Crowdfunding Myth Busting Series – Quick Fixes

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Peter Adams, Executive Director at Rockies Venture Club

Let’s tackle crowdfunding myth busting to better prepare for raising capital. What are the most commonly believed myths in crowdfunding? Here we look at crowdfunding as a quick fix.

Myth #6:

Once the SEC releases its guidelines, funding will become easy and freely available.

Reality:

Even if Crowdfunding portals do become popular, it will likely take years before people begin investing with them regularly. There are several factors that may slow the adoption:

Many “accredited investors” today do not even think of themselves as Angel Investors.  It is unlikely that the existence of a portal will change this perception. Accredited investors are individuals with a net worth of $1 million or more, not including their primary residence, nor an income of $200,000 or more a year with a reasonable expectation that it would continue. These investors are typically working with wealth advisers who are not motivated to move money to angel investments where there can be significant work in doing due diligence and risks with unknown investments. So, even though these people are qualified to make angel investments, few actually will engage in angel investing. It’s reasonable to assume that the same resistance to angel investing may exist among the non-accredited investors as well. While one upside of the JOBS act is that those who want to have the opportunity to experience the significant returns that angel investing can provide, it may take time for these individuals to get used to the idea of investing through a funding portal.

Platforms like E-Bay took years before people became used to the idea to bidding for things in an auction format.  People were simply not used to bidding for things and had concerns about whether they would actually receive the items they had won in an auction. It took E-Bay years to develop their buyer’s insurance program and for word to spread of the deals that could be had on their platform.

Even if Crowdfunding becomes as popular as E-Bay, it will take some time before it catches on in the mainstream. They will likely need to develop their own version of buyers’ insurance in order to gain investors trust.

 

 

Crowdfunding Myth Busting Series – Public Offerings to Non-Accredited Investors

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Peter Adams, Executive Director at Rockies Venture Club

Let’s tackle crowdfunding myth busting to better prepare for raising capital. What are the most commonly believed myths in crowdfunding? Let’s look at many of them to find what’s truth and what to debunk. Here we look at how existing offering exemptions already allow for public offering to non-accredited investors. We’ll examine one more myth, so look for our final blog post in a few days.

Myth #5:

In Colorado, many of the crowdfunding opportunities created by the JOBS act are already available to entrepreneurs.

Reality:

The Colorado Division of Securities already offers SCOR and RL limited registrations for public offerings to non-accredited investors for in-state deals. These registrations are rarely used, even though in some cases they represent less work for the entrepreneur than filing with a crowdfunding portal.  Entrepreneurs can pay $50 and fill out a few forms and in a few weeks of regulatory review they may be legally entitled to publicly market their securities to accredited and non-accredited investors alike.

Many people confuse the two things that must occur for successful securities sales.  The first is that it must be legal. There has been much excitement about the SEC releasing the details the JOBS act, but since many of these opportunities for lightweight registration have already existed for years, there must be something else missing.

That second thing missing is the marketing effort that must be expended to raise capital.  Most companies seeking capital are not prepared for the process. They are promoting their companies without having put together a working team of people, without having done the detailed financial projections and analysis needed, and without having done the market research to gauge market demand and competition for their product.  Even those who have gone through these steps to prepare for raising capital are often not ready for the extraordinarily difficult process of marketing their securities.

Funding portals will help companies to some extent in that there will be a place where investors can look at a good amount of deal flow in one place.  Entrepreneurs will likely find that it takes more than a portal listing to sell securities and they will need to develop significant social networks and spend significant dollars and time in putting together presentations, traveling to meet investors, advertising and more.

 

Stay tuned for the next crowdfunding myth busting blog post on quick fixes

Crowdfunding Myth Busting Series – Due Diligence

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Peter Adams, Executive Director at Rockies Venture Club

Let’s tackle crowdfunding myth busting to better prepare for raising capital. What are the most commonly believed myths in crowdfunding? Let’s look at many of them to find what’s truth and what to debunk. Here we examine the importance of due diligence. We’ll examine a few more myths over the next week, so look for subsequent blog posts in the coming days.

