How To Properly Prepare An Equity Crowdfunding Pitch

With the success entrepreneurs are having raising capital with rewards based platforms like Kickstarter and Indigogo, many first time entrepreneurs are seeking the preparation advice from crowdfunding experts and people who have successfully raised capital on various platforms.  Successful campaign owners have indicated that there is an extensive amount of planning to their crowdfunding success, and entrepreneurs would do well to thoroughly prepare for what is in some cases a significant expenditure of time and resources.

First however, we need to take a step back to realize that there are two types of crowdfunding campaigns an entrepreneur can start; rewards-based campaign (think Kickstarter) and a equity/debt campaign (think SME).  With the introduction of equity crowdfunding, a new type of crowdfunder has emerged.  This type of crowdfunder is concerned about getting their money returned to them with interest.  In some ways, they may not see themselves in the same boat as the kickstarter crowdfunder, but instead see themselves as an investor in ventures, or a part-owner of a great business.

Crowdfunding platforms like Kickstarter operate on what’s known as a rewards model, where crowdfunders give money to a company with no intention of making a financial gain.  Instead the crowdfunders receive a product in return for their contribution.  In a rewards based model, entrepreneurs are pitching an audience that needs to feel some sort of emotional attachment to a product or service, or simply think the product is cool in order to contribute to the campaign. The benefit for project owners, who are not always startups, is validation of the marketability of their concept, a pool of early adopters, upfront cash of course, but also a more intimate connection between makers and enthusiasts.

With equity/debt crowdfunding, the crowdfunder is looking for a return on their investment, which means that your company, product, or service needs to show that it can generate sales, become self sustaining, and ultimately profit.  The crowdfunder in this scenario may or may not have an emotional attachment to your company, product, or service. The most important question to be answered in preparing for an equity campaign is when and how you the entrepreneur intends to return the capital to your investors.

For the purpose of this article, we will focus on how to properly prepare an equity crowdfunding pitch. A good equity pitch should contain the 5 basic elements outlined below:

Who are you?

Surprisingly many entrepreneurs overlook this simple introduction and proceed right into what their product or service will do without ever qualifying who they are or their credentials.  A good pitch will have a succinct and concise introduction, stating who you are and why you believe you are uniquely qualified to bring this company, service, or product to profitability.

If you are trying to start a technology company, did you once work for Google or Microsoft?  Did you manage corporate sales at Louis Vuitton?  Having direct experience in the industry you are looking to start your company in is the first step to instant credibility with your backers.   Think about it this way, would you invest in someone who wanted to build a rocket ship but didn’t know the first thing about science?

Clear description of your product and/or service

Define your product/service in 15 seconds.  Film producers are able to condense even the most complicated story lines into a 2 or 3 sentence synopsis.  Communicate your idea as simply as possible with the understanding that the average attention span is extremely short.  The majority of your backers will not have 10 minutes to spend understanding your product or service.  At most, a potential backer will spend 2 – 3 minutes reviewing your entire capital raising campaign.

 

 

How are we (you/entrepreneur – me/investor) going to make money?

 

As previously mentioned, investors on equity crowdfunding platforms have an understanding that they are contributing to a campaign in order to get a return on their investment in a timely manner.  Stating that you are going to simply build the product will not do.  Investors want to know how you are going to sell the product and get your target audience to buy?  . Is there any evidence that people are willing to pay for your product or service?  If you remember one thing when pitching it is this: no revenue = no cashflow = no profit = angry investors.

How much you are looking to raise?

 

Don’t forget to ask for the money.  The equity crowdfunders want to know how much capital you are looking to raise and whether or not you intend to raise money later.  It’s better to explain your intentions upfront.

How much equity are you looking to raise?

 

Entrepreneurs should be very careful in deciding how much equity to give away.  Sometimes new entrepreneurs believe equity is similar to an interest free loan that does not have to paid back.  This could not be further from the truth.  Equity is not like a loan or debt which can be paid off with no further obligations.  When an investor takes equity in a company, that equity exists for the life of the company.

What will you do with the funds?

While the initial reaction would be to say that you are going to spend the money building the product or service, a specific breakdown of the use of funds is very important.  For example, how much are you going to spend to acquire customers (sales and marketing), and who is going to be responsible for this effort?  Breaking down your use of funds will clearly show equity investors that you have thought through this process and have a plan in place.

When will I get my money back?

This is a crucial component to getting equity investors to back your campaign.

With debt, you can establish an estimated payment schedule, whereas with equity, you can state your intentions to go public, get acquired by a larger company, or provide dividends to your investors.

What should be omitted?

 

–        Long winded stories.

• While a long winded story about your childhood may invoke an emotional response from some investors, for the majority of backers that are looking to invest, they will see this as a distraction.

–        Desperation

• Equity/Debt funders like to know that they are helping to bring your idea to fruition, not a company or entrepreneur who is declaring bankruptcy tomorrow.  Appearing desperate will send red flags to your potential investors and ultimately derail your campaign.

 

 

 

How many times should you try to raise capital on crowdfunding sites?

 

–        Raising capital whether offline or online is a time intensive process.  At the very least however, if you prepared your campaign properly, you should see results within the first week of your live campaign.  If after 7 days of a live campaign, not a single person has backed your company, product or service, it may be time to revise your campaign and perhaps take a look at why no one is attracted to your idea.

From Bernie to Sanford to Peregrine….Where Do We Go From Here?

Over the last few years as I reviewed the numerous scandals and fraud (and others yet to be discovered) within the financial sector, I continued to wonder, how can investors ever truly protect themselves from unscrupulous activity in the marketplace?

