Crowdfund Investing For Dummies E-Book

Sherwood Neiss

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 628

Veröffentlichungsjahr: 2013

Beschreibung

The easy way to get started in crowdfund investing Crowdfund investing (CFI) is going to be the next big thing on Wall Street. U.S. investment banks, brokerage houses, and law firms are gearing up for the creation and regulation of new financial products that will be available to the general public starting in early 2013. The introduction of these products will revolutionize the financing of small businesses and startups for these key reasons: * Entrepreneurs and small business owners, who have had difficulty obtaining capital through traditional means (such as bank loans and angel investors) in recent years, will have access to investors around the world through social media. * For the first time, investors (so-called unqualified investors) will be able to purchase an equity stake in a business or new investment vehicle. The Securities and Exchange Commission (SEC) is overseeing the creation of online portals that will allow entrepreneurs and small investors to connect. When these portals go live in 2013, Crowdfund Investing For Dummies will be on the front line to educate business owners, other entrepreneurs, and investors alike. Crowdfund Investing For Dummies will walk entrepreneurs and investors, like yourself, through this new investing experience, beginning with explaining how and why CFI developed and what the 2012 JOBS says about CFI. Entrepreneurs will find out how much funding they can realistically raise through CFI; how to plan and launch a CFI campaign; how to manage the crowd after a campaign is successful; and how to work within the SEC's regulations at every stage. Investors will discover: the benefits and risks of CFI ;how much they can invest; how a CFI investment may fit into a broader investment portfolio; how to provide value to the business or project being funded; and how to bow out of an investment when the time is right. Crowdfund Investing For Dummies is an indispensable resource for long time investors and novice investors alike.

Leseprobe

Crowdfund Investing For Dummies®

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Library of Congress Control Number: 2012956396

ISBN 978-1-118-44969-1 (pbk); ISBN 978-1-118-46022-1 (ebk); ISBN 978-1-118-46024-5 (ebk); ISBN 978-1-118-46025-2 (ebk)

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About the Authors

Sherwood Neiss: Sherwood Neiss is a co-founder of Crowdfund Capital Advisors (CCA). He is an expert at building successful businesses. He is a three-time Inc. 500 winner whose company won E&Y’s Entrepreneur of the Year. As a serial entrepreneur and investor during the credit crunch, Sherwood saw a need for a change in outdated securities laws and did something about it — as a co-founding member of Startup Exemption, Sherwood co-authored the crowdfund investing framework used in the JOBS Act that was signed into law by President Obama on April 5, 2012. CCA advises angel groups, venture capital, private equity, investment banks, and hedge funds on understanding how to profit in what expert VC Fred Wilson claims will be a $300 billion per year market. He produces comprehensive crowdfund investing educational materials so that investors can decide whether crowdfunding is appropriate for their portfolios, as well as help them access the essential tools to invest safely, legally, and successfully. Sherwood co-founded and sits on the board of the Crowdfunding Professional Association (CfPA) and Crowdfund Intermediary Regulatory Advocates (CFIRA), where he leads the fight to ensure that investors are protected while entrepreneurs have access to the capital they need to start and grow promising companies. He also sits on the boards of advisors for several crowdfunding portals and industry players, as well as on the boards of Invest Crowdfund Canada and the European Crowdfunding Network. An avid public speaker, Sherwood speaks at congressional hearings, universities, and seminars around the world discussing crowdfunding. Some of his appearances include testifying in front of Congress, the MIT Global Startup Workshop in Istanbul, and the 2013 SXSW Conference in Austin, Texas. He is a contributing author to TechCrunch, VentureBeat, Forbes, and The Huffington Post. Sherwood is a recipient of the first Crowdfund Visionary Award. He holds an International MBA from Thunderbird and a BA from Tulane University.

Jason Best: As a co-founder of Startup Exemption, Jason Best co-authored the crowdfund investing framework that was used in the JOBS Act to legalize equity- and debt-based crowdfunding in the United States. The JOBS Act was one of the largest changes in U.S. investment laws in over 30 years; it allows private companies to raise capital via their online social networks. Jason has provided U.S. Congressional testimony on crowdfunding and was honored to attend the White House ceremony when President Obama signed this legislation into law on April 5, 2012. He is also a frequent speaker both domestically and internationally, including speaking at the 2012 White House Global Entrepreneurship Celebration; TEDx San Miguel de Allende, Mexico; and the Global Innovation Symposium and Globe Forum in Stockholm, Sweden. As a co-founder and principal at Crowdfund Capital Advisors (CCA), Jason works with angel groups, venture capital firms, and family offices, as well as the World Bank, governments, and NGOs, to understand crowdfunding and to create successful strategies for maximizing the value of this emerging asset class and its ecosystem. Jason is a co-founder of the Crowdfunding Professional Association (CfPA) and the Crowdfund Intermediary Regulatory Advocates (CFIRA), which is the global industry advocacy organization for crowdfunding. Additionally, he is a board member of the European Crowdfunding Network and the Canadian Technology Alliance. CCA also participates in the U.S. State Department’s Global Entrepreneurship Program.

