Fundraising in all its forms is about three things: having a reputation for excellence, developing true friends, and accepting failure.

Getting people to give you money is one of the hardest things on the planet. Ask anyone to give you clothing, food, time, a couch to sleep on, or their car for the day and you will likely be more successful than if you ask for money. Don’t be mistaken, it’s not about the value of the money. Frankly, time is our most precious resource. Yet, people seem very willing to offer their time. The scarcity of the resource doesn’t seem to matter.

Cash money has a universally defined value. One US dollar equals 0.76 Euro, 54.56 Rupees, and 6.38 Kronor. Across the planet, we can all agree how much our currency is worth in relation to other currency.

Applying cash value to the value of goods can get a little tricky. A watch is not always $50. You can pick one up for $14.99 at Target. Or you can get a real deal–save $43,355 on a blinged out Rolex on sale for $439,995.

Reputation for Excellence

What’s the value in the Rolex Oyster Perpetual GMT-Master II Ice timepiece versus the Merona round face watch with changeable strap? I’m going to venture a guess that it isn’t the sense of peace you feel when you walk onto a crowded subway wearing it.

It also isn’t really about the way the watch looks. I have an expensive watch that was given to me as a gift. It was a hand-me-down from someone who can afford the luxury of an expensive watch, two actually, since I gained ownership of this one when they bought a new fancier version. I’m not known for my lavish income and I’m guessing that people have no idea that it’s expensive. To that point, the Rolex serves to reinforce a person’s brand, not create it. A poor man wearing a Rolex looks like a poor man with a knockoff. However, for the right man, the Rolex Oyster will serve to reinforce the idea that he is doing very well indeed.

This brings me to my first point about fundraising. Rolex has developed a reputation for excellence. The value of a  Rolex is higher than that of Merona which has a reputation for affordability. Those who shop for Rolex don’t question whether the particular watch is worth the price tag (of course it isn’t). They are paying for an item that will support their personal brand.

Whenever you are fundraising, you have to have the reputation for excellence so that the person giving you money will feel as though you are supporting their personal (or business) brand.

Make True Friends

Sometimes you will get very lucky and a random person holding cash will knock on your door to tell you that they want to give you the money. Ok, you’re right. That never happens.

You must create a relationship with a person (or institution) before you can ever hope to get money out of them. Apply this in your head, right now across all the situations where people exchange money.

  • Customers want to know the business and product will be around for a while and that they can depend on it.
  • Donors want to be (or feel) involved with the mission and activities of the organization.
  • Investors want their money back in 5-7 years, and they want to have a successful portfolio to chat about at cocktail parties.

Think about it on a personal level. How often do you buy a brand you’ve never seen or heard of before? How many charity causes have you given money to? Let me guess, someone you knew was running a race or otherwise raising money for the charity and you gave to support Breast Cancer research, but deep in your heart, you gave because you wanted to see your friend happy.

Investors give money to the people they like. They have to qualify their investments by calculating whether the investment has the possibility of making them a lot of money. But it’s not the future trips to Tahiti that make them sign the check. It’s the knowledge that they get to be involved in the company as it grows, if only to drop knowing comments about the company’s burgeoning success to their friends.

You can get a lot closer to your fundraising goals by developing real relationships with the people who can help you access capital. I’m not talking about the, “let’s do lunch” schmoozing stuff here. I’m talking about remembering birthdays, being genuinely curious about how someone’s child did in their big soccer game, and really enjoying the person for reasons that have nothing to do with money.

Learn to accept failure

Failure is almost as complicated as money. When you fail, you feel way more miserable than the failure should actually feel. A failed marriage can bring an otherwise successful person to disability and depression for a year or more before they buck up and move on. Getting fired, losing a big account, having a stock portfolio crash, all these things make people feel worse than the failure actually requires. In short, we are very bad at getting over it.

