Article about a company from startup to IPO
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ENTP325-Spring2018-Week31.pptx
ENTP 325 Early Stage Venture Financing Week #3
This week
Tuesday
Crowdfunding
Thursday
Guest speaker
Other sources of early capital
Sunday
Crowdfunding analysis paper
Crowdfunding
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture.
Often used after founders capital but prior to raising angel capital
Friends and family funding might be prior to crowdfunding or part of a crowdfunding campaign
Founders
Friends and family
Crowdfunding
Angel investment
Venture capital
Exit
Modern-day Crowdfunding
The earliest recorded use of the word “crowdfunding” was in August 2006 (wordspy.com)
Crowdfunding on the internet first gained popular and mainstream use in the arts and music communities.
The first noteworthy instance of online crowdfunding in the music industry was in 1997, when fans underwrote an entire U.S. tour for the British rock band Marillion, raising US$60,000 in donations.
Crowdfunding started to gain mainstream traction with the launch of ArtistShare (2003)
As the model matured, more crowdfunding sites started to appear
Kiva (2005)
IndieGoGo (2008)
Kickstarter (2009),
GoFundMe (2010),
Microventures (2010)
YouCaring (2011)
What happened to these guys?
Acquired by Facebook for $2B
Crowdfunding methods
Kickstarter stats
https://www.kickstarter.com/help/stats?ref-footer
How can you be successful at crowdfunding?
Make sure your product or service solves a real problem
Test and refine your idea
Be prepared
Seek and accept advice
Get your campaign started prior to campaign launch
Get some financing to build a great campaign
Focus on the pitch
Seek feedback
Commit to your campaign
Avoid the crowdfunding curse – 75% of products are delivered later than expcted
Advantages of rewards crowdfunding?
Provides money
Generates interest in product
“Tests” the market – social proof
Builds early relationships with customers
Various funding options from which to choose
Exciting process
You’re in control
Disadvantages of rewards crowdfunding?
Not quick and easy
Exposing your business to the world – info disclosure
Possibility of highly visible failure
Product delivery challenges including shipping costs
Negativity about crowdfunding
https://techcrunch.com/2017/01/20/how-to-fail-at-kickstarter-even-if-you-get-funded/
Common Rewards Crowdfunding Mistakes
Choosing the wrong platform
Setting an unrealistic funding goal
Not enough social media presence
Lack of updates or communication with your backers
Failure to get feedback and advice from the “crowd”
Insufficient media coverage
Failure to deliver product or rewards post-campaign
Coolest Cooler (2014)
A souped-up cooler complete with a cutting board, blender, Bluetooth speaker and USB charger
Started out as Kickstarter's own Cinderella story - went on to raise more than $13 million and break Kickstarter's funding record. Price was $165-$185
Almost two years after Coolest launched on Kickstarter, only about one third of 56,000 backers received their coolers
Asked backers to pay $97 more since original backing price wasn’t enough
Angry backers
Had a cool idea, and received the money thought needed to make the Coolest Cooler come to life.
But that doesn't mean he had the business knowledge and foresight to know how to fulfill the delivery promises he made to investors.
Failures and cautions
9% of successfully funded projects fail to deliver.
When you back a project on Kickstarter, you aren't buying a product; you're investing in a product and helping someone complete a goal.
Just because a campaign hits its financial goal doesn't mean the project will be successful.
More failure analysis: https://www.kickstarter.com/fulfillment
“Scams”
More “scams” at http://kickscammed.com/
Exercise: Kickstarter Campaign
Teams of 2-3
Go to www.kickstarter.com
Setup campaign (up to launch)
Examine the experience
Share with class
Easy, difficult?
What’s important?
Anything surprising?
Thursday’s Guest speaker Alperen Topay Founder and CEO, EAOS Be prepared with questions!
What is Equity Crowdfunding?
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First, let’s get down an important definition: Accredited investor
A person or entity that can deal with securities not registered with financial authorities by satisfying requirements regarding income, net worth, asset size, governance status or professional experience.
The term is used by the Securities and Exchange Commission (SEC) to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings.
How do you become accredited?
A person must demonstrate an annual income of $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher.
Also if they have net worth exceeding $1 million, either individually or jointly with spouse.
Also if they are a general partner, executive officer, director or a related combination thereof for the issuer of unregistered securities.
Also, they can demonstrate sufficient education or job experience showing professional knowledge. This includes registered brokers and investment advisors.
An entity is an accredited investor if it is a private business development company or an organization with assets exceeding $5 million.
Why is this important?
The SEC has adopted requirements for accredited investors to protect those who may be unable to sustain economic risks of investing in unregistered securities.
When a company or individual engages in an unregistered securities offering, it bypasses registering valuable information with the SEC, which may mask certain risks inherent in these investments.
Participants in these private placements are vulnerable to losing their entire investment.
Another important definition: Registered and unregistered securities
Before securities (stocks, bonds and notes) – can be offered for sale to the public, they first must be registered with the Securities and Exchange Commission (SEC).
Any stock that does not have an effective registration statement on file with the SEC is considered "unregistered.“
To sell or attempt to sell a financial security before it is registered is considered a felony.
However, certain exemptions apply.
For example, a privately-owned corporation may issue shares of stock to its executives and board members
Companies can also raise capital by soliciting investments from individuals outside the company who are considered to be “accredited investors.“
What is Equity Crowdfunding?