Jason is a co-founder and serves on the leadership team of the UC Berkeley Program on Innovation in Entrepreneurial and Social Finance, in addition to serving as an Entrepreneur-in-Residence at the Center for Entrepreneurship and Technology at UC Berkeley. As a successful investor and entrepreneur, Jason brings over a decade of executive leadership experience at two SaaS companies, one of which earned an Inc. 500 Award two years in a row. This award is given annually by Inc. Magazine to the 500 fastest growing private companies in the United States. As part of the leadership teams of those two companies, he helped raise over $40 million in private capital. Jason contributes to publications including TechCrunch, The Huffington Post, and VentureBeat. He is a recipient of the first Crowdfund Visionary Award.

Jason earned his master’s degree from the Thunderbird School of Global Management, the world’s top international MBA program, and also holds a bachelor’s degree from William Jewell College.

Zak Cassady-Dorion: Zak is currently the CEO and co-founder of Pure Mountain Olive Oil, LLC, a chain of olive oil and balsamic vinegar tasting shops in the Northeast United States. He is also a co-founder of Startup Exemption, where he led the effort to legalize debt- and equity-based crowdfunding. He co-authored the crowdfund investing framework that was used in the JOBS Act to legalize equity- and debt-based crowdfunding in the United States. In the campaign to legalize crowdfunding, Zak provided U.S. Congressional testimony on crowdfunding. He was honored with an invitation to the White House on April 5, 2012, when President Obama signed the JOBS Act into law. He is a recipient of the first Crowdfund Visionary Award.

Zak is a partner of Crowdfund Capital Advisors (CCA), where he works with angel groups, venture capital firms, and government organizations consulting on crowdfunding. Zak speaks regularly across North America about crowdfunding to entrepreneurial groups and universities.

Zak has successful entrepreneurial experience in Latin America and Southeast Asia, in addition to a successful business development career with Wyndham Worldwide. He earned his MBA from Thunderbird School of Global Management, ranked as the world’s top international MBA program, and a BS from the University of Vermont. Zak has worked, lived, and traveled in over 35 countries and is fluent in English, Spanish, and Portuguese. When not working, Zak can be found playing an adventure sport in the wilderness, such as rock climbing, hiking, skiing, paragliding, kayaking, or skydiving.

Dedication

This book is dedicated to unreasonable people who question the status quo, create solutions, and make rational positive change. When we began the fight to legalize crowdfund investing, people told us we were crazy. Sometimes good timing, good luck, optimism, and hard work come together to make change happen. Be unreasonable in pursuing what you believe in.

This book is also dedicated to our parents, family, loved ones, and friends, who have been and continue to be unreasonable in their love and belief in us as we pursue what we’re passionate about.

Authors’ Acknowledgments

This book is a team effort. Our teams started with our parents (Gertrude and Edward Neiss, Sulin and Roger Best, and Trisha Cassady and Pablo Dorion) who ignited in each of us the passion to pursue a master’s degree in business from Thunderbird, the American Graduate School of International Management. Our paths wouldn’t have crossed if it weren’t for this fortunate circumstance. Our families gave us the support and critical feedback we needed along the way to pursue our passions and to do so with integrity and optimism.

We couldn’t have done this without the opportunities we’ve had in business that taught us the fundamentals of taking an idea, seeding it with capital, and growing successful companies. The lessons we learned there were critical to our being able to translate the needs of startups and small businesses into a framework that would reside on the principles of crowdfunding.

And we couldn’t have done this without a bipartisan Washington, D.C., that understood that the Internet and social media could allow us to update securities laws to match the way we live our lives today and will do so in the future. Our thanks go to Karen Kerrigan, who was our champion through the entire process in Washington. Deep gratitude goes to President Obama for his early leadership on crowdfunding and for the opportunity to attend the JOBS Act signing ceremony in the Rose Garden of the White House on April 5, 2012. We thank Representative Patrick McHenry (R-NC) for his bipartisan leadership in drafting the first bill in the U.S. House of Representatives on crowdfund investing and for its passage with over 400 votes. Thank you to Senator Jeff Merkley (D-OR), Senator Scott Brown (R-MA), and Senator Michael Bennett (D-CO), for taking the leadership in driving a bipartisan compromise in the U.S. Senate.