When you ask someone for money and they say no, you might feel terrible. You stuck your neck out and got rejected. You might even feel like cutting ties with them. They clearly aren’t supportive. Right? To be clear, a no is not a rejection. It’s not a failure, it’s an open ended sentence…. It’s a relationship that you need to build before you can get to the possibility of a yes.

I guarantee if you try to raise money for anything, you will hear more nos than yeses. Accepting that as a part of the process will make fundraising much easier.

 

 

 

As a mom with little time outside of childcare, I want shopping to be as painless and efficient as possible.  I don’t dare waste time in malls.

I would like to buy a Kettler Kiddi-o Air Tire Tricycle. It is sold by a multitude of websites including eBay, Amazon, Walmart.com, and so forth. After searching two hours for the best price and comparing shipping costs and coupon codes, eBay won the sale with a price of $89.99. Now I really don’t want to spend that much, but that was the best price I could find.

Brian Grega and Anthony Sanchez, veterans of sales and marketing, are coming to my rescue. Shortly after Christmas 2011, they began to discuss how they have spent their careers figuring out buyers, trying to be better guessers of who will buy what when.

Here’s the conversation that changed everything:

Sanchez, “I wish there was a way to know when someone wants to buy something so we don’t have to spend so much time and money marketing to them.”

Grega, “Why can’t we have that?”

Within the few minutes of that interaction, these guys had started the ball rolling on what would shatter the existing models of today’s online marketplace and start an e-commerce revolution with infinite possibilities in today’s environment and technology.

What started in that brief exchange between Sanchez and Grega, quickly took form as the only C2B (consumer to business) online shopping model in e-commerce, Infinite Buyer. They created a site where the buyer arrives with a specific product in mind and makes an offer for it to registered sellers. Venders, in turn, respond with an acceptance, counter, or refusal of the customer’s price. In this simple exchange, Infinite Buyer has revolutionized the online market in a radical shift of power to the buyer.  Both the buyer and seller save time and money in an unprecedented way with this model.

Infinite Buyer entered a market saturated with successful online stores like Amazon and eBay. How it can contend with such formidable forces? It doesn’t have to. These big guys serve the general, uneducated shoppers at the wide mouth of a shopping funnel whereas Infinite Buyer captures the decided buyer at the narrow end of that same funnel.

Grega likes to say, “The little red book of selling will tell you that people do not like to be sold, but they love to buy.” This statement is the best testament for Infinite Buyer’s goal – create a place where buyers have the power to guide the market and sellers enjoy the profits without as much of the usual expense of earning them. Imagine that you wake in the morning with a purchase in mind and can simply enter the item on Infinite Buyer with an offer to sellers within your budget. Then you go about your day fulfilling other responsibilities and return later to find which sellers have accepted your price. Finally, you can complete the transaction quickly, wasting almost no time shopping.
Sanchez puts it this way, “There’s no more waiting for the right seller offer to pass in front of you, no more waiting for a summer sale. Everyday everything is on sale at the exact price you want.”

While the control currently lies mostly with Infinite Buyer’s consumers, sellers still reap many benefits. Without the expense of sales and marketing teams, they get feedback as to what buyers want and what they are willing to pay. And while the beginnings of Infinite Buyer focus on the consumer, the future holds many exciting possibilities for sellers. Grega and Sanchez envision capturing more and more of the funnel described earlier, moving up a bit, if you will. For example, the site will eventually allow sellers to post items for offer. When buyers use Infinite Buyer to pursue specific items, they can also submit an offer on other items sellers have displayed.

Grega, CEO of Infinite Buyer, spent the majority of his 30-year career at high tech Silicon Valley start-ups. He’s an expert at market development, sales operations, marketing, and industry pioneering activities. Sanchez, CMO of Infinite Buyer, is a former Fortune 500 Marketing Executive with 25 years of experience in marketing strategy, digital marketing, branding, website development, and entrepreneurial pursuits. He was one of Silicon Valley’s first web marketing professionals at Oracle. So you’ve got two of California’s Silicon Valley business gurus forging the way with an exciting new company in Colorado’s “Silicon Summit.”