Myth #4:

Due diligence is a critical part of the early stage investment process. Most professionally prepared due diligence packages are no more than a collection of hundreds of documents, which is too much for someone to go through for a $500 investment.

Reality:

Unless crowdfunding sites find a way to crowdsource the due diligence process, it will not make sense for any one person to do all the research on a company, and many companies may be funded without receiving the scrutiny that they should. Even for Angel groups, Due Diligence is a time consuming and expensive process that sometimes threatens to eclipse the value of the investment in terms of the time it takes to do the research.  Groups have the opportunity to work together and split up the work so that no one person bears all of the burden. Crowdfunded Due Diligence will always be suspect when we don’t know who the other investors are and do not have a means to get to know them individually and develop trust relationships that face-to-face angel investors have.

 

Stay tuned for the next crowdfunding myth busting blog post on public offerings to non-accredited investors

Crowdfunding Myth Busting Series – Negotiation

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Peter Adams, Executive Director at Rockies Venture Club

Let’s tackle crowdfunding myth busting to better prepare for raising capital. What are the most commonly believed myths in crowdfunding? Let’s look at many of them to find what’s truth and what to debunk. Here we consider whether or not negotiation is needed. We’ll examine several more myths over the next week or two, so look for subsequent blog posts in the coming days.

Myth #3:

Private placements and Angel groups have typically involved a back-and-forth negotiation that allowed deals to get done through discussion and creative deal making.

Reality:

With hundreds of investors involved, and a national scope where investors and entrepreneurs don’t have the opportunity to meet face to face,  it is nearly impossible to negotiate a deal once it has been offered and one or more investors have jumped on board. Typically all investors in an investment round will invest on the same terms with the same term sheet. The funding portals make an “offer” to sell securities at a particular price and it is up to investors to take it or leave it. The results of this kind of transaction, especially when it is not vetted by a professional investment banking or venture capital firm, is that either the entrepreneur will not receive investment or worse yet, they will receive investment, but they shouldn’t have received it at the terms offered.

The benefit of negotiation is that it gives parties a chance to test the premises upon which the valuation is based.  If the valuation is too low, then the entrepreneur gives up too much equity and they may be challenged in raising further rounds which may be necessary for the survival of the company.  If the valuation is too high, the investors may be pushed down in a “down round” where their equity is significantly diluted. Angel groups with experienced participants have benefited from using that experience to negotiate deals that are good for both investors and entrepreneurs alike.

Unless funding portals can find a way to crowdsource the negotiation process as well as investment, there will be many unhappy investors and entrepreneurs who are not getting what they had hoped for from the crowdfunding experience.  Unfortunately, many people will not realize what has happened until several years later when things go awry.

 

Stay tuned for the next crowdfunding myth busting blog post on due diligence

Crowdfunding Myth Busting Series – Fraud

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Peter Adams, Executive Director at Rockies Venture Club

Let’s tackle crowdfunding myth busting to better prepare for raising capital. What are the most commonly believed myths in crowdfunding? Let’s look at many of them to find what’s truth and what to debunk. Here we ask if fraud is as concerning in crowdfunding as many believe. We’ll examine several more myths over the next week or two, so look for subsequent blog posts in the coming days.

Myth #2:

The SEC and others are concerned about the potential for fraud. It is a valid concern.

Reality:

We need to build in systems to prevent or minimize fraud, but fraud is the least of our concerns and will likely be a rarity. There is an even greater threat, however.  With unsophisticated entrepreneurs pitching deals to unsophisticated investors the opportunities for well-intentioned failure are enormous.
Funding Portals do not provide the vetting process that Angel Groups or Broker Dealers do, so unqualified companies will be on-line seeking funding. When unqualified investors invest in these sure-to-fail companies, everyone will be unhappy. There will be charges of fraud made, but in most cases the money will vanish due to poor strategy and mismanagement rather than fraud or intentional deception.