One popular option tends to circle around regulation, which in the long run will preclude innovation and entrepreneurial growth in an economy and country that requires it now more than ever.

A good friend of mine was recently telling me about his client and investor who gave $650,000 to a startup entrepreneur who essentially ran away with the money.    While I am sure this was truly frustrating for the investor, it reiterated the need for an overhaul of the micro-VC/angel investing process that is currently based on trust.

Having been involved in the hedge fund and finance markets for quite some time, I am continually amazed at investors’ willingness to invest in companies who provide little transparency into their financials.

With the prominence of the new crowd funding market, one of the reasons I like to participate in sites like Lending Club and Prosper, is due to the fact that there is a great deal of transparency provided to an investor.  I can review a candidate’s credit score, income verification, and the rating given by the site to see the likely hood of default on debt.

Although corporate debt is a slightly different security than equity, the same principles of transparency should apply.  By giving investors access to a company’s financials and real time data, entrepreneurs are challenged to do more with less by not spending investor funds on frivolous non-revenue generating items.  And Investors can rest assure that the companies they are investing in, are truly putting their capital to work.

How To Get Funding On An Equity Based Crowdfunding Platform?

I was speaking to a friend of mine the other day about the pending crowdfunding legislation, being that there are so many players in the space.  Every day a new platform emerges promising to connect startups and investors.  Some of the most publicize platforms already have a significant amount of pledges (people that promise to invest).  Some industry analyst say this will be a $300 billion dollar market – that’s right $300 billion!

We then shifted the conversation about which companies will get funded and what an entrepreneur can do to successfully raise on an equity based crowd funding platform.  While many companies have successfully raised capital on reward based platforms like Kickstarter, raising equity capital where investors demand ROI requires a slightly different mindset.

As we prepare to launch our crowdfunding platform, I wanted to share some tips that will best position entrepreneurs to successfully raise capital.

1. Have a READY TO GO team.

Long gone are the days where investors will give an entrepreneur money based upon the idea alone or without a solid team.  Investors are generally more confident about investing when there are several team members involved in a company as it signifies that others have taken the leap of faith that your business will succeed.

Keep in mind that a core team does not include contractors or your outsourced team.  The core team should be heavily invested in the success in your business and are members in your company that have an equity stake in lieu of cash comp.

2. “Skin in the game”

Not everyone has a rich uncle – at least I don’t – so where do you get the money to bootstrap your company?  Funds from friends and family has been the normal path for the budding entrepreneur.   However, by showing investors that you have your own capital in the game, it makes a strong statement that you are serious about your company’s success and are willing to risk it all. I personally have never invested in a company when the entrepreneurs own capital is not in the game.

3. Full Time Commitment

While moonlighting is great, I have rarely seen a business get off the ground without at least some of the team members working in the business full time.  If you are asking someone to give you an investment (no matter how small or large), you should be doing everything in your power to make sure to treat your investors with respect – Do everything you can not to lose their money!  Having a JOB can be a major distraction when trying to build a company.

While these are generally my criteria for making an investment in a startup company, I am sure there are other investors who may have different criteria.  However one thing’s for sure.   We all ultimately seek ROI. Convince investors that you will do this and the path to getting that check will be much quicker

You will also notice that items like a solid business plan and financials are not mentioned here as I consider them standard practice in business.

Thoughts, comments, suggestions are always welcome!

First Crowdfunding Conference!

READY SET GO!

Tickets are ready, people are lining up to the event, and we are ready to hit the ground running. We are hosting our first crowdfunding event in the city tomorrow Click Here.

Having begun this company only 12 weeks ago, I began to think about how we arrived at our present located.  We have some extremely talented individuals working within our company that have turned this idea into realty, so it would be foolish to say I built this company alone.

I am reminded of the fact that entrepreneurship is at the heart of the American economy, yet so few Americans get to participate in this awesome endeavor.  I speak to promising students, interns, and executives every day, who are all at heart, budding entrepreneurs.  They tell me about the businesses they want to start and the dreams they have and I am always there to provide encouragement and am very careful never to discourage.

However, I always attempt to bring a dose of reality to the conversation.  Building a company is hard…..let me rephrase…it’s near impossible, that is unless you have the stamina of a marathon runner.   Is it possible for one man or woman to build a company alone when there are so many things to accomplish when starting a company? I think not

BUILD YOUR TEAM!

For some reason, entrepreneurs believe (which the media reinforces) the hardest stumbling block to building a business is the lack of capital.  While capital is extremely important, I would argue the most important impediment to building a business is finding a qualified and highly motivated team, and giving them the tools they need to succeed.

When I ask entrepreneurs who want to start a business about their team, I get a variety of answers, but rarely a fully developed team and board advisory.  Don’t get me wrong, all great ideas start in the head and slowly make their way onto paper.  However, the challenge to the budding entrepreneur is in his/her ability to motivate others to join a startup with just an solid idea and a business plan.

If you can pull a talented team together who believe in your idea, you are more than likely to move forward as a startup as you now have people who are relying on you for direction, focus, and ability to take the company to the next level.

SOLVE A PROBLEM!

As a crowdfunding platform, our goal is not just to connect entrepreneurs and investors, but to build real companies with real revenue, and real communities that are solving real problems.  Over my career, I have had the pleasure to work with so many small business, startups, and entrepreneurs who continue to be the driving force behind America’s economic growth.

Finally, our team is really excited about doors this will open for so many budding artist, entrepreneurs, investors and who have and will continue to do great things in the name of Entrepreneurship

See You Out There!

Jeremy