Of course, this book wouldn’t have been as wonderful as it is without the awesome input of Joan Friedman. Thank you, Joan!

With the passage of the law, we’ve had the good fortune to become friends and compatriots with people who will lead the crowdfunding industry into the future: Doug Ellenoff, Judy Robinett, Whitney Johnson, Davis Jones, Richard Swart, Vince Molinari, Chance Barnett, DJ Paul, Ryan Feit, Ruth Hedges, Luan Cox, Chris Tyrrell, Candace Klein, Joy Schoffler, Kim Wales, Chris Reed, Dan Meader, Carl Esposti, Kevin Grell, Brian Tsuchiya, Alejandro Cremades, Tanya Prive, Mike Norman, Maurice Lopes, Dara Albright, Steve Yin, Freeman White, Sara Hanks, Brad Thatcher, and iLona Major. Thank you also to David A. Saltzman for being the first securities attorney to patiently listen to our crazy idea and to provide important early feedback.

In Washington D.C., we thank all the dedicated, hard-working people we met with and who believed in crowdfund investing. Specifically, we would like to thank Doug Rand, Andy Green, Kunal Punwah, Ryan Minto, Marne Marotta, Nat Hoopes, Brian Murphy, Brian Appel, and Shelley Porges.

From Woodie: Thank you to the following people for helping me along my journey: Chris Bookfield, Andy Buyting, Marc Casey, Shelli Coleman, Tom Coleman, Colin Denney, Levi Downs, Joe Freeman, Scott Giersch, Matt Hagan, Keith Harris, Alex Jacobs, Ray Janssen, Bryan Kilpatrick, Scott King, Andrew Kranis, Frank LaRocco, Maria Helena Lopes, Nancy Maveety, Patrick Menasco, Kevin Miller, Marvin Miller, Roy Morris, Todd Pearsall, Diana Perez, Brian Petro, Bud Russell, Kerry Shahan, Steven Stralser, Craig Thomsen, Marc Wallace, Ricardo Zapata, and my brothers and sisters: Shelley, Marc (and Carolyn), David, Gary (and Amy), and Heidi.

From Jason and Woodie: Thanks to Trent Blanchard, Karin Brandenburg, Guy Chetwyn, Whoopi Goldberg, Verne Harnish, Tom Leonardis, Todd Malensek, Neil Malik, Alix and Susan Shaer, and the entire Thunderbird Crew: Rob Mitchell and Jay Cabalquinto, Kellie and Chedo Vugrincic, Laura and Francis Santora, Rich Gardner and Kiko Kas, Kya and Neil Sainsbury-Carter, Amanda and Sami Eden-Fox, Stephanie Marcone, Julie Smith and Taylor Rabbetz, Arpana and Raj Jain, Alexine Hazarian, Tomas Soto, Meredith Tolan, Kristine and Bryan McCabe, and Doug and Karmei Morin.

From Jason: Thank you K-Tjen for believing in me; I can’t wait to see what’s next. Thank you to Andrew, Misti, Hunter, and Lara Best; David Law; Darin Barker; Luke Cassady-Dorion; Michael Wykoff; Thapanont (Tae) Phithakrattanayothin; Joel and Mary Werner; Julie Goins; Debbie Ramirez; Victoria Hernandez; Chris and Arron Hester; Scott and Krista Hester; Keith Davis; Richard Chisenhall; Jenna Daly; Bruce Jenett; Greg Horowitt; Sen Luo; Denmark West; Sang Lee and Michael Ellis; Doug Vu; Gary Manalus; Greg Millard; Michelle and Mark Karma; Joyce Reitman; Ken Singer; Greg Slamowitz; Al Watkins; Nima Adelkhani; David Arronson; Leslie Yuan; John Rowe; Draven Lee; Nacho and Lloyd and Judy Jenkins.

From Zak: Thanks to my wonderful and supportive family: my brother, Luke Cassady-Dorion, who is my best friend and mentor; my mother, Trisha Cassady, and father, Pablo Dorion, for their endless support and encouragement in everything that I do; and my stepfather, Earl Dworkin, and step-mother, Nancy Gilman. Thank you Erin Marie Freund for all that you do for me. And thank you to Thapanont (Tae) Phithakrattanayothin, Marc and Meg Laurent, Shaun Miller, Charlie Ruehr, Wolfgang Foust, David Law, Mike Caplice, Zach Glaser, Donnel Much, Michael Welch, and to all my other friends without whom I wouldn’t be where I am today.

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CrowdFund Investing For Dummies®

Visit www.dummies.com/cheatsheet/crowdfundinvesting to view this book's cheat sheet.

