Tuesday, March 27, 2012
Last week, the Senate passed the Crowdfund Act by a vote of 73-26, the sister act to the Jobs Act (or Entrepreneurs Access to Capital Act) p...
As a quick history lesson, prior to crowdfunding being enacted, SEC laws limit private company investments to accredited investors with over $1MM in net worth or $200K of annual income. That limited startup investing to largely the wealthy. The logic of the law was that most startups fail, and the SEC assumed wealthier people made smarter investments and could more easily digest losses, and the masses wouldn't flush their life savings down the toilet on a bad idea. But, the counter argument was "how is startup investing different than making donations or gambling", which is accessible to everyone. So, with proper controls and the convenience of web enabled tools, crowdfunding could become a great resource to stimulate the economy.
The two acts are not in agreement on the exact details yet. The House's act allows up to $10K investments or up to 10% of your income, to be invested into startups. The Senate act, allows up to 5% of your income if under $100K per year (e.g., $2K), and up to 10% of your income if over $100K per year. Another difference is the Senate requires the investment be made via an accredited crowdfunding marketplace, that is government screened, in an effort to control fraud. Both laws require a verification process that the investors meet the stated investor thresholds. It will be interesting to see what details finally get agreed upon in the final law, once enacted.
Price Waterhouse Coopers estimated that seed stage investments for startups totaled $920MM in 2011. And, as evidenced by crowdfunding pioneer, Kickstarter, generating $100MM of funds pledged in 2011 by themselves, and the scores of additional crowdfunding platforms beginning to take off, access to seed stage investment capital will explode in the coming years, helping to launch the next generation of great startup businesses.
That said, entrepreneurs should be cautious about these new channels for capital. Coordinating and communicating with hundreds of investors, can become much more cumbersome than dealing with one or two large angel investors or VC firms. And, these "mom and pop" investors typically do not come with the networking benefits or strategic advice provided by professional investors. At the end of the day, it is simply money. And, some entrepreneurs need much more than money to make their businesses a success (e.g., Rolodex of connections, mentorship from people that have done it before). So, buyer beware!
Most crowdfunding sources take a cut of the monies raised (e.g., Kickstarter keeps 5%, and their payment processor Amazon.com keeps 3%-5%). So, make sure you read the fine print, and make sure you are asking for enough funds, once you net out these fees. And, be sure to research the various nuances of these funds. Things like: (i) where are they based; (ii) how many investors do they have in their network; (iii) how many successful fundings to date; (iv) what is the average size of their fundings to date; (v) the industry/product focus of these networks (e.g., music, design, CPG, green, startups); and (vi) whether they raise funds via "donations" that do not need to be repaid, or whether they are actually taking equity in your business.
As best as I have been able to research the crowdfunding market to date, I feel they fall into three camps. First, you have micro-donations websites for various projects, like Kickstarter, IndieGoGo, Fundly, Microgiving, Helpers Unite, Pozzible (based in Australia) and Give A Little (based in NZ). Most of these have a creative design project focus, cut could be accessed for good startup ideas. Second, you have U.S. based micro-investment websites specifically focused on startup companies, like WeFunder, FundRazr, Microventures, Bank to the Future, Crowdfunding Bank, Early Shares, PathfinderBCM, RocketHub and Crowdfunding Offerings. These are probably the best place to start for U.S. based startups. Third, you have foreign based micro-investment websites specifically focused on startup companies, like Seedrs (UK), Crowdcube (UK), Crowdfunder (UK), CoFundos (Germany), Grow VC (Hong Kong), and Symbid (Netherlands). They may do equally well, but not sure how foreign investor demand will be for U.S. based startups? As a subset of these startup focused crowdfunding resources, there are ones specifically focused on certain industries, like Quirky for consumer products and Green Unite for ecofriendly projects. And, I am sure there a many more in the works, that I haven't stumbled upon yet. Time will only tell which ones of these will grow into dominant market leaders, given the infancy of this space. So, do your homework on which one is best for your needs, location and industry.
For future reading on the matter, be sure to check out the crowdfunding section of Crowdsourcing.org, the leading research group in this space. Or, check out this blog on crowdsourcing trends, called Daily Crowdsource.
Here are some other useful articles I used to research this topic:
Senate Passes Crowdfunding Bill (from Techcrunch)
Senate Approves Crowdfunding (from Forbes)
Comparison of Crowdfunding Websites (from Inc.)
9 Crowdfunding Websites to Help You (from Web Distortion)
Crowdfunding is Great, But is it Right for Startups (from BostInno)
And, be sure to read my follow-up blog post from October 2012 with an update on key crowdfunding details that were beginning to emerge as of such date.
If any of you have had any good or bad experiences from working with the various crowdsourcing websites, or if there are others we should add to the list, please tell us in the comments field.