A majority of early stage companies are going to fail and the loss of money may look like fraud when the losses are due to other factors related to the operation of the business such as competitive pressures, regulatory changes, technological shifts, etc.  How are we going to be able to tell the difference when the time comes?

Just because money is lost does not mean that fraud has occurred.  If the company hired staff, developed product, and spent money on marketing, but never really took off, then that’s a simple company failure. If the company raised a first round and was depending on another round twelve months later that never was raised, then the company may have to shut down, even if its prospects were good. That’s not fraud either. There are dozens of scenarios where companies close – and in many cases shutting down sooner rather than later is the best option.

Investors need to be wary to protect themselves from fraud, but before they invest, they should be taking courses and workshops from groups like Rockies Venture Club in order to teach themselves about how companies are valued, how to identify risks, how to evaluate a deal and negotiate a winning term sheet.  Smart investors who invest with angel groups earn up to three times more on their portfolios than those who randomly point and click at crowdfunding offerings.

 

Stay tuned for the next crowdfunding myth busting blog post on negotiation being outdated…

Keystone Memberships for Investors

RVC Academy kickoff a huge success

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I’ll admit to having spent an inordinate number of adult years in academia and I hold two advanced degrees to show for it. I’m no stranger to the teaching part of higher education either; I’ve been in front of many hopeful faces looking for knowledge. But there is something very inaccessible about traditional higher education that I just don’t like.

I took a single graduate class a couple of years ago in a well-known university. The school made me register as a special, non-degree seeking student. The Dean of Students had to OK my registration and it took over a month to actually get the signature. Then I had to take time off work for 15 straight weeks to attend the class. Let’s just say the whole process was a pain in the neck and I don’t wish that hassle on anyone.

Last year I heard comments from conference goers at both the ACS2012 and the CCC2012. People said that they always love the seminar parts of the conferences. The most common complaint was that the seminars were too short and we were only scratching the surface of the topic. This got me thinking.

What if Rockies Venture Club were able to provide continuing education classes taught by industry experts just like the Universities do? Although we thought we might have a couple of modifications to the traditional course plan. RVC Academy classes would be stand-alone, two-hour events so you don’t have to worry about scheduling months in advance. The classes would be focused on issues surrounding private equity since that’s what we do best. Since these issues are important to both entrepreneurs and investors we’d make sure that all classes were open to both types of folks to learn side by side.

Our classes are open to the public. You don’t need to be accepted to the program like TechStars or the Founder institute, just register quickly online and attend. Although we do have to charge tuition for the classes, we are planning to schedule once a month classes that are free to all RVC members. Also, all classes are free to Keystone Members so we do feel good about providing the community with affordable options.

We just started the regular series of classes this month and frankly, we didn’t know how amazing these classes were going to be. Not to toot our own horns but, holy shmoly these classes were a good idea! It turns out that our community is just crawling with expertise.

  • Mid January, Brian Tsuchiya gave an overview of the little known ways to register your investor deal with the state of Colorado. Colorado has form RL and SCOR which allow you some freedom in advertising your deal publicly and legally.
  • January 28th we had Lauren Ivison from Clear Creek Partners and Kelly Matthews from RWO teach a room of investors and entrepreneurs about structuring their investment deal. Lauren occasionally has to turn away folks seeking A Round investment because they’ve so badly botched previous term sheets. Her class will certainly help folks prevent this kind of avoidable flub.

We saw great attendance at both of these classes and people’s wheels were really turning as they scribbled notes furiously. The format is such that we have lots of time for discussion and interaction. Also, we want students to go home with new knowledge, but not so much new information that they can’t process it.

We’re super excited about the pipeline of great classes in the next few months.

In the beginning of February we’ll learn about Market Strategy and Branding from Access Marketing Company.  At the end of the month, we’ll get an in depth view of Due Diligence from Lauren Costantini (CID4). She’ll school us on how much due diligence angels should reasonably be doing, how they should  go about it, and how can entrepreneurs can make the process easier to accomplish.