Introduction

Crowdfund investing is an exciting new business financing opportunity created by the JOBS Act that President Obama signed into law in 2012. It taps into the power of the crowd by connecting entrepreneurs and small business owners with investors via LinkedIn, Facebook, Twitter, and other social media networks. And it offers small investors the chance to purchase an equity stake (or to fund debt) in small, private businesses run by people they know and trust.

Regulated by the U.S. Securities and Exchange Commission (SEC), crowdfund investing occurs via online funding portals — websites that host investment campaigns and collect investor pledges. An individual can invest only a limited amount each year in these campaigns (to mitigate investor risk), and a campaign must be funded completely in order for the business to receive investor dollars.

Is crowdfund investing a funding source you should consider for your startup or small business? That’s a big question, and it requires some serious consideration. Asking for crowd support can produce amazing results; you can benefit not only from the money but also from the talents, skills, and collective wisdom of your crowd. But using this funding source is a big responsibility. If you decide to sell equity shares of your company to the crowd, your investors become your business owners. In doing so, you must be prepared to be a master communicator (because crowds don’t like silence and will fill it with speculation) and to spend every dollar with your crowd’s best interests in mind.

If you’ve got a great concept, a solid business plan, and vibrant social networks, you may find that crowdfund investing is a great fit for you. Reading this book is your first step to figuring out if that’s the case.

About This Book

In this book, we address two separate audiences:

Small business owners and entrepreneurs looking for capital

People with capital — even very modest amounts — who may be interested in investing via this new funding resource

If you’re in either camp, you’ve come to the right place!

For both audiences, we’ve done our best to outline what we envision the crowdfund investing industry will look like based on the parameters set by JOBS Act. For the small business owner or entrepreneur, that includes how a crowdfund investing campaign will proceed, what services an online funding portal will provide, and how your investment crowd influences the way you conduct business post-funding. For the potential crowdfund investor, that includes how you find the necessary information to become educated about various investment opportunities, how you actually commit funds to a startup or small business, and what role you play in the venture post-funding.

The word envision in the previous paragraph should tip you off that we’re discussing a subject that’s emerging as we write this book. The three of us were involved from day one in developing the crowdfund investing framework that served as a model for the part of the JOBS Act that addresses this subject. We’re not outsiders making predictions based on our hopes and dreams; we’re intimately familiar with how the legislation was crafted and how SEC regulations are being developed to support it. However, we fully realize that the law remains subject to change or interpretation after SEC regulations are adopted in 2013. Until the SEC adopts such regulations, the sale of securities through crowdfund investing is prohibited, and the new regulations may affect the accuracy of this book’s content.

We do our best here to offer you a broad introduction to this subject and to show you why crowdfund investing has the potential to ignite our economy, create jobs, and promote investment at the community level. But we strongly encourage you not to take this text as gospel because all new laws and regulations are works in progress. Therefore, before you take any action to start a crowdfund investing campaign or to invest in such a campaign, you should read the most up-to-date information you can find about industry regulations. The SEC website (www.sec.gov) is the best place to start, and you can also visit the website for the Crowdfunding Professional Association (www.crowdfundingprofessional.org), an industry trade organization that we helped to launch.

We cannot emphasize this enough: If you’re a business considering offering equity buy-in to crowd investors, you should consult legal counsel before making any such securities offering. And if you’re considering selling debt instead, or if you’re a potential investor intrigued by the crowdfund investing concept, you must undertake due diligence to make sure you’re educated and up to date on the SEC regulations at play.

Conventions Used in This Book

To help you navigate the text as easily as possible, we use the following conventions:

Whenever we introduce a new term, it appears in italic. You can find a definition or explanation nearby.

If we want to share interesting information that isn’t essential to your success with crowdfund investing, we place it in a gray box called a sidebar.

All web addresses are clearly formatted in monofont so they’re easy to pick out if you need to go back and find them.

Keep in mind that when this book was printed, some web addresses may have needed to break across two lines of text. Wherever that’s the case, rest assured that we haven’t put in any extra characters (such as hyphens) to indicate the break. So, when using one of these web addresses, just type in exactly what you see in this book. Pretend as if the line break doesn’t exist.

What You’re Not to Read

Because we have two distinct audiences for this book, you may find that not every chapter presents information that’s crucial to you. We encourage you to peruse the chapters in Part I no matter what perspective you’re coming from. If you’re a business owner or entrepreneur, Parts II, III, and IV are written for you. (Investors and curious onlookers, you may or may not find that the chapters in these parts are essential reading.) Investors, you’ll get coziest with the chapters in Part V. (Business owners and entrepreneurs, we suggest that you at least skim these chapters as well, because understanding the investor’s perspective can only help you to succeed.) Part VI is a fun one that’s written for every reader to enjoy — feel free to skip ahead to it if you want to get a taste of what this book is about.