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Tuesday, March 20, 2012
Last week, Lisa Leiter at Crains Chicago wrote a great article "When Should a Startup Worry About Making Money?" It raised good ...
This really is not a simple question to answer. There are so many nuances that go into assessing the right answer. What is going on with the economy? How liquid is the fundraising climate? Are you B2B or B2C? Are you the first mover? How defensible is your business, with patents, product complexity or otherwise? What are your competitors doing? How big is the market opportunity? How quickly is it emerging? Are you trying to dominate the world, or build a nice lifestyle business? Are you venture backed, or privately owned? So, in light of all these moving pieces, I will do my best to layout some high level guidance.
Based on the above questions: (i) the softer the economy, the more you should protect your cash reserves to weather the storm; (ii) the better the financing climate, the more comfortable you should feel in accelerating growth with access to investors; (iii) I think B2C businesses need to think "faster" than B2B businesses, given the nuances of consumer behavior vs. corporate behavior; (iv) it is always best to be the first mover, and accelerate your lead when you can (or catch up if you are not first); (v) the more complex or defensible your business, the less speed becomes an issue; (vi) the larger the market, the more room there is for multiple companies to thrive, and hence speed becomes less an issue; (vii) brand new markets or business concepts are typically dominated by the first mover, so move quickly at the expense of profits; and (viii) venture backed businesses trying to dominate the world, need to move quickly to ensure growth and liquidity value for your investors.
Let's use Groupon as a case study. They are the fastest growing company in the history of business. They went from zero revenues in 2008 to a forecasted $3BN of revenues forecasted for 2013. And, they spent hundreds of millions of dollars in capital and startup losses, to acheive a dominant market position in the revolutionary B2C "daily deals" space. Why was that the right answer and strategy for Groupon? First of all, their product was not all that hard to build, and their early success spawned hundreds of competitors. Secondly, they were the first mover with a highly-lucrative new business model, and they wanted to dominate the global markets before anyone else did. And thirdly, their biggest competitor Living Social was also investing hundreds of millions of dollars in trying to catch up and take the lead in the daily deals space. What was the outcome: a publicly traded Groupon valued at $10BN and forecasted to drive $400MM in net profit in 2013 (its fifth year of business).
Facebook was an equally successful, but different story. There wasn't a clear e-commerce model to drive revenues with. And, their executives and investors decided the idea was so revolutionary, as a communication platform, that it was critical to get all consumers locked up, even without a clear revenue model. And, that they did, amassing hundreds of millions of users worldwide, on the shoulders of hundreds of millions of dollars of startup capital. And, similar to the premise of the Field of Dreams movie, if you build it, the revenues will come, soon thereafter. Sure enough, Facebook does about $4BN in advertising-based revenues today, and is estimated to go public in 2012 at a valuation of around $100BN. Not a shabby return on their investment!!
Now let's look at a third example, this time for a slow mover. Streampix is the new online streaming movie service by Comcast, launched to go head-to-head with Netflix. This was already a very crowded space with YouTube, Hulu, Redbox, Blockbuster, Amazon, iTunes and others trying to dominate online movie streaming. But, why was that a good launch for Comcast? They already had all the studio and network relationships? They already had the cable box hardware in everyone's homes, so an easy upsell? It was a simple message to consumers to simply stream online movies from Comcast, instead of Netflix, for a lower price already bundled into your cable service. And, Comcast is much better funded, to afford the high content licensing costs with the film studios. Time will tell if Streampix succeeds or not. But, this slow mover has as good a chance as anybody, given the nature of this industry and its current market dynamics.
As I said before, each business has its own considerations. Study your options, and plan accordingly. And, where you can, I am always a fan of moving faster before your competitors do. If you have specific questions about what is the right path for your business, simply ask them in the comments field.
For future posts, please follow me at: www.twitter.com/georgedeeb.
Monday, March 12, 2012
Howard Tullman is a serial entrepreneur in Chicago, and the current Founder and CEO of the highly successful Tribeca Flashpoint Media Arts A...
Below is an excerpt from Howard’s acceptance speech, that Howard graciously allowed me to share with all of you. There are some terrific words of wisdom herein, for all you aspiring entrepreneurs:
Monday, March 5, 2012
Entrepreneurs are not always aware of the various financing structures that may be available to them when raising new capital to finance the...
Thursday, March 1, 2012
A local private equity firm recently asked me to summarize my thoughts on what I saw as the key investment themes they could consider in bu...
A. Social-Local-Mobile will evolve to Hypersocial-Hyperlocal-Hypermobile as more and more interesting applications get developed.
So, if you are entrepreneur considering which avenues to pursue, following one of the above themes could prove fruitful for you. And, if you feel that I am missing any, please add them to the comments field below.
For future posts, please follow me at: www.twitter.com/georgedeeb