November 2009 was when Michael Migliozzi and Brian Flatow started a website called BuyaBeerCompany.com who's lofty goal was to buy the ailing century old Pabst Blue Ribbon beer company. In less than two years, working to match the $300 million sale price, the pair attracted over 5 million investors pledging upwards of $280 million, with an average pledge of $40.
The SEC found out about the money raise and put a stop to it in Sept 2011. The problem? They hadn’t registered the offering with the SEC and they targeted unaccredited investors. These are two major no-nos in investment circles.
Because no money changed hands, only pledges, the two escaped charges, but the entire incident fueled the interest of some very prominent people who saw the potential for invigorating the cash-strapped startup and small business world where most new jobs get created. The concept of crowdfunding was born.
On November 3, the U.S. House of Representatives overwhelmingly passed H.R. 2930, a crowdfunding bill that will allow startups to offer and sell securities online. The Senate will likely vote on the bill in early 2012.
After eight decades of arguably the most restrictive rules for raising capital in the world, we are standing on the precipice of a new era for funding: crowdfunding. Here are 23 unusual ways in which the crowdfunding revolution could redefine the business to investor relationship.
First a Little Background
On the evening of Monday Jan 23, 2012 DaVinci Institute hosted a packed Night With A Futurist event as three experts took the stage to speak on the topic of crowdfunding. Brian Tsuchiya, Karl Dakin, and Steve Reaser all covered different aspects of the topic, but combined, painted an inspiring picture of how crowdfunding could unfold over the coming months.
Here are some of the highlights:
At the same time the Crowdfunding bill was being voted on in the House of Representatives, Senator Scott Brown of Massachusetts introduced a similar bill in the Senate which was referred to the Committee on Banking, Housing, and Urban Affairs.
There are four significant differences between the House and the Senate Bills so far and more changes may be coming:
- The Senate bill only permits the issuance of securities “through a crowdfunding intermediary”. Accordingly, startups would not be permitted to raise funds via social media sites like Facebook, Twitter or LinkedIn (as permitted under the House bill).
- Under the Senate bill, each investor is limited to investing up to $1,000 per year per company; the House bill permits an amount equal to the lesser of $10,000 or 10 percent of the investor’s annual income.
- Similar to the House bill, the Senate bill caps the total amount of capital that may be raised during any twelve-month period at $1 million; the House bill, however, raises the cap to $2 million if the issuer provides potential investors with audited financial statements.
- Finally, the Senate bill permits some form of registration by the State in which the company is organized and/or “any State in which purchasers of 50 percent or greater of the aggregate amount of the issue are…residents.” The House bill preempts State law and, accordingly, there is no State registration requirement.
Opposition groups are forming with the North American Securities Administrators Association (NASAA), a trade group for state regulators lobbying very hard against the House Bill to prevent the preemption of State law and to reduce the maximum investment amount per investor.
The topic of fraud has also been touted by the opposition, and while fraud is a legitimate concern and there probably will be cases of it, that concern is disproportionately small compared to the benefits crowdfunding will ultimately create.
Remember, people had similar concerns about e-commerce when it first debuted, but those fears have since been allayed. Crowd-funding won’t replace venture capital, angel investing or bank lending, nor should it. They encompass a substantially different model and mindset for raising funds.
Popular websites like Kickstarter and IndieGoGo have already shown the power, possibilities and vitality of crowdfunding. In these models, people request funds online from strangers to back specific projects such as a new invention, filming for a movie, or a cupcake delivery truck. What makes these allowable and legal under the current regulations is that those who pledge money can only receive perks and products like T-shirts, DVDs, or posters in exchange, not actual equity shares.
Lending websites like Prosper.com are another facet in understanding the funding puzzle. They facilitate person-to-person loans. People ask to borrow money for anything from plastic surgery to starting a company and offer a fixed interest rate in return. But again, equity stakes are not allowed.
Speaking recently at an event titled “Silicon Valley comes to Oxford,” Reid Hoffman, the LinkedIn founder and serial investor, said many startups seeking investment money still don’t properly think through where they fit in to the markets they aim to penetrate. Incorrect sizing of the commercial opportunity and the company’s competitive circumstances are still widespread barriers that fund raising amplifies.