Also, as we mention in the previous section, sidebars are not essential reading, so feel free to fly by them if you’re in a hurry.

Foolish Assumptions

If you’re approaching this book from the businessperson/entrepreneur perspective, we assume that you’re bringing at least a little business acumen. Maybe you’re already running a company, or you at least have a draft of a business plan in hand and know a bit about how companies are traditionally funded. With that said, we avoid jargon and focus on the fundamentals here, so even if this is the first book you read about business financing, you won’t have any trouble following along.

If you’re a potential investor, we likewise skip the jargon and stick to the basics here. That means you should have no trouble understanding what we’re saying, but it also means that you should supplement your investment education with more in-depth reading. The latest edition of Investing For Dummies, by Eric Tyson (Wiley), is a good place to start if you’re an investment novice, and we encourage you to heed our repeated warnings throughout this book that investing in small businesses or startups is really risky business. Crowdfund investments should make up only a small percentage of your portfolio. If you have more acumen, we assume you have some portfolio construction experience and/or work with a financial advisor to make sure any new investments you make are logical in terms of risk and potential reward.

How This Book Is Organized

Here’s a broad overview of what you’ll see in the coming pages.

Part I: Tapping the Potential of Crowdfund Investing

This is where you discover what crowdfund investing is all about. In Chapter 1, we give you an overview of how this form of private equity or debt investment works and what the potential benefits are to entrepreneurs, small businesses, and investors. Chapter 2 explains how the crowdfund investing concept evolved, why it gained bipartisan support in Washington, D.C., and was included in the JOBS Act in 2012, and how it was one of the largest changes to the business financing landscape in over 77 years.

For entrepreneurs or small business owners, Chapter 3 offers a great overview of how crowdfund investing campaigns work, including the types of businesses that are the best candidates and the risks involved with this funding source. It ends with some wise words from the lawyers. Chapter 4 is a great resource for potential investors, outlining why and how you may want to become part of a company’s investment crowd.

Part II: Planning Your Crowdfund Investing Campaign

If you’re an entrepreneur or small business owner, you don’t want to miss this part. The chapters here provide the foundational information you need to begin developing a crowdfund investing campaign.

When you plan to seek business funding of any kind, you have to present a solid business plan and define your financial needs. If you need help accomplishing these important first steps, Chapter 5 gives you a quick overview. Chapters 6 and 7 outline the next steps involved when preparing for a crowdfund investing campaign: picturing how large your crowd will be and who will be in it, and choosing an online funding platform to host your campaign. In Chapter 8, we provide a guide for how to create and mobilize your crowd — a necessity for crowdfund investing.

Part III: Managing Your Crowdfund Investing Campaign

The chapters in this part are a crash course for an entrepreneur or small business owner looking to launch and run an online crowdfund investing campaign. In Chapter 9, you find out how to market your pitch, how to tap into your social networks for maximum effect, and what to expect when your campaign gets started. We devote Chapter 10 to helping you prepare for potential problems related to your campaign, and in Chapter 11 we explain what to expect — and what actions you should plan to take — after you successfully complete a crowdfund investing campaign.

Part IV: Running Your Business with Your Investors in Mind

Inviting a crowd of investors to support your startup or small business is no small matter; when you take this step, you accept a fiduciary responsibility to your crowd. We know you want to do the right thing by your investors, and this part can help. In Chapter 12, we demonstrate how to communicate clearly and regularly with your crowd so they’re always informed about the status of their investment. Chapter 13 advises how to avoid mistakes that could lead your investors to revolt and shows you how to win them over again if they do. And Chapter 14 recognizes that even the best laid business plans can experience hiccups (or major detours), so we offer advice for keeping your investors happy even when your plans are delayed or your goals need to change.

Part V: Becoming a Crowdfund Investor

This part is written with the investor in mind. The JOBS Act that legalized crowdfund investing opened the door for many people to have the opportunity to invest in small, private companies for the first time. But before you invest a dollar, you need to read this part.

The risks inherent in investing in small businesses and startups are extremely high, and you have to make sure that this type of investment makes sense as a small part of your financial portfolio. You also have to make sure that you do your homework and study thoroughly the investment opportunities available to you, as well as the investment limits established by the legislation. Chapter 15 can help you work through all these steps. In Chapter 16, we explain how you actually commit your capital by interacting with the online funding portal that supports the crowdfund investing campaign.

