Turns out that successful equity crowd-funding your startup may be a detriment to your gaining funding from professional investors afterward. And, as of now (May 2013), this cannot actually be done in the U.S.
I’ve been talking with attorneys and investors about the JOBS Act (“Jumpstart our Business Startups Act), which was signed into law in April 2012, a law which has not proceeded quickly since that time. Now, more than a year later, we have little clarity on the restrictions and structure of how we can offer early stage equity for our new ventures through public solicitation, primarily the Internet. In fact, it is not at this time lawful to do so.
We can accept cash contributions in exchange for rewards (like T-shirts or access to back-stage events) and this is working well in the arts and entertainment sectors. But we cannot yet accept cash for an equity stake in any venture.
And it seems this may make some trouble if you need more than the crowd-funding capital to build, launch and grow your venture. Currently the proposed cap on crowd-funded investment is $1M. Here’s how professional investors may see it:
- Your cap table is too complex.
- There are already too many investors in the mix to ensure an ROI,
- You may not be communicating with those many investors correctly, which may imply some later liability for the venture.
- The ROI for those early stage crowd-funding investors may be questionable, implying later trouble from them.
- The hassle of handling these many early stage investors when setting valuations and creating an ROI scenario may be too much work for the professional investors, in light of the risk of a follow-on investment.
Professional investors (angels and venture capitalists) are generally looking to say “no” to most early stage opportunities, and this may count on the negative side of their evaluation of your venture.
That said, crowd-funding for ventures needing serious equity investment in an upcoming round can use rewards-based crowd-funding to establish important benchmarks with those potential professional investors. Here’s how:
- Establish your product’s market viability by driving early sales through promotions and discounts offered through your crowd-funding site.
- Show you have tested your product in various market sectors and at various price points, and share the results.
- Prove which of your product’s target market sectors are responsive at what price point through tested online channels, and build your growth strategy on real data.
- Validate your market traction, and projected market penetration, from early market response and sales.
- Offer metrics to support your claims of rapid scaling.
So, while we are all waiting for the JOBS Act to become law, we can leverage crowd-funding in ways that direct our launch and growth strategies, and which investors will appreciate.