Even the Angel Capital Summit in March will be affected by our new view on continuing education. The workshops will be longer and get deeper into the nitty gritty of the topics presented.

I’m particularly excited about this spring’s educational lineup. Michael Armstrong from Front Range CFO will hold two classes on accounting. The first will be a basic course to get all of us non-accountants up to speed on accounting basics like quickbooks, debits/credits, balance statements, and statements of cashflow. The second class will be focused on challenging and defending pro formas. Having never taken an accounting class in my whole life, I’m pretty excited to see what Michael can teach me.

RVC Academy is in pilot stage. We are completely open to suggestions for future classes! In the comments, let us know what topics you’d like to see or teach this year.

Nicole Gravagna, MS, PhD, is the Director of Operations for the Rockies Venture Club. After having spent way too many years involved in formal educational programs, she is happy to be guiding the RVC Academy, which can best be described as an “informal educational program”.

 

 

Crowdfunding Myth Busting Series – Capital Flood

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Peter Adams, Executive Director at Rockies Venture Club

Let’s tackle crowdfunding myth busting to better prepare for raising capital. What are the most commonly believed myths in crowdfunding? Let’s look at many of them to find what’s truth and what to debunk. We’ll start with crowdfunding as a flood of capital. Then we’ll examine several more myths over the next week or two, so look for subsequent blog posts in the coming days.

Myth #1:

Crowdfunding will open the floodgates of capital for their business.

Reality:

It’s a lot more difficult to raise money than entrepreneurs believe. There is not a huge, untapped market of investors out there just waiting for the opportunity to invest in startup companies. Those who have the interest are probably already involved in Angel Investing groups like Rockies Venture Club. The rest are unaware of the opportunities for angel investing, and crowdfunding is not likely to produce immediate activity among these investors.

Entrepreneurs have difficulty raising capital for lots of reasons. Rarely is it because they simply can’t access unaccredited investors or public solicitation. There are many other reasons that keep entrepreneurs from getting their investment – primarily surrounding their concept (is it a lifestyle company or a venture company?) or their readiness level.

The most common problem is that entrepreneurs want to jump into fundraising before they do the work. Even on a crowdfunding site, backers are going to want to see an experienced and proven team, a product or prototype, paying customers, proformas, and other finished homework before funding occurs. You may not need these things when approaching friends and family for investment, but when you are convincing people you’ve never met before – you need to be prepared.

Companies will still need to spend huge amounts of time and money to bring people to their portal sites and invest.  This is not a “build it and they will come” situation. Even if the company has gone through a thorough readiness preparation, the marketing of a public security is complex and expensive. Just having a page or video on a portal is not likely to sell equity in your company or gain you donations. You will need to mobilize your social media network, reach out to individuals and groups, advertise, promote through speaking and making appearances at angel groups, and more.

Entrepreneurs who realize that funding portals are just one tool among many resources that they will need to marshal in order to receive investment will tend to do the best when crowdfunding sites are launched.

 

Stay tuned for the next crowdfunding myth busting blog post on fraud

 

It's Angel Capital Summit Time Again!

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Register for Angel Capital Summit 2013
Date: Tuesday March 19th and Wednesday March 20th
Location: University of Denver, Sturm Hall, Room 346, 2000 E. Asbury Ave. Denver CO

Registration is open!

(Updates added on Jan 28th, 2013)

Angel Capital Summit is a two day conference designed to bring together angel investors and vetted companies that are serious about raising private equity.

Apply to Pitch

Now accepting applications to pitch at the March, 2013 Angel Capital Summit. The ACS has more early stage companies and investors in one place than any other event in Colorado all year!

New Single-track Format

The single-track format brings both sides of the negotiating table together on important legal, financial, and social implications of private equity deals. Entrepreneurs and Investors are faced with different challenges surrounding the same topics. With all the players in the same room throughout the workshops and pitches, we hope that the discussion will powerful and that more connections will be made throughout the day.