Chapter 17 focuses on how to be a valuable asset to any company you support (without becoming a nuisance). And finally, Chapter 18 encourages you to map out your investment exit strategy well in advance so you aren’t making any rash decisions.

Part VI: The Part of Tens

Here, we offer short-and-sweet chapters that present the best practices for a crowdfund investing campaign and the reasons that we believe every nation should be noticing what the United States is doing with crowdfund investing. We then turn our attention to some case studies: ten examples from the crowdfunding world that illustrate the power of collective investments, as well as ten crowdfunding stories that will tug at your heartstrings.

Icons Used in This Book

Throughout this book you’ll notice small graphics in the margins, called icons. These symbols are meant to draw your attention to particular ideas.

This icon denotes information that can ease your efforts when starting a crowdfund investing campaign or making an investment decision.

To avoid a common misstep, heed the advice offered in a paragraph accompanied by this icon.

These tidbits are worth tucking into your mental filing cabinet for future use.

Where to Go from Here

This book is designed to allow you to open to any chapter and understand what’s being discussed, so you shouldn’t feel obliged to start with Chapter 1 and read straight through. However, we strongly encourage you to spend time with the chapters in Part I because they offer such a helpful overview of what crowdfund investing is about and how it takes place. Then, if you’re a business owner or entrepreneur, look for the chapters in Part II, III, or IV that best address your questions or concerns. If you’re an investor, you may want to head straight to Part V to get the scoop on issues related to making investment decisions.

No matter where you start, we hope you catch just a bit of the excitement we feel about this new industry! And we encourage you to stay up to date with the regulatory changes that come from the SEC by visiting www.sec.gov.

Part I

Tapping the Potential of Crowdfund Investing

In this part . . .

Here you find out the basics about this fresh opportunity called crowdfund investing. Chapter 1 provides a quick overview of how this form of private equity or debt investment works and how businesses and investors stand to benefit from it. In Chapter 2, you find out how the concept of crowdfund investing evolved and why it gained such rapid and fervent support in Washington, D.C.

If you’re an entrepreneur or small business owner, don’t miss Chapter 3, which offers a great overview of how crowdfund investing campaigns function, including which types of businesses are the best candidates and what risks are involved with this funding source. It ends with some wise words from the lawyers. If you’re coming to this topic as a potential investor, turn to Chapter 4, which outlines why and how you may become part of a company’s investment crowd.

Chapter 1

The Crowd’s in Your Corner: Funding or Investing in a Business

In This Chapter

Getting thematic

Tapping in to the crowd’s collective power

Sensing why people want to be part of the crowd

Identifying business benefits from crowdfund investing

Connecting private businesses and investors

Anticipating this industry’s impact

There are very few instances in history when we’ve had a start date for an entire industry that will disrupt the way the world looks at business. This is one of them. For the first time in 80 years, the average Jane and Joe have the ability to start a business with the help of the crowd or own a part of a friend’s American dream.

Communities will come together to look at business ideas, fund those they believe in, rally around entrepreneurs with knowledge and experience, and help create millions of jobs. Welcome to the emergence of Web 3.0, where the social network meets seed/early-stage financing — and where you become an active participant instead of a passive investor. It merges the principles of crowdfunding, where a large group of people pool small dollar amounts to help someone bring an idea to fruition, with early-stage financing and growth capital for startups and small businesses. What is it? Crowdfund investing. In this chapter, we offer an introduction to why this new industry exists and what it’s capable of accomplishing.

Sharing Our Hopes and Themes

Unreasonable, disruption, and hope: These words summarize the themes of this book. Although this book is meant to provide a road map to crowdfund investing from either an entrepreneur’s or an investor’s point of view, we hope it also serves as a motivational tool to show you how laws that have been in existence for 80+ years don’t have to govern our future if they no longer serve society due to sociological and technological change.

It’s unreasonable to believe that three entrepreneurs, who are not lobbyists or lawyers with blank checks, could show up in Washington, D.C., and change a law in 460 days. But that’s what we did. We showed up when our country was suffering from the worst recession since the Great Depression. When millions of jobs were lost and hundreds of thousands of businesses were closing. When the financial markets had seized up and capital had stopped flowing to the people responsible for getting us out of prior recessions — small businesses.

We brought a solution to get money flowing to startups and small businesses so that they can grow and hire employees. In doing so, we disrupted the way in which the financial markets will forever operate. For over 80 years, we’ve lived under laws written in the 1930s that governed how businesses could raise capital. Although those laws were prudent for the times when they were written, they proved to be crippling in the aftermath of the collapse of the world financial markets in 2008.

