Equity Crowdfunding Explained – Dispelling Mysteries & Misunderstandings That Shouldn’t Even Exist
Equity crowdfunding explained in a nutshell: As a tool for raising capital, crowdfunding replaced the traditional focus on stockbrokers reaching out to prospective investors. Crowdfunding operates in a model without the brokers where issuers advertise their offering to attract investors and bring them in. Modern data mining techniques enable each company to reach out to more highly targeted investors. The cost of investor acquisition can be estimated with greater accuracy. Good marketing works but it isn’t cheap. There is a cost, certainly, of acquiring investors for any given offering, but if you pay that cost, you will get the investors you need.
I call it “buying investors online”.
Nobody else does.
You have to get your head around the idea that good marketing will sell the investment you offer in much the same way good marketing sells most products. The campaign only runs ads that have been pretested. You will sell twice as many if your offer reaches twice as many people. A good marketing plan is a highly targeted numbers game.
You just have to pay for a good marketing company. Hire a marketing company that specializes in crowdfunding campaigns. Pay them whatever it takes to raise the funds you need to succeed.
Then don’t look back.
That’s the short version of equity crowdfunding explained. It’s simple too for those who already have business acumen. Sadly, that’s sorely lacking by far too many people in the crowdfunding space.
The cost of a crowdfunding campaign can be leveraged into millions of dollars of new funding for your business. Funding that you get on the terms you set, not the terms a bank would insist upon.
That is the whole idea behind crowdfunding in the first place. I foolishly thought that the marketing people in the crowdfunding industry would have gone out of their way to set the record straight about the costs of crowdfunding but apparently not. What I find to be more discouraging is how many CF portal owners I speak with who don’t understand that a portal is in the business of selling securities or what that entails. You will have to look far and wide to find any common sense in the CF industry.
Confused about crowdfunding?
Here’s another angle to equity crowdfunding explained; Look at it this way.
Wall Street uses paid, commissioned sales people to introduce investors to companies seeking funding.
Crowdfunding uses technology and advertising to introduce investors to companies seeking funding.
Sound simple? It is.
The truth is that if you have a healthy advertising budget and the proper advertising agency, virtually any company can raise millions.
Anyone who tells you anything else is wasting your time.
Crowdfunding “Expert” Advice
I have been on Linkedin for several years. I can get a lot of advice about a lot of things.
My problem (and I cannot be alone) is trying to discern those kernels of good advice from the dung heap of advice offered by people who don’t have any depth in the subject they are discussing.
I try to stay in my own lane. I write articles and comments on finance and crowdfunding. I have been working in finance for almost 50 years.
Still I am inundated with advice about crowdfunding from 30 year old marketing gurus who know nothing. Equity crowdfunding explained by them would be funny if not so painful.
They advise that crowdfunding is free (it isn’t); social capital can easily be converted to real investment capital (it can’t) and most absurdly that investors will be attracted if you assign a fantastic valuation to your company.
I would not take advice about finance from a 30 year old anymore than I would take advice from a 30 year old about sex. Both require nuance and finesse that only comes from repetition and experience.
Yesterday I was solicited to purchase a list of “15,000 motivated investors” for $49.95.
Put aside for a minute that lists of accredited investors cost about $5 per name and that no one doing a crowdfunding campaign would need to purchase that many names at any price. It turns out that the person making the solicitation does not even exist.
Apparently it was a BOT programmed to interact with anyone who mentioned crowdfunding in a post or comment. Linkedin’s algorithm spread it far and wide.
I would imagine this little scam took in many thousands of dollars. I was actually impressed.
I think that I am going to ask chatgpt to compile a list of the 100 dumbest things crowdfunding experts say and sell it as the best crowdfunding advice ever.
Coming soon for $49.95.
Equity Crowdfunding Explained: the Good, the Bad and the Ugly
As the crowdfunding industry celebrates 11 years since the passage of the JOBS Act, the industry as a whole has devolved into three groups.
The Good appreciate that they exist to enable small businesses to tap into a huge pool of capital that was never before available. The members of this group actively assist each company and help them successfully reach out to investors and raise the capital they seek.
The Bad are simply passive. They fail to inform companies of the true cost of running a successful crowdfunding campaign. They created the idea of “social capital” and equated it with experienced investors who actually have capital to invest in a campaign. This has led to a plethora of companies that post their offerings on a crowdfunding platform and just pray that investors will notice them.
The Ugly have polluted the pool of potential investors by encouraging founders who have no chance in hell of executing their questionable business plans. This group permits companies to claim absurd valuations that scare off more serious investors than they attract. At its worst this group refuses to conduct even a modicum of due diligence permitting scam artists to proliferate and literally steal hundreds of millions of dollars from unsuspecting investors.
So Happy Birthday to the crowdfunding industry.
I raise my glass and tip my hat to the visionary group who worked tirelessly to get the JOBS Act passed in the first place.
Let’s hope that the industry survives its turbulent adolescence, learns from its mistakes and matures to transform the capital markets in the profound way that the JOBS Act envisioned. With luck, equity crowdfunding explained by me here is hopefully for the last time. Meanwhile I’ll keep beating the drum on my blog.