Friday, June 23, 2017

New Crowdfunding Methods to Raise Cash for Both Startups and Mature Businesses

Kickstarter, StartEngine, GoFundMe, and Others Can Help Your Business Raise Needed Money

Do you have an idea that you believe could sell millions of units, but you just lack the money to bring it to market? I have been faced with that dilemma multiple times in my life. The resources generally available until just this decade are listed below and I have done all of them, some of them multiple times or continuously:

  • Credit Cards
  • Friends and family equity or loans
  • Borrowing against personal assets like your home    
  • Bank borrowing using personal guarantee, personal or business assets 
  • Small Business Administration Loan 
  • Selling stock to qualified investors with SEC filing 
  • Asset lending on accounts receivable, inventory, or purchase orders 
  • Customer advanced payments

All of these are still valid methods and commonly used, but there are limits and companies are commonly not able to use these approaches for all the opportunities or crises they encounter.

Now there are two more methods that are creating massive funding for companies, products, and services that don’t require any assets or much cash. Both involve crowdfunding online. One method uses “rewards” that are paid for in advance based on a HOPE that the company will actually deliver the rewards as promised, someday. Almost generically known as Kickstarter, the most common reward is a new product that the funding is designed to help the entrepreneur bring to market.

The other is raising equity or loans from qualified and non-qualified investors in amounts as little as $100 at a time. The investors are found online as part of a crowd of folks that like to take these kinds of risks.

Let’s take a look at these one at a time

Over the course of the last 40+ years I have brought multiplied hundreds of products to market and either owned or worked with 180 companies that offered products are services. In the course of these years they new company or new product process worked something like this:

  • Idea
  • Business plan for development
  • Cash requirements analysis
  • Personnel and facilities requirement to launch
  • Source of cash analysis
  • Timeline
  • Raise cash, execute on personnel and facilities
  • Spend money on design, tools, packaging, inventory
  • Take idea to buyers and attempt to create pre-orders based on brochures or prototypes
  • Make initial buy of inventory with no idea how fast product will move through distribution and off the shelves.
  • Ship and wait for results – manage results to best extent possible
  • Evaluate and shift as necessary regarding product, packaging, POP displays, distribution channel marketing, price, competitive shifts, etc.
  • Evaluate movement and begin to plan inventory rotation based on sales

Kickstarter and other websites like this are now firmly established with outstanding records for raising amounts as small as a few thousand dollars to multiple millions. The advantages for any company launching a new product using Kickstarter are huge:

  • Almost all of the risk is shifted to those seeking the reward (product.) With other methods the entire risk generally falls on the company and/or owner.
  • You can test market the product prior to spending more than a few dollars on copy, artwork, videos, etc., about the proposed product
  • The product gets displayed on a website where thousands of potential consumers can see your concept and potentially take a risk by placing an order for the “reward.”
  • The marketing content that you create for a successful Kickstarter campaign is now tested and ready to be used to sell in the future in traditional “stores.”

What does it take to create a successful Kickstarter type campaign?

  • A solid and serious new product or service idea that has an element of inspiration around it. There needs to be something seriously new and innovative.
  • Your own large following on social media, preferably including a big email list of folks who would be interested in the product or at least with helping you out.
  • A well thought out and creative pitch that can be translated into Great Copy, videos, spec sheets, etc
  • Rewards – This would include variations of your product, but might also include T shirts, thank you letters, etc.
  • A serious fund raising goal
  • Evidence of trustworthiness

What if there is no “amazing” new product, but you have a great company idea, or an existing company with a track record. If you would like to issue stock, you can go traditional routes similar to what John just outlined with friends, family, associates, venture capitalists, etc. But congress passed a bill which provides a new route.

You can now use online resources, including social media, to “advertise” your stock offering to both qualified and non-qualified investors. The stock can be preferred or common, voting or non-voting, it can even be bundled so that you are only dealing with one entity instead of thousands of individual share holders.

Under these new rules, these stock offerings do not have any of the onerous SEC requirements that earlier offerings require. Sadly, you are limited to only raising $2m per year. LOL

How does this process work?  What do you need to be successful?

While there are those who only try to raise a few thousand dollars using this approach, I would recommend sticking to credit cards and Mom if that’s all you need. Personally, I would suggest a minimum raise of $25,000 or even $50,000 for this type of stock offering.

You will want professional help. Start Engine Is one of the largest, but there are many. Each has their own niche, so it is hard for me to say which would be better for you. The reasons you need help:

  • Unless you think your friends and fans will fork over all you need, these online companies are followed by investors looking for these types of opportunities.
  • They will help you with the legal filings and what you need on your listing
  • For a fee, some will help you with the marketing (Start Engine $4000)
  • There are also issues of timing, how much to ask for, how to value your company preoffering and what that will look like post offering.
  • The actual type of stock, limitations, etc., are other legal issues you may get help with.

To be successful, you either need a killer idea, a great company story, an amazing leadership team or all of the above. Then you need to tell your story within the bounds of legal and ethical constraints. In other words, you are not allowed to puff your deal.

Consider this scenario, which is exactly what I’m doing with a current client. 

  • You have a new product or service idea
  • You have $10,000 available from friends, family, credit cards, cash flow
  • You raise $50,000 through a stock offering (cost $7000)  Net $43,000
  • You put the new product concept up on Kickstarter – cost $5000
  • You raise $100,000 (cost of goods $50,000) net $45,000
  • You now have $98,000 in working capital ($88,000 if you repay the $10,000)
  • You finish the research, make the tooling, buy the goods and ship the orders.
  • You may have spent some of the $98,000 on the make ready and overhead.  Let’s say you have $50,000 left. You can now use the $50,000 to buy inventory, set up the product on Amazon and eBay, and start selling.
If you would like to discuss more about the details of these methods of starting or financing your small business, please call Randy Kirk at 310-910-1848. The first 45 minutes of consult is without charge or obligation. 


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Sunil Goyal said...

Capital investment is the biggest challenge faced by startups; crowd funding could be an answer to this.

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