurs who are thinking of using crowd funding options such as his.
1. Since people typically give to friends and family, utilize your community to allow it to invest in you. "That's an important piece and what crowd funding can and will do is be a megaphone for those things happening. An example would be if you're funded by an accelerator," he said. "There's a handful of accelerators and incubators here in L.A. There are some trusted people who, if they're going to make a bet and invest in a company at that incubator stage, not only is that a good bet and a signal of potential quality about the founding team, they're going to get the mentorship of that successful entrepreneur investor. That's a really good place to set yourselves up for what we call some potential successor around your social capital."
2. People love stories, so entrepreneurs should be able to describe their company in a compelling manner. "It has to be credible," Chance said. "There needs to be a story told that shows a narrative of where you've been, where you are now and where you're going. Then that also has to be credible: What are your financials, what are your assumptions? Allow people to pick that and tell you, 'I believe' or 'I don't believe.'"
3. Make sure to speak to the impact of your company on your community, so that it will be a compelling investment socially as well as financially. "What's totally new is the return model," Chance said. "What is the financial opportunity and benefit for people? There's not only financial return in that piece but there can also be impact return, too. It brings a new dimension to crowd funding as a whole," he said.
"What's in it for you? The excitement is that it provides a much larger pool of potentially interested people -- your local community," Chance said. "If there's someone who has had a successful restaurant in Los Angeles and they're a great well-known chef and they want to open up a new restaurant at a new location in Los Angeles, imagine them being able to go out to their existing social network -- that social capital -- so that they can connect to and get in front of the rest of the local community. That's really exciting. When they have alongside that the promise of financial return when they're successful, that can really bring a giant amplifier to that opportunity."
In my next blog. I further explore Crowdfunder, its mission, typical customers, and the potential in crowd funding new business enterprises following the JOBS Act.
NOTE: Over the next year, I'm embarking on a BOLD mission -- to speak to top CEOs and entrepreneurs to find out their secrets to success. My last book Abundance, which hit No. 1 on Amazon, No. 2 on the New York Times and was at the top of Bill Gates' personal reading list, shows us the technologies that empower us to create a world of Abundance over the next 20 to 30 years. BOLD, my next book, will provide you with tools you can use to make your dreams come true and help you solve the world's grand challenges to create a world of Abundance. I'm going to write this book and share it with you every week through a series of blog posts. Each step of the way, I'll ask for your input and feedback. Top contributors will be credited within the book as a special "thank you," and all contributors will be recognized on the forthcoming BOLD book website. To ensure you never miss a message, sign up for my newsletter here.