Monday, May 16th, 2016 was a HUGE day for crowdfunding!
@@Entrepreneurs can now legally raise money from “the crowd” by giving everyday people a chance to own part of their business.@@ For the past several years, rewards-based crowdfunding sites like Kickstarter have prospered, allowing entrepreneurs with products that can be pre-sold, and for art, music and film projects, to raise money by giving away rewards, but no equity or ownership in their company. But now, this past Monday, the long-awaited JOBS Act equity crowdfunding law goes into effect allowing startups and small businesses to raise capital of up to $1,000,000 online through an equity crowdfunding portal.
Why is this important?
The most important factor to consider in successful crowdfunding campaigns is the ability to market the campaign and reach “the crowd” of potential supporters or investors. (THIS IS WHAT WOODSHED AGENCY SPECIALIZES IN) But before this past Monday, this meant exclusively rewards-based projects, with the greatest potential for funding success adhering to those with broad national or international appeal. Now with equity crowdfunding, small businesses such as these below have a unique opportunity to reach a local crowd through geo-targeted marketing in an economical manner, and also have the ability to get local media coverage to assist in their equity crowdfunding campaign. This combination of factors makes these small businesses a great fit for the new equity crowdfunding laws.
Here are four types of businesses that I think are going to flourish with equity crowdfunding:
1. Local investment real estate.
Real estate crowdfunding is a huge industry already. In 2015, a reported $483 million was invested (mostly by rich “accredited investors”) through real estate crowdfunding. We have found people typically understand the value of buying a house, or investing in land, so the conversations around crowdfunding are not as foreign as reward-based crowdfunding campaigns.
Everyone has thought about opening a restaurant, but very few can afford the upfront cost to get the business started. The ability to raise up to $1 million with the new equity crowdfunding law allows local foodies a chance to own a small amount of the business and fulfill their dream of restaurant ownership. Hundreds of small investors will become brand ambassadors who bring their friends and family to eat at “their restaurant.” What better way to start a restaurant than with a crowd of people excited to eat the food. I don’t think you can say that for a bank loan. :)
Equity crowdfunding creates an opportunity to expand and scale your business (and, as with the restaurant above, have hundreds of investors advertising your business to everyone they know -- for free) now cash flow concerns will be the least of your concerns.
4. Small office or retail buildings.
WARNING: This is not a sexy pick. Who doesn’t drive by a building or strip center, see all the cars parked outside, and think that someone is making a living owning that property and renting it out to others? Crowdfunding law’s bigger cousin: the Regulation A+, the Mini IPO, allows a company to raise up to $50 million for a local business. How would you market this idea? Could you imagine what could happen if the people took over all the abandoned buildings and made them profitable with fresh ideas? Being from Detroit, I see this section as a huge upside to the growing city.
So you're probably sitting there thinking about the business idea or growth plan you've been dreaming about, with your mind blown now that there might be a way to make it happen. What are your first steps? Start with your market evaluation by contacting Woodshed Agency! We can guide you through the necessary measures to get your paperwork for equity crowdfunding and then help market your campaign to get the people excited about your business.
P.S. - Some early equity crowdfunding stories:
The new rule, known as Regulation Crowdfunding, allows most private companies to advertise shares for sale to anyone, regardless of income. Individual investors can invest $2,000 to $100,000 a year in crowdfunding offerings, depending on their earnings and net worth.
The option appeals to Bhree Roumagoux, 42, and Robert Hensch, 46, a married couple in Anchorage who make a hobby of tracking early-stage technology ventures. They recently sank a five-figure sum into buying shares in Virtuix, a privately held start-up in Austin, Tex.; that is developing a virtual reality motion platform for gaming.
The company caught Mr. Hensch’s eye nearly two years ago after it raised $1.1 million on Kickstarter. He scoured tech blogs for tidbits, signed up for the company’s newsletter and followed along as executives posted updates from China about their production process.
So when Virtuix announced in March that it would crowdfund its next investment round, Mr. Hensch and Ms. Roumagoux jumped in.
Another company thinking about taking this route is Rorus, a technology start-up in Pittsburgh that makes water filters for developing countries. It has already raised nearly $300,000 from rich individuals and traditional venture capital funds, but the founders like the idea of building a larger circle of investors who act as advocates.
“We can build a community around our company. That’s an intangible that you don’t get from private fund-raising,” said Kyle Henson, 23, the company’s chief business officer. He is preparing Rorus to comply with the new securities rules, he said, if it chooses to do a crowdfunding offering.
If you are a business and you are thinking about raising capital please get in touch with us.