Get ready for crowdfunding 2.0

posted Jul 1, 2012, 12:28 PM by David Khorram
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Since mid-June, Ben Powell's Manhattan firm, Motive LLC, has attracted more than $12,500 from 370-plus backers for its product, a stylus to handwrite notes and draw on the iPad.

Like other small businesses that have won over supporters through Kickstarter, a crowdfunding site for companies seeking to raise money online from individuals, Mr. Powell rewards backers with small gifts. Motive, for example, provides everything from a single black stylus for a donation of $20 or more to 10 styluses in a choice of four colors and a black leather Apple iPad Smart Cover for $500 or more.

With the passage last April of the Crowdfund Act, startups and small businesses now have the option of luring investors to back them by selling stock or raising capital through debt in their firms. The Securities and Exchange Commission is currently working on the rules for equity and debt-based crowdfunding, including how companies can use social networks to promote their capital-raising drives. The SEC is slated to present the new regulations in mid-January.

Considering the new options in crowdfunding? Here are some tips.

Be realistic. Crowdfunding isn't for every company. Before you invest time in it, consider how long it will take for you to bring your product or service to fruition and deliver a return to investors. That will affect how many takers you get for your offering. “It's about matching backers' investment timeline with the company's development timeline,” said Jason W. Best, a principal in Crowdfund Capital Advisors, which is headquartered in San Francisco and has a Manhattan office.

In the past, many small backers of crowdfunded ventures have been attracted by the small rewards that they get for making a donation, such as a signed CD by an artist they have supported. Entrepreneurs should consider “whether their product would be attractive as a reward,” noted Mr. Best. Do background checks. The law requires corporate officers to submit to securities-fraud and criminal-record checks, so companies need to do their own due diligence first to ensure there are “no bad actors” involved in the firm's crowdfunding efforts, said Mr. Best, who also serves as the co-founder of Crowdfund Intermediary Regulatory Advocates, a Manhattan-based self-regulating association for the crowdfunding industry and co-chair of the Crowdfunding Professional Association in Salt Lake City.

Prep the paperwork. To drum up investors, you'll need to be prepared with financial statements, a comprehensive business plan that includes how much capital the firm needs to achieve its objectives and a budget delineating how the money will be allocated, according to Sang Lee, founder and CEO of Return on Change, a Long Island City, Queens, firm with an equity crowdfunding site geared to socially conscious ventures and technology startups. “Transparency is key,” said Mr. Lee. “If you are spending money on nice monitors because your graphic designer needs them, put it out there. Don't try to be coy.”

Craft a compelling pitch. On crowdfunding websites, pitches abound—but investors are drawn to those that focus on the “why” of a new product and its impact on “society and the world,” said Brian Meece, CEO and founder of the 2-year-old, a Harlem-headquartered crowdfunding site. Providing such information “will resonate” with contributors, he said.

Create a communication strategy. Small-fry investors' questions, complaints and suggestions can consume vital company time, so it's critical to manage their expectations. Keep them in the loop with monthly emails and quarterly newsletters, and assign a point person to handle investor relations. “You want to always speak with one voice,” said Mr. Best.

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