Small Businesses And Crowdfunding
Changing legislation could create new sources of capital for startup operations.
Sustainability is all about social, economic and eco innovation, but where will the capital for future enterprise innovation come from?
Whether it is a high-growth or main-street enterprise, crowdfunding is a powerful new source of alternative capital that intrinsically aligns with sustainability.
It is about people helping each other to get things done.
Very simply, crowdfunding is all about people funding other people with small amounts of capital.
Do you have a great idea, product, service or mission that is innovative and solves a big social, financial or environmental problem?
Take it to the crowd for funding.
For any project to successfully attract capital of any sort, it must be investment-worthy from the start.
Banks want to see credit, equity wants revenue, but people who participate in crowdfunding have their own individual reasons to invest or contribute, and much like sustainability, crowdfunding gives entrepreneurs the ability to appeal to multiple public and private stakeholders with different social, economic and eco bottomlines.
Some will invest for the financial returns, some the social or eco impact, while others will contribute or invest to be part of something special and new; and it’s personal.
A Practical And Versatile Financing Solution
So how does it work?
Start with fundamentals to make a direct connection with the public.
Crowdfunding is institutionalizing private funding for high-growth and main-street small and medium enterprises (SMEs) by digitizing and simplifying the complex processes of sourcing investment capital.
According to the Small Business Administration (SBA), 55 percent of all new and innovative products and services come from entrepreneurs and small businesses.
Paying 44 percent of the country’s private payroll, these enterprises generate 30 percent of the value of goods and services exported by the United States.
Yet it is these smaller enterprises most seriously underserved by any structured financial market.
More often than not, they are either too early stage or do not generate sufficient revenue or scale to provide double digit ROIs and exit opportunities that meet the requirements of traditional sources of lending, VC and PE.
The Heart Of Crowdfunding
Shared interests and follow through are at the heart of a successful crowdfunding campaign.
Recognizing that many things appeal to many people, in order to attract a larger crowd, there must be a collection of strong touchpoints that make for a rich and ongoing story.
This lends itself especially well to sustainability, as the development process takes years to accomplish, and the asset itself has a many-year life span that can change overtime.
To meet the challenges of crowdsourcing funds, the communications strategy would begin with the development of a media-savvy digital story that includes video, narrative and pictures that represent not only the project, but the passion of the project creator for the project.
A multi-tiered broadcasting strategy will have an overlapping appeal to a variety of audiences that identify with: the project creator, the locale and geography, the purpose of the project, the project brand, potential users and customers, developers, supply chain vendors/contractors and financial resources beyond crowdfunding.
Combining a tiered broadcast strategy with a tiered financing strategy that includes donations/rewards for various early stages of the project with crowdfunding equity (JOBS Act- 2013) for more institutional-like later stage financing will allow companies with sustainability interests to manage crowdfunding in a manner that will promote project execution from start to finish.
Crowdfunding Is An Eco-system
Once stymied by efficient access to capital, entrepreneurs and SMEs are embracing crowdfunding in growing numbers as an alternative source of pre-institutional funding.
In 2012, the U.S. crowdfunding sector grew 112 percent, raising $1.6 billion over approximately 650,000 campaigns, and $3.7 billion was predicted for 2013, according to experts at Massolutions.
Recognizing that the problematic gap in access to pre-institutional capital that creates jobs and fuels economic growth could not be solved within the current capital market's eco-system, the JOBS Act ostensibly institutionalizes and extends the already powerful “people-to-people” investment strata of family and friends.
Practically speaking, crowdfunding in the U.S. and globally is comprised of four primary types:
- Donation based crowdfunding contributions to 501(c)(3) organizations, business and personal project contributions are raised from personal funders who do not expect any tangible returns or incentives for their funding.
- Rewards based crowdfunding is a powerful way to raise funds by offering non-financial rewards in exchange for a contribution. Returns are experiential and exciting, from thank you notes to pre-sell of first run production or V.I.P. status; no ownership in the enterprise is exchanged for funding. Rather, rewards based crowdfunding is fast becoming a way to not only raise funds, but also to test products, spread the word about a new brand and engage contributors to become loyal customers.
- Equity based crowdfunding will launch in late 2013, subject to pending SEC regulation. The general public (accredited and non-accredited) can invest in the securities of small businesses and startups qualified to list on registered BD/Portals with a variety of economic return strategies including stock sales, refinancing exits, dividends and customer-owner discounts.
- Lending based crowdfunding will launch when the SEC promulgates rules. Micro-finance, peer-to-peer, local bank lending bid models prevail, with conditions for application based on commercial or impact lending that range from a structured payback with and without interest over time.
In addition to crowdfunding, the JOBS Act accelerates growth and eases the costly and time-consuming regulatory environment for SMEs with groundbreaking legislation:
- Title I creates a new class of emerging growth company and eases IPO registration requirements for companies with less than $1 billion revenue.
- Title II lifts the ban on general solicitation and advertising for Regulation D, Rule 506 & 144A offerings. On July 10, the SEC lifted the 80 year ban on general solicitations with a 4/1 vote, as one of the first rulings announced from the JOBS Act.
- Title III says crowdfunding provides a registration exemption for limited sized offerings of $1 million per year per issuer to be sold online via portals and broker/dealers in small amounts to a large number of accredited and non-accredited investors, who will have caps on how much they can invest per year based on non/accredited status verification. Currently, donation/reward crowdfunding is legal in the U.S., and is an option that does not dilute ownership for entrepreneurs.
- Title IV increases the amount of capital that can be raised under Regulation A from $5 million to $50 million.
- Title V increases the threshold for mandatory registration from 500 to 2,000 shareholders per company.
- Title VI increases the numbers of shareholders required for mandatory registration from 500 to 2,000 and raises thresholds for non-listed banks or bank holding companies to terminate registration from 300 to 1,200 shareholders.
But not everything is legal yet.
As the crowdfunding market awaits SEC rulemaking for the more complex debt, equity and exemption issues legislated by the JOBS Act, the powerful donation/reward crowdfunding model is legal and gaining immense traction for high-growth and main-street SMEs.
Both SMEs and investors have seen crowdfunded businesses make headlines in the past year.
Capital markets are being reset and crowdfunding is fast becoming the go to alternative for capital formation for startups and SMEs focused on people, planet and profit.
Elizabeth Smith Kulik is the co-founder and chief executive officer (CEO) of ProHatch. Kulik is a business leader and entrepreneur that has earned an international reputation for mastering complex business problems. She created and executed development, acquisitions, dispositions, repositioning and growth strategies for more than $75 billion of institutional operating company and real estate investments. Kulik’s diverse leadership experience in business and real estate, investment, technology and operations gives her a unique perspective on crowdfunding.