In this book, you see how crowdfund investing takes us back to our roots, where communities come together to fund and support local businesses. It leverages the power of community to decide which businesses are worthy of funding and which entrepreneurs should be trusted. It provides the mechanism for the funding to happen and a framework to carry the business forward.

We’re hopeful because anytime you disrupt a large institution or system, you create fear and uncertainty — but you also create opportunity. That’s why we’ve worked so hard to put together this book: to provide guidance and clarity around this new way to raise capital so that you can take advantage of this opportunity whether you’re a businessperson looking for capital or an investor seeking good investments. We hope that the information we share will provide the knowledge you need to become an entrepreneur or to support one that you know, love, and trust! Crowdfund investing isn’t something new; it’s an old way of financing companies that’s facilitated by the power of technology. We have the power; now is the time to use it!

Packing a Punch: The Power of the Online Crowd

When governments in the Middle East start to topple because of a tweet, you begin to understand the power of social media. Never before have we had a tool so powerful that a small group with no resources can rally thousands of people together via Twitter to promote an idea (Occupy Wall Street) or protest a government (Egypt). Never before have we had a tool to provide fact checking in real time, and never before have we been so connected because of technology. Social media creates transparency and accountability. Businesses of the future will use this transparency and accountability to build trust and loyalty. Why? Because social media is the conduit to allow us to do what we love to do as humans: engage.

But although the world is operating more and more as one global community, we still rely on our local communities for our bare necessities. That’s what this book is about. Our goal is to show you how to rally your online crowd to conquer your own part of the world. It’s about connecting people at a local level to create businesses that will benefit communities. And instead of doing it at city hall, you’ll be doing it online where most of us spend our days.

In this section, we briefly tour the rapid evolution of online crowd activity, from crowdsourcing to crowdfunding to crowdfund investing.

Sparking the revolution with crowdsourcing

Part of this revolution we can credit to crowdsourcing: the online gathering of a group of people to share knowledge and wisdom to build a better product. Crowdsourcing first gained prominence in the world of programming in what was called open source. Open-sourced programming was a way for companies to leverage the collective coding power of essentially freelance programmers so that they could deliver a great product (code). By opening it up to other programmers, people were allowed to clean up, fix, and/or improve the code. The theory was that opening up the proprietary code to the crowd wouldn’t make competitors but compatriots. The crowd would work together to make it better.

Most recently, we’ve seen this concept expand into online collaboration through mediums like Wikipedia, an online encyclopedia of sorts, where the crowd’s wisdom fills the pages. Anyone is free to edit it, and together the information is more powerful than any one person could create.

Shifting toward finances: Crowdfunding

It was only a matter of time before this community involvement moved into the financial arena. And in reality, it already had. Going to the crowd for funding is nothing new; keep reading for examples of how we’ve been doing this for decades, and turn to Chapter 2 for more details about the emergence of crowdfunding.

Donation-based efforts

The American Cancer Society (ACS) has been crowdfunding for decades. It hosts events like Making Strides Against Breast Cancer, in which teams form to raise money to fight cancer. Large groups of people pool donations together for a good cause — in the case of ACS, to the tune of half a billion dollars since 1994! However, any charitable giving, whether to a church, National Public Radio, or AIDS walks, is really crowdfunding.

And the crowdfunding concept doesn’t apply just to charity. Politicians crowdfund their re-election campaigns all the time. The theory is, if they can actively engage voters with campaign contributions, those voters will have a vested interest in the success of the candidate. Unfortunately, this can also be seen as one of the biggest problems with politics. Politicians are constantly out there looking for capital to fund their campaigns . . . so much that they aren’t always focused on policy. (Mind you, we didn’t have that experience in Washington, D.C. Both sides of the aisle took plenty of time to sit down with us, understand our crowdfund investing framework, and help us pass the law. But that’s a story for Chapter 2!)

One of the reasons for President Obama’s 2008 success was his ability to harness the power of crowd donations. His campaign was able to raise over $50 million from over a million passionate followers. These people spoke not only with their voices but also with their wallets. Instead of relying on individual large contributors, the Obama campaign went to hundreds of thousands of Americans and asked them for small contributions. It was the difference between winning and losing for Obama. It also shows you the power of pooling small dollar contributions together.

Most recently, we’ve seen people use crowdfunding to raise money for art-related projects. Probably the most well-known platform for doing so is Kickstarter (www.kickstarter.com). Started by a guy who wanted to raise money to put on a concert, Kickstarter has become a crowdfunding phenomenon where people from all over the world are helping to fund mainly art-related projects — to the tune of $250 million in 2012!