Besides Grega and Sanchez, Infinite Buyer’s team includes experienced advisors on the Board of Directors and field experts on the Board of Advisors, such as Skip McGrath, eBay’s only endorsed Online Sales Coach. There are also technical experts and highly skilled architects in product development.

The niche Infinite Buyer has filled in the marketplace and its leadership combined to earn the company a finalist pitching spot in Denver’s Angel Capital Summit, hosted this week by Rockies Venture Club. Infinite Buyer will join many other Colorado start-ups in a quest for funding.

Grega and Sanchez see funding as a vehicle for supporting Infinite Buyer’s viral growth potential. Once monies are received, they will exercise their marketing expertise and put many features into place that will guarantee a rapid increase in the user community, platform development, and the creation of a mobile app. Additionally, funding will focus on creating loyal customers by utilizing data acquired through transactions for augmenting features and options. Grega and Sanchez envision tens of millions of buyers within 3-5 years and tens of thousands of sellers by then. The funding amount they seek now ($400K) is relatively low considering their playing field, but they say it is enough to carry them through the impending viral growth period that will, in turn, lead to enough revenue for independence.

As with any start-up, there are issues to address. Infinite Buyer faces an imminent viral growth period, one that will surely entail the need for a lot of customer support. Once a transaction is complete, there are shipping and handling, quality assurance, and other processes to ensure. Also, there are worries that buyers won’t be loyal if they aren’t experiencing successful transactions, and current sellers, in turn, expressed concern about buyers being bottom feeders. Sellers also want anonymity for brand quality assurance.

Grega and Sanchez, in their business wisdom, have addressed these issues up front. Part of the funding they seek will go to developing customer support needs and toward analyzing data to provide buyers with guidance for successful purchases. Furthermore, current data already shows that buyers are offering reasonable amounts consistently and sellers are satisfied with revenues from the site. Infinite Buyer also rates buyers based on offer and purchasing records, so sellers can have more confidence in transactions. Also, sellers’ names are not publicized, only buyers know the source of an item.

Because of its radical C2B nature, Infinite Buyer stands alone. There is a huge $250 billion e-commerce market in the US, projected to expand to $330 billion in the next five years, so it there is plenty of space for Infinite Buyer to fit without posing a nuisance. Besides, the big guys have no incentive to switch their successful models nor risk established relationships to compete in an untested market.

Interestingly, therein lies the true challenge to Infinite Buyer. Grega and Sanchez recognize their obligation to shareholders is to build this niche in the market so well that when Infinite Buyer becomes large enough to constitute a nuisance to the titans, it will have enough revenue and customers to be acquired rather than squashed.

Back to me. I’ve cancelled my purchase from eBay for the Kettler Kiddi-o Air Tire Tricycle. I’m going to offer $50 for it on Infinite Buyer. Then I’m going to bed because I don’t have to spend any more time on it. I’m sure a seller will be waiting for me in the morning…

 

Stacy Gregg is an educator, runner, reader, and mom to two energetic pre-schoolers. She joined the Rockies Venture Club at the end of 2012 to support the communications side of the organization.

 


In this edition:

 


 

Angel Capital Summit News

The Angel Capital Summit is scheduled for March 19 and 20th at the DU Campus in Sturm Hall. This is the same location as last year. Don’t take that to mean that we are repeating the same old conference! We’ve revisioned the ACS to include suggestions from last year’s suggestion box. All the seminars will occur on one stage. No more choosing between two awesome talks. Just relax and take it all in!  Similarly, pitching companies will not compete for attention; they too will pitch on one stage.

Local Legends, David Cohen, founder of TechStars, and Jon Nordmark, CEO of eBags will both be giving Keynote addresses at the ACS. We have confirmation that many angel and venture capital investors will be in the audience. We have a growing list of VCs who will be attending so they can browse our local seed stage companies.