But in asking the right questions, any funding process arguably forces entrepreneurs to think further ahead and arrive at more water-tight justifications for the paths they are planning to take. If more people thought about raising money, more people would be thinking more seriously about the plans that underpin this activity – and that has to be a good thing.
Crowdfunding in Other Countries
Other nations - such as Great Britain, France, Hong Kong, and the Netherlands - already offer equity-based crowdfunding opportunities to investors and startups to help companies get started. Here are four quick examples:
- One of the pioneers of crowdfunding in the music industry was the British rock group Marillion. In 1997 American fans underwrote their entire U.S. tour with $60,000 following a highly successful Internet campaign.
- The British site A Swarm Of Angels raised the first $50,000 of a $2 million feature film that was distributed free online.
- British documentary filmmaker Franny Armstrong raised more than $815,000 to underwrite the film - The Age of Stupid. People who gave 20 quid ($35) got a credit on the film's website; those who gave £5,000 ($9,000) and up got a percentage of the profits.
- Another Britain project, My Football Club, tapped into global soccer fervor to raise more than $2.6 million from 53,000 fans in less than four months to purchase a British soccer team.
The Future of Crowdfunding – 23 Unusual Examples
The popularity of the House bill with over 90% voting in favor, and the speed with which it cruised through the process has led many to believe crowdfunding is a done deal.
The blocked Pabst purchase brought to light the massive potential for crowdfunding and changing the rules of business funding options from here on out.
Granted, what the two beer-minded gentlemen were doing may have been a bit over the top, it undeniably proves a point. There is a strong interest for the average American to support ideas they believe in. While raising $300 million on the Internet may be excessive, allowing entrepreneurs to raise a limited about of seed or growth capital through crowdfunding can easily be seen as being very beneficial.
Regardless of the details that are put into the final legislation, entrepreneurs will find a way to work with it. Assuming it passes, crowdfunding will either make a huge difference or relatively little, with the devil-in-the-details being the deciding variable.
While there will be an initial rush to “throw things at the wall to see what sticks,” only those who are able to cultivate a loyalist investor following will find the gold at the end of the rainbow.
Investor pitches will likely be much more grassroots and emotional, pulling on the heartstrings of people through cause marketing campaigns, save the city pitches, or “we’re all in this together” movements.
The most effective campaigns will spend time developing a target market of likely investors and custom tailor their strategy around reaching that community.
Virtually every trick in the marketing handbook can quickly come into play with these new parameters for business to consumer investor pitches.
Redefining the Company-Investor Relationship
More than anything else, crowdfunding will re-invent the company-investor relationship. Gone are the days of suits meeting suits to hammer out contracts in the boardroom on the 37th floor.
Companies will no longer be judged solely on their office furnishings, polished appearance, or the address of the company. Instead, we are moving into an era of common people doing business with common people.
Those who are most successful at funding their business will have a unique way of rising above the noise, standing out in the crowded din of “pick me, pick me” language surging through the blogosphere.
For this reason I’ve decided to feature 23 unusual concepts that entrepreneurs might utilize to stand out. Not all of these may fit in the legal category once the final legislation is approved and most will involve a second stage of relationship-building, but marketing the products simultaneously with the investment opportunities will likely create a loyal customer base in the process.
1.) Stage a Positive Protest – Stage a protest in front of the business seeking funding with fake protesters holding signs that read “This company is brilliant” or “These people are too nice.” With a little creativity and the right audience, this strategy could be an overnight sensation.
2.) Guest Blogging – This is for the bloggers and freelance writers out there. Thousands of blogs are starving for good content and getting your article posted will be relatively easy. This will be most effective on high traffic blogs that are closely aligned with the target audience of prospective investors.
3.) Product Demonstrations – For some products or services a demonstration done on a street corner or in a building entrance may be an effective way to get people’s attention. Offering free food, drinks or snacks can be leveraged to attract a crowd of people who can then be introduced to the investment opportunity.