Microfinance projects

Back in 1983, a man by the name of Muhammad Yunus started the Grameen Bank. The goal was to leverage the undeveloped skills of the poor by providing the money to entrepreneurs to create businesses. The unique feature was that there was no collateral. The bank would provide micro-loans to borrowers (98 percent of them being women). Peer pressure would ensure that borrowers followed through with repayments. It was so successful that Yunus went on to win a Nobel Peace Prize. (See Chapter 2 for a bit more detail about his story.)

Although Yunus’s efforts were funded by microfinance organizations and community development banks, individuals like Matt Flannery and Jessica Jackley saw the ability to expand the opportunity by allowing the crowd to step in and pool their resources in the same way to help entrepreneurs in the developing world. Their story led to Kiva (www.kiva.org). Kiva allows people in developing countries to lend money via the Internet to people in developing countries. Kiva doesn’t pay out any interest on the loans it facilitates. People do it to help others around the world, to be a part of something other than themselves, and to build a stronger global community. (Kiva gets a bit more discussion in Chapter 2 as well.)

Embracing the equity world: Crowdfund investing

Which brings us to today. Over time, we’ve become comfortable giving to causes we believe in or entrepreneurs in the developing world who need financial assistance to create their own jobs. Now we’re bringing these concepts to our shores. Instead of just giving your money away because it feels good or is the right thing to do, now you can do so and own shares of stock in that business! For decades we’ve been used to investing in Fortune 500 stocks listed on public exchanges. Now you’ll be able to invest in businesses in your own backyard. Although some of these businesses may have the potential to be high-growth businesses, not all of them will have the ability to make you rich. They will, however, provide tangible benefits that money invested in a Fortune 500 company can’t provide — benefits like convenience, service, and a sense of community.

Why People Care: Appreciating the Appeal of Being Part of the Crowd

The heart is a powerful thing. Emotional impulses drive people to make decisions. Coupling those impulses with logic can be powerful, and that combination is the main force behind what will drive crowds to become part of crowdfund investment opportunities. People aren’t just wallets — they’re users of products and services — and no one knows better what solutions they need than those who live in communities under the same circumstances.

Thanks to the advances in technology, we can solve problems faster and cheaper than at any other point in history. No longer does it take a Fortune 500 company to deliver a local solution that can be tailored to the needs of a community; an entrepreneur with initiative can do the job.

If you can appreciate these facts, then you understand the desire of the crowd to step in where they see a solution to a local problem and to fund it. Thanks to technology, we now have a medium to allow crowd solutions to take place. And thanks to the advances in the law, people now have the choice to be active participants in the growth of a business, to reap rewards for doing so, or to see their returns tied in with those of entrepreneurs over the long term. In this section, we touch on some of the key reasons that crowds will quickly get onboard with quality crowdfund investing campaigns.

Using the technology at your fingertips

Thirty years ago, it would have been very difficult for crowdfund investing to occur on a massive scale. Today, however, the technology you need to raise capital for your business is at your fingertips. All you need is a computer, a video camera (or a built-in camera on your computer), vibrant social networks, and the passion to create or expand your business. This book details how you can use technology to make a successful crowdfund investing pitch and raise the money you need to launch or grow the business of your dreams.

As an investor, you’ll be able to find businesses that people in your social networks are launching, and you’ll be able to support them with your dollars and your expertise. We all like being part of something that’s bigger than ourselves, and crowdfund investing allows us to do exactly that. From the comfort of your own living room, you can help your nephew or former roommate or co-worker get a new company off the ground.

Reaping rewards through perks

Through websites such as Kickstarter, crowdfunding has allowed people to pursue their passions through direct support from their online networks and beyond. People have gained support in the form of dollars and through expertise from the crowd. Many people have launched crowdfunding projects and been blown away by the support that they found. (See Chapter 21 for a description of ten such projects.) Oftentimes, people think that they’re alone in their passions, but after they create an online campaign requesting financial support, they’re happily surprised. This type of support goes a long way toward energizing people into building something great.

Before we led the fight to legalize equity- or debt-based crowdfund investing, all crowdfunding was perks- or rewards-based. That meant that, as an investor, you would get small perks in exchange for your dollars. Sometimes the perk took the form of presales of a product. For example, the entrepreneur developed a prototype, but in order to build the product on a larger scale, she needed more capital to make it a reality. This direct support of the entrepreneur’s passion has allowed many projects to come to fruition that otherwise would not have happened.

Consider another example: If an artist wanted to raise money to make a new music album, he might give people a sticker for a $5 contribution, give them a digital copy of the completed album for $10, give them a hard copy for $30, list the supporter’s name on the album as a co-producer for $100, and for $1,000 offer backstage passes to the band’s concert. Bands have even offered to do private shows for their supporters above a certain level of contribution.