Pitch applications are in Executive Review through February and companies will be invited to pitch in early March. We have seen some hot new companies come through both the Gust and Business Catapult application databases. Companies will be matched with trained Pitch Coaches and the Finalists will be chosen during the week of March 11 after we’ve seen the pitches in person.

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No Pitch Event in April

Since the Angel Capital Summit is late in March (corresponding with DU’s Spring Break), we will have a bye in April. Although we won’t have new pitches in April, the investor Forum will still meet in April. This allows the Investor Forum to fully digest the large number of companies that pitched at the Angel Capital Summit. A Bye in April is good for entrepreneurs and good for RVC staff. Whew!  We will resume our normal pitch event schedule in May.

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New RVC Staff Roster

We’ve been growing!  RVC is an amazingly complex organization at the cutting edge of angel investing and private equity community development. We are so thankful to have found some amazing new staff members so we can accomplish our goals this year. As a new non-profit, we are thankful to have the deep experience of executive-level interim staff. We really are lucky to have such a great team! Here’s what our roster looks like right now…

Peter Adams, MBA – Executive Director

Known as the brave soul who took over the Rockies Venture Club in Dec of 2011, Peter is the visionary force shaping RVC today.

Kevin Andresen – Interim Staff

Most recently VP at Urban Lending Solutions, Kevin is experienced with the crazy world we call Private Equity and Venture Capital.

Patty Laushman, MA – Interim Staff

Past CEO of the Uptime group, she now calls herself a “cashed out entrepreneur”, Patty is intimate with the inner workings of start-up operations and knows the path from zero to exit.

Nicole Gravagna, MS, PhD – Director of Operations

Just like the human brain strengthens useful neural connections and removes extraneous ones, Nicole is constantly developing new Standard Operating Procedures to keep RVC running smoothly as it grows.

Stacy Gregg, MA – Communications Manager

With two advanced degrees in education, Stacy is well-suited to managing the constant stream of three-way communications at RVC.

Rebecca Wiedemer, MBA – Events Manager

Senior Financial Analyst at Standard and Poor’s by day and master of Event Management by night. Rebecca is responsible for the high quality of our monthly Pitch Event these days.

Mimi Zheng – Analyst Intern

Soon-to-be-graduate of Metro State University, Mimi is involved with Analysis at RVC this year. She’s taking a deeper look at operations, revenue, and communications to make RVC a sustainable non-profit for Colorado.

 

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Writing Venture Capital for Dummies

We have a confession. We’ve been moonlighting. Peter and Nicole are writing Venture Capital for Dummies with John Wiley & Sons, Inc. publishing company. We were excited to take on the project when Wiley approached us in the fall since we already wanted to build extensive educational curriculum around fundraising. This book will walk founders through the process of fundraising in an easy-to-grasp “for dummies” format. VC’s for Dummies will be on shelves by September 1st of this year.

 

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RVC Classes are a big hit!

Speaking of educational curriculum (see above), we have been thrilled with the quality of education and the amount of energy that arrises from each RVC Academy class. We’ve had a couple of stellar classes so far, A Good Investment Deal, Marketing and Branding, and Due Diligence. Our thought leaders bring specific expertise to the table, and the small setting allows for amazing discussion around the issues facing everyone in the room. We will try to do 2 or three of these classes every month.

We’ve had a request for a class on Anti-dilution Clauses in term sheets. These are the sticky clauses that can help early investors feel safe in their investment, but can ruin the deal for future investors if done poorly. Does anyone else want to learn about this topic? Send Nicole an email or mention your interest in the comments section at the bottom of the page.

 

 

Tim Harvey, Software & Biotechnology Consultant

Joni Gale Kripal’s idea for a Kickstarter project began with just her and a friend, looking for something they wanted and couldn’t find on the market – an iPad attachment with practical organization and the elegant design they were looking for. Joni says simply, “I made it for myself because I wanted it,” and they saw the potential in the market as well as talent within themselves to build a business. Although her project wasn’t fully funded, she considers it a positive experience and has some thoughts for anyone considering crowdfunding.