Workshops

Angel investing and raising money from angel investors both require a specific set of skills that are not common knowledge. Experts in each field lead in-depth workshops on topics such as understanding the termsheet, preparing and executing due diligence, vetting exit strategies, go-to-market strategy, and developing the board.

Pitches

We have access to the best up-coming companies in Colorado and around the country. We will identify the companies that are serious about raising capital, connect with the ones that best suited for angel capital investment, and coach them to begin developing relationships with investors.

 

RVC Shark Tank Forums

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Shark Tank

Shark Tank

The holidays are a time of reconnecting with old friends and much-missed family. Inevitably, over the last month, my conversations have turned to work and how things are going in the new job I began this year. I’ve been with the Rockies Venture Club since the end of January 2012. We’re a small staff (only two until very recently) and the job has been hectic, scary, fun, amazing, and rewarding for all kinds of reasons.

My friends and family don’t really understand what I do for work. I tell them that I run a non-profit that connects entrepreneurs and investors. When I get to the part about helping companies pitch to investors, my friends faces light up with recognition. “Oh!”, they exclaim, “Like ‘Shark Tank‘ on TV!” I generally shrug and make comparisons and differences and wave off the idea that Rockies Venture Club is anything like the Emmy nominated reality show by Mark Burnett.

But then I reflect on the unique vantage point that we have here at RVC. From our small office in Thrive LoDo, we see incredible quantities of early-stage company dealflow. We know the (often secret) identities of the 200+ angel RVC Forum Investors in Colorado and elsewhere. We get to witness the leaps and bounds of improvements made between Friday afternoon at Pitch Academy and the following Tuesday at the Monthly Pitch Event. We are sometimes the first to find out that a company has closed a round, sometimes the last. And we know the truth when three companies in Denver simultaneously think they are the ONLY ones solving a given problem.

There are some similarities between Rockies Venture Club and ‘Shark Tank’. In the television show, the Sharks are angel investors. They are playing with their own money so they can make go, no-go decisions without discussing the deal with anyone. Most of the investors in our RVC Investor Forums are angels too. Their due diligence process can be expedited into a 15 hour study instead of a 15 week operation because they don’t have to answer to principals like Venture Capitalists do.

On the show, the Sharks have stacks of cash sitting next to them on their table. A viewer can get wrapped up in the drama of the stories, pitches, and negotiations and might forget to keep track of the amounts of money pledged by the Sharks to the entrepreneurs. I was amazed to read that it took 3 seasons of ‘Shark Tank’ before the Sharks’ investments totaled $15 million. They aired 38 episodes of the show in those three seasons. Our companies raised the same amount in a single year with only 12 “episodes” of RVC Pitch Events. At the rate we are helping companies raise money, we could have nearly $50 million raised after 38 pitch events!

Obviously, RVC is different than ‘Shark Tank’. We tend to look at early-stage companies, but the Sharks entertain embryonic companies with undeveloped teams and even inventors working alone. We don’t have a panel of investors at the pitch events who banter with each other and the entrepreneur; instead we let the whole community ask questions of the pitching company. Further, our negotiations go on behind closed doors. As for the dramatic focus, we prefer that the entrepreneur revel in the spotlight during the pitch instead of the investors stealing the show.

Shark Tank is in the middle of a very successful 4th season and RVC Investor Forum is wrapping up its very promising first year. We hope that RVC’s investors will continue to be active participants in the fun work that we do at RVC. It may not be exactly like Shark Tank, but really is a blast to get involved with all of the RVC companies. We get to meet amazing, driven, brilliant people who want only to achieve their company’s goals. It’s a pretty inspiring place to be. We’ve had a busy year, for sure, but there’s an upside to what we do. It’s downright entertaining.

 

Editorial by Nicole Gravagna, Director of Operations, Rockies Venture Club