By Samson Williams
- Investment crowdfunding enables you to set terms on your terms
- 60% of investors in crowdfunding campaign are already accredited
- Crowdfunding platforms make managing your cap-table and communicating to investors easier
- Increase in sales revenue while running your investment crowdfunding campaign
- Increase in the lifetime value of your customers, as Investomers
Any discussion about raising money should start off with the obvious. Raising money is hard AF and sucks. Too, there is no guaranteed way to raise capital for your business or startup. That said, if you are considering offering your Startup baby to Sharks for capital, here are a few things you should know about why Investment Crowdfunding should be your first option.
1. Setting The Terms
So, you are looking to raise capital? But on whose terms? Yours? Or Sharks? The primary benefit of crowdfunding is that it enables you to set your terms and then share them openly with as many Sharks, Angels, Institutional and Retail investors as you can find. There are numerous other strategic reasons why you want to set your own terms. Chief among those reasons is to prevent you from becoming so diluted that you can be fired from your own business. When accepting VC money, the majority of Founders find themselves no longer working at the company they Founded within 18 months of accepting VC funding. Keeping in mind that VCs only write checks for less than 1% of all businesses, doesn’t it make sense for you to position yourself in a position to potentially accept all investor’s money, not just Sharks?
2. Sharks follow the money
In 2019 there was $105M raised via RegCF. In 2020, during the pandemic $214M was raised via RegCF. Oh, RegCF stands for Regulation Crowdfunding, where businesses can raise up to $5M. Please keep in mind that the average raise for RegCF was $266K in 2020, with the average investment of $653.00. Why these data points are important is because the majority of investors in RegCF deals have historically been Accredited Investors, aka Sharks and Angels. So, while Sharks may insist that “dumb money” from Retail Investors ruins a captable, as the old adage goes, “Listen to what they do, not what they say.” Sharks love investing in crowdfunding campaigns because when a business already has 1000 or 5000 Investomers in their deal, it reduces the Shark's risk, while positioning them to lead future rounds.
Too, it should be noted that from Mr. Wonderful himself, to Arlan Hamilton from Backstage Capital, Sharks themselves are turning to crowdfunding to raise money for…themselves. Again, one of those, don’t listen to what they’re saying but what they’re doing. What are Sharks doing? Following the schools of Retail Investors into crowdfunding campaigns, that’s what.
3. Managing your Captable & Investor communications
One of the biggest myths VCs like to spread is that crowdfunding messes up a business’ captable. Which is funny, because the entire point of VCs is to take an early-stage business public…after they’ve gobbled up as much $0.10 cent shares of it as possible. Taking a Startup public means having hundreds of thousands if not millions of Retail Investors as shareholders in that business. So, when you hear, “Have 20,000 Investomers on your captable is a bad thing.” Just be aware of who is saying it and why.
Too, with modern technology, spreadsheets and PowerBI powered analytic tools, reporting and dashboarding is automated to a click of a button. Its not that crowdfunding messes up a business’ captable, rather antiquated operational practices by VCs make leveraging modern-day tracking, analytics, reporting and communication tools a challenge. To put differently, yes, the manual tracking of investors on sticky notes and on paper documents is hard AF. Go digital, go crowdfunding.
4. Sales Revenue
Turns out the best time to SELL your business’ goods, products or services is when you are raising money to grow that business. Hence why, when you are executing your investment crowdfunding campaign what you are in fact doing is giving potential and return customers options:
Option A – Buy Something!
Option B – Invest Something!
Option C – Buy something and invest something!
Option D – Ask a friend, “Hey, have you ever tried Susan’s donuts? Are they any good? She is trying to raise money to open a chain of donut shops. Do you think that would be a good investment?
Funny thing is Option D happens more often than you think. Even if you are not selling donuts, which are universally loved, and instead selling say a SaaS product, the conversation generally goes the same way. The one exception is that instead of delicious donuts as part of the due diligence, your potential customers download, try, or buy your software. Now we cannot exactly say what the downside is for either onboarding a new user (download) or generating revenue from a sales vs receiving some amount of money in the form of an investment. Cause once you say it out loud, you’re like, “Oh. There is no downside.” Exactly.
Generally speaking, any business with a good, product or service should see a bump in sales during their crowdfunding campaign. Why? Because at the end of the day you are not ONLY selling the opportunity to invest in the business that customers love so much that they’re already customers of…but also the ability to buy the goods, products, services that actually make your business profitable. If I have not said it before, lets reiterate, “Raised money isn’t earned, you’ve got to pay it back.” However, sales revenue is sales revenue and I have never heard any Founder complaining that while advertising to raise $500k via RegCF they inadvertently sold $1.5M worth of inventory.
See what we