Kickstarter (funded by Index Ventures and Union Square Ventures, among others) is a way for anyone in the world to fund creative projects and is open to creators from the US and UK. Kickstarter specifically requires that all projects be creative in nature, although other platforms focus on different areas. These types of crowdfunding platforms rely on “backers” not investors, people who find these campaigns online, believe in the idea, and agree to put in cash for the project at certain levels. Based on their level of support, backers get rewards, such as the products they’re funding, or a one-of-a-kind experience. There is technically no “investment,” so the creator(s) keep 100% of their equity. This also means an entrepreneur is not likely to find mentorship or guidance going through crowdfunding.

So far, Joni and her partner had just invested sweat equity and personal money, and as they were looking to scale the business they realized they needed more cash to do so. They chose Kickstarter over other services primarily because of the “all or nothing” premise. Other platforms, like Indiegogo or RocketHub have a “keep-it-all” scenario, where an entrepreneur keeps all of the money raised, even if the campaign hasn’t met its fundraising goals. With an all-or-nothing premise, if the goal isn’t reached by the deadline (as in Joni’s situation), no money is collected from the backers. In this case, they won’t expect anything else from you, which limits your risk and sets their expectations upfront. In addition, backers may recruit others before the deadline just because they want to see the idea succeed. For these reasons, ideas tend to be either popular and hit their goal, or don’t get very far – there is little middle ground on Kickstarter. Joni’s biggest take away from her experience was market research insight and real world feedback, and she also had some more specific recommendations as well.

If you’re considering crowdfunding, the first thing to do is to back a few projects that you find interesting to get a feel for how it works. It’s a good idea to have a solid website and a multi-channel social media campaign running prior to launching your project. Keep in mind that having established users liking, tweeting, and blogging about you prior to the project can create credibility for new people finding your idea. Twitter can certainly be useful, and Pinterest could be even more important, especially if your idea is visual in nature and/or is more targeted toward females, as they are 80% of Pinterest’s user base (TechCrunch on Pinterest). Be thoughtful with the rewards that you give backers, and structure the package levels simply. Rewards that are close to the heart of your idea are likely to do well, because backers resonated with them in the first place. Decisions made on social media tend to be fast, making first impressions ever more important, so if you use video (which is a good idea) don’t be afraid to spend some money on video production. It can also be helpful to overestimate your funding needs, as fees and unexpected challenges always come up.

There are things to be careful with as well. As always, read the fine print and keep up on any changes in your business environment. A platform’s rules may change during your experience with them, as Joni’s did, so pay attention to the ones that affect your project. When the JOBS act is implemented (Forbes infographic here), it will change some things in the industry, so be aware of that as well. Fees will cut into your margins, 10-15% in Joni’s case, since Kickstarter takes 5%, Amazon Payments 3-5%, and shipping for backer’s rewards are usually included. “You have to discount to get on Kickstarter,” she says. Competitors can see your ideas out in the open, so if necessary look into filing patents or other IP protection. As always, be careful in hiring any outside professionals, as there are shady “consultants” who cold-email to offer marketing, design, or other little services than are little more than a scam. Do your diligence if you hire someone, and if the offer sounds too good to be true, it usually is.

Joni sees her Kickstarter project experience and education as a good thing and something she would do again. She doesn’t consider it a failure, but a learning experience that is part of her entrepreneurial process. It gave her a new level of market insight as well as a chance for market exposure and feedback from potential customers. In the end, Joni’s positive attitude and learning from her project means that her experience is a valuable stepping stone in building her business.

About the author:

Tim is pursuing a Master’s from CU-Boulder in Engineering Management, after a few years working with entrepreneurs following an undergrad in Cognitive Neuroscience at U. of Denver. He started his first business at age 19 and currently consults for startup companies, primarily in software and biotechnology.

 

 

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.

 

 

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

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

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

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…