- Aug 4, 2020
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Image source: Brian Merrill / Pixabay
It's tough to raise money from your friends and family to finance your startup. You've got visions of greatness and that look of money in your eyes. Your sales pitch is full of excitement and dreams. Convincing your friends and family, however, only some of whom may be able to afford or envision your dream, is a scary proposition. Then comes the caveat to them – I have an idea but no product yet!
After you've gone that first and most logical fundraising route, you start going after angel investors and venture capital (VC) guys. Doing a pitch to VCs is daunting at best and usually a waste of time.
When you start looking for money from Joe Average, you will find that you need term sheets and other regulatory documents. The most important thing is investors must be accredited and qualified, meaning they are vetted according to SEC regulations that they can afford to lose the investment if it goes south. They must have a larger than average net worth and a good six-digit income before they can be accredited. You can't break the SEC rules with this one!
A lot of us have used Kickstarter to raise money or support a startup by buying a product before it's been released to the public. If you invest in an equity crowdfunding opportunity, you actually own a piece of the company. As the founder, you have all of the control over how much you want to give up, when to sell and for how much. Of course, there is a formula to figure this all out but suffice to say the control of this venture is still in your hands.
Bear in mind, as an investor, the equity crowdfunding is for a private company, so it's not subject to the same rigors as a public IPO, but it's easier to invest than via the complexity of a public company.
While an angel investing in your company may bring a lot of expertise, the 'crowd' brings customers. A lot of times, it brings people who would never have considered investing in stock or had the opportunity. It brings them accessibility to the market so they can get a taste of owning penny stock. It gives access to your Mom and her hairdresser to "play the market."
Equity crowdfunding has been around for about 5-6 years in both Canada and the US. Private companies could always raise private money but they had to wait many years for a liquidity event, meaning when the private company would be sold, merged with another company or taken public. The equity crowdfunding's goal, and reason for being, is to raise small contributions from the general public.
The startup founders acquire shareholders more readily with perhaps a 2-year goal to becoming a public company. I'm using the goal of going public loosely here because in the US and Canada not all private companies using an equity crowdfunding platform have an end goal of being a public entity. The shareholders can sell, reduce or increase their investment as an exit once the company is public.
My buddy and serial entrepreneur, George Moen, suggested I check out a Vancouver equity crowdfunding platform called Vested. The two founders of Vested have in excess of 50 years of combined experience working in both the public and private sectors and capital markets. I signed up, took a tour of the platform and ended up buying stock myself.
I must admit it was exhilarating to plunk down my credit card without calling my friendly broker. It was fun!
Did I spend the whole morning analyzing, transferring money and talking myself into which stock to buy? Well, no, I didn't and that was the fun part!
I looked at 2 resource startups, read a very transparent one page synopsis on what each planned to do, then was offered the choice of either investing C$100 or C$200. The stocks were 5 cents. In one case there were the two options of $100 or $200, while the other had five choices up to a regulated maximum investment of $1500.
I bought two stocks for a total of $200 investment. Will I make money? I'm not sure, but it was a learning experience and from previous companies that have gone through the platform, the stated returns are historically between 4 to 10 times.
I called Dave Patterson, CEO of Vested, to get the inside information because it all seemed such a great idea for startups. I was struck by one thing he said after one person called him a shepherd leading investors and startups to success. He said, “Shepherds lead sheep to slaughter. I prefer to be called a sherpa, leading and guiding people through a treacherous mountain pass, or in this case the minutiae of regulations and strategies.”
In my jurisdiction, the Canadian Securities Exchange (CSE) regulates that a private company needs a minimum of 150 investors to turn it into a public company. This number varies across the board, as does the cost and time frame it takes.
The costs and time frame involved in this can also be incredibly low and short compared to proceeding directly to a public offering. One of Vested's clients, Temas Resources took only seven weeks and around C$30,000 to be listed. Resource companies tend to get a listing faster (9-12 weeks) than other tech companies that can take from 9-12 months.
Vested's Patterson told me that having been around the capital markets for decades, he dealt with institutions, brokers and family offices without seeing shareholders directly. He said crowdfunding is a great way to reconnect with investors. With narrowly held stock like that offered via equity crowdfunding, when Patterson receives a payment from a grass-roots investor he can “look them in the eye” when he virtually shakes hands with them. Apparently, it is common for crowdfunding investors to hold onto their share positions longer because they often have a personal relationship with the CEO or COO. When was the last time that happened?
The US is better positioned for equity crowdfunding with platforms like Wefund, Circleup and Localstake providing investors and institutions access to previously untapped opportunities. The size of the market enables a higher capital raise limit than a smaller market like Canada. Did I mention in both Canada and the US, there are no fees to the investor? The startup is charged a modest fee, usually once funds are raised.
So, the advantages for a startup founder to find financing in this manner are clear:
- Equity crowdfunding is approved by securities regulators in Canada and the USA
- Raise money from a large public not a small select group of investors
- Little barrier to entry for investors
- No more pitching to just the three VCs you might know but to hundreds, or thousands, of possible investors
- The money raised is held in escrow until the funding ends, thus protecting your shareholders
- You are very visible if you prefer to use social media to promote your new startup.
- You get the complete list of investors from the platform for future rounds
- You have absolute control of the process
- Investing in equity crowdfunding doesn't break anyone's wallet
- Your startup is not severely diluted like traditional investing
There must be disadvantages, right? If you're trying to operate your company in stealth mode, because of IP issues, it may not work because everything about you, your company and finances are transparent. I guess the other disadvantage is, if you fail to raise money on this type of platform it tends to be very embarrassing.
Is it a good idea for a founder to review for sure. It's not for everyone, as running a public company has its own set of headaches. It's not for the faint of heart, but the option is there for a seasoned CEO to consider as well as for a first time investor.
Gary is CEO of Syphon Quantum Energy Inc., Bizzo Management Group Inc., and Bizzo Integrated Marketing Corp. in Vancouver. London-based Richtopia placed Bizzo on the Top 100 Global Influencers in the World for 2018. He is an Adjunct Professor of Integrated Marketing & Communications, as well as, Consumer Behavior at the New York Institute of Technology, MBA School of Management (Vancouver Campus). Gary can be reached at firstname.lastname@example.org.
Equities Contributor: Gary Bizzo
Source: Equities News