Catching a Crowdfunding Wave
Question:
What’s the deal with regulation crowdfunding? Is it free money?
A: Crowdfunding can mean a lot of things. The kind I’m familiar with isn’t free money at all — it’s a way to raise capital under Regulation Crowdfunding, or Regulation CF (created by President Obama’s 2012 JOBS Act and regulated by the Securities and Exchange Commission). Suffice it to say that raising cash like this isn’t any easier than going to your local bank or any other traditional route. I know this firsthand because I raised $267,000 this way in 2016. Here’s what I learned:
- Entrepreneurship is an Action Word. A benefit to pursuing a crowdfunding “raise” is that it pushes founders and small business owners to act like CEOs. To launch a campaign, I needed reviewed or audited financials, a pitch deck with a clear value proposition for the uninitiated, and positive proof of contact with an actual customer. This requires market traction — but the process can be as valuable as the outcome.
- It’s More Like a Funding Campaign. Raising money this way is a full-time job in itself. It’s not a single meeting or weekly agenda item. It took me a little over two months — 61 days to be exact — of being fully focused on balancing the marketing strategy of the raise with the legal landscape of SEC compliance, fielding timely answers to potential investors’ questions, and essentially just keeping the cash flowing while somehow managing a myriad of other business tasks and functions.
- You’d Better Enjoy Crowds. Regulation CF allows everyday folks — anyone — specifically non-accredited investors, to invest small amounts, perhaps just $100, into small businesses. Later, when the round closes, all these investors can be grouped into one line on your capitalization table. However, I think it’s important, and in my case ironically counterintuitive, to note that you’ll continue to hear from many of them individually, at random intervals. I had 271 investors and I’m not sure that I ever handled this expectation for individual communication well. This should be viewed in light of the fact that the overall idea of Regulation CF has been branded as putting the “humanity back into capitalism.”
Ultimately, I think Regulation CF can be a piece of a larger capital strategy. Raises can be debt or equity; SAFEs (Simple Agreement for Future Equity) are common. Like any funding, there’s a catch-22; you only get this money if you can show you don’t really need it. People support traction and momentum, not desperation. Unlike a bank loan, you won’t sign a personal guarantee or put up outside collateral, but you should believe in what you’re doing enough to give everyone a fair shake and list the risks plainly. You can set your own terms; don’t copy what’s trending. This isn’t “smart money” like you’d get from a venture capitalist, private equity firm or local banker with industry know-how and connections.
Know what you’re getting, and what you’re not. With that said, my business experience shared here should not be taken as legal or accounting advice.
Central Oregon Community College’s Small Business Development Center (SBDC) offers free, confidential professional business advising and a variety of low-cost courses to help entrepreneurs through the business lifecycle. Visit cocc.edu/sbdc to learn more and read testimonials from successful businesses.
About the Expert:
Keith Sherrill served most of his adult life in the U.S. Army, quickly rising in the ranks within the elite 75th Ranger Regiment and 160th Special Operations Aviation Regiment. Upon exiting the military, Keith applied his lessons learned and leadership to his own entrepreneurial pursuit, building an award-winning microbrewery and beer brand from the ground up. He holds an MBA from William & Mary and is a graduate of the Stanford Graduate School of Business’s Ignite program.