4.) Online Investor Gambling – This one may be pushing the limits, but is “gambling your way to an investment” still gambling? If it were allowable, a business could create an online gambling site to entertain people as they play for the opportunity to invest in your company combined with some other form of return.
5.) Competitions – Offer a series of prizes to people who can figure out new uses for your product or services. The investment offers will follow once you’ve collected all the contact information from the top competitors and participants.
6.) Movie Theater Ads – If the business being funded is a movie production company or music recording studio, movie theater ads could be an effective way to reach a very targeted investor group. Combined with an effective phone app, newly converted investors could invest from their theater seat before the feature even begins.
7.) Borrow a Wall - Get a projector and find someone who will allow you to use the side of their building at night. The wall could host projections of your company logo and website information as well as promo videos of how your product works and other teasers.
8.) Invest $10,000 and Date a Supermodel – Sex still sells, and while posting photos of beautiful women on a website may seem sleazy or lazy to some, for the right company, this could be an effective strategy.
9.) High End Hair Salons and Barber Shops – Hair stylists love to talk. With a little motivation in the form of finders fees or commissions, these people could become a good investment funnel.
10.) Grouponing Your Investment – Deal of the day sites like Groupon and Social Living reach huge audiences. With their current business model, these sites take half of the revenue that comes in through the offer. However, thinking more creatively, an offer could be created that would have prospects “buy” a dinner, tour, or show that was combined with and includes a short no cost investor pitch.
11.) Free Chauffeur – Offer free limo rides to people at airports or hotels and pitch them on the investment while they are being driven to their destination. This approach could reach several dozen good prospects a day in a “captive audience” setting.
12.) Legacy Building – Buy a brick with your name on it or Have your name engraved on the wall are common donor strategies for nonprofits. They could also work as investment incentives in the crowdfunding model.
13.) Framed-Art Stock Certificates – Having artistically crafted stock certificates framed and prominently posted on a wall gives investors bragging rights and also generates conversations within their circle of friends.
14.) Affiliate Marketing Investments – Paying a finders fee has been a long standing tradition within the investment community. Working through affiliate networks should be considered an extension of this in the online world and a natural part of its evolution.
15.) Live Animal Marketing – Walking through town with a cow, water buffalo or cloned triceratops on a leash can be a highly effective attention-getter.
16.) Building Lists – Building lists is all about building a community of online followers. Using fishbowls to have people drop in a business card for a free prize or signing up for a free newsletter are just couple of the many effective ways to build lists, but innovative crowdfunders will create many more and ultimately find techniques of quickly generating large lists.
17.) Riding the Ski Lift – Instead of actually going to a ski resort to ski, people sitting next to you in a ski lift become a captive audience until you reach the top.
18.) Free Seminar – A well-orchestrated free seminar can attract large numbers of people who will listen to an inventive investor pitch on a hot topic.
19.) Limited Edition Artwork – One investment model could be structured around 100 people making a $10,000 investment. If each were offered a limited edition piece of artwork, signed by the artist, some of the money would go to the artist with the rest used to fund the business.
20.) Partner Promotion – Invest $10 and get a $10 gift certificate to Nordstroms, Macys, Dillards, or some other high-end department store. You get the investment, they get the customers.
21.) Personalized App Promotion – Create a smartphone app that is custom designed around the business seeking funds and the person buying it. Since people will pay more for something that is “all about them,” the app could be priced at $10 or more.
22.) Host a Blood Drive – A blood drive for a cause creates a good will atmosphere for the event sponsor.
23.) Underground Music – If there is a genre of music that your target market listens to, host a concert or benefit with live music to set the stage for brief investor pitches between sets.
Yes, you may find some of these ideas too far out to consider reasonable investment tools for crowdfunding, but most will not.
Crowdfunding will usher in a new era of thinking, with the advantage going to those who are the most creative, innovative and passionate.
It certainly won’t solve all the problems with funding early stage companies, and it will likely create many more at least initially. But the investment world is overdue for something that will shake it up, and this is exactly that.
Look for many new resistance groups to form as this gains momentum. Even after the legislation is passed, the battle will be far from over.
Author of “Communicating with the Future” – the book that changes everything