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Enables small startup businesses better access to capital to use the internet and social media to raise capital, typically from a large number of people and in relatively small amounts.
Has been a viable option for U.S.-based startups and small businesses since the passage of the 2012 JOBS Act (additional regulations passed in 2015 and 2016)
Some differences based on “Tier” (next slide)
Equity crowdfunding: Investors
Before the JOBS Act was fully implemented, equity crowdfunding was limited to accredited investors.
Today, there are no limitations on non-accredited investors’ access to Tier 1 offerings.
Tier 1 - company can raise up to $20 million
There are some limitations on non-accredited investors’ access to Tier 2 offerings
Tier 2 - company can raise up to $50 million
No more than 10% of a non-accredited investor’s annual income or net worth, whichever is greater
Consideration for entrepreneurs: Easier Access to Capital
The new regulations removed many restrictions on advertising and eased other rules that formerly limited early-stage companies’ access to capital.
Equity crowdfunding platforms allow startups to put themselves in front of thousands of potential investors at once, and streamline the funding process for interested investors.
The result is faster, easier, and less costly access to capital for young companies.
This allows entrepreneurs to focus less on regulatory compliance and more on getting their products and services to market.
However, more investors to deal with and costs
The flip side of easier access to early-stage capital is an increase in the number of investors involved with the firm as it tries to get off the ground.
Managing many small investors can present logistical challenges and costs, such as the need to hire an investor relations liaison or communications staff.
Reporting and auditing requirements can be costly and burdensome as well.
Be aware of the registration and reporting requirements depending on Tier 1 or Tier 2 status
Disclosure Requirements for Equity Crowdfunding Issuers
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A Form C will need to be filed with the SEC
Requires the reporting of:
Information on the issuer, directors and officers, owners (if they own 20 percent or more of the issuer)
The intended use of proceeds
The targeted offering amounts
A business plan
Details on the intermediary to be used,
The offering price and how it was determined
Number of current employees of the issuer, risk factors relating to the offering, the issuers of debt position, and related party transactions.
Financial statements
Considerations for investors: potential for return on equity
For investors, the biggest benefit of equity crowdfunding is simply having skin in the game.
Though most startups fail, partially or totally wiping out early investors, many go on to succeed.
Traditional crowdfunding campaigns offer tangible rewards, such as a facility tour or free merchandise, for those who contribute funds.
However, they don’t offer a stake in a potentially successful business.
Oculus VR demonstrates the downside of traditional crowdfunding.
Considerations for investors: liquidity
Equity crowdfunding shares for the most part can’t be sold on public exchanges – though some Tier 2 companies do opt for public listings.
Most don’t make regular income distributions (dividends)
You’re likely to wait years to see a return on your equity crowdfunding investment.
Liquidity of any secondary market is likely to be limited
Legal stuff Always get a lawyer before raising money!!!
Equity crowdfunding falls under the jurisdiction of federal and state securities laws.
Every offering is either registered, exempt, or illegal.
Equity crowdfunding is illegal without registering the offering with the SEC or fitting within an exemption from registration.
There are requirements for disclosing financial statements (reported, reviewed or audited depending on amount raised)
If you do something wrong, your company (and its officers and directors) can be sued, and in some cases, could go to jail.
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The Economic Reality
Plan for legal fees, compliance costs, funding portal fees, broker-dealer fees and marketing expenses.
The SEC estimates that it will cost $39,000 in fees to accountants, lawyers, and the funding portal to raise just $100,000, and more than $150,000 to raise $1 million.
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This week’s readings (complete by end of week)
Venture Hacks – How to set the valuation for a startup
40
Crowdfunding Analysis Paper due Sunday midnight
A 2-3 page double-spaced paper where you will research a successfully completed crowdfunding campaign.
The purposes of the analysis are for you to
Determine what were the key elements to the campaign’s success
What tactics were used throughout the campaign
What has happened to the company since the close of the campaign.
There are several high-profile cases you can consider, and you can also focus on campaigns that have been run from the Baiada Institute.
Guest speaker Alperen Topay Founder and CEO, EAOS
Other Sources of Early Capital
Banks
Most banks DO NOT fund startups
Banks though are important for establishing credit, building your network, connecting you with resources
The Small Business Administration (SBA) also partners with banks to help startups and help newly-formed businesses grow. Look for banks that are SBA preferred lenders (e.g. Univest)
The Small Business Technology Transfer (STTR) expands funding opportunities in the federal innovation research and development (R&D) arena.
The unique feature of the STTR program is the requirement for the small business to formally collaborate with a research institution
The Small Business Innovation Research (SBIR) helps small businesses conduct research and development (R&D).
Other grants (city, state, federal, private)
Merger/ acquisition
Strategic partnership/investment
This week’s readings (complete by end of week)
Venture Hacks – How to set the valuation for a startup
44
Crowdfunding Analysis Paper due Sunday midnight
A 2-3 page double-spaced paper where you will research a successfully completed crowdfunding campaign.
The purposes of the analysis are for you to
Determine what were the key elements to the campaign’s success
What tactics were used throughout the campaign
What has happened to the company since the close of the campaign.
There are several high-profile cases you can consider, and you can also focus on campaigns that have been run from the Baiada Institute.
Next week
Tuesday
Determining early stage valuations
Thursday
Negotiating with investors: Shark Tank case studies
Sunday
Quiz #2 (focus on crowdfunding, valuation and cap tables)
Cap tables introduction
Team exercise using the Startup Valuation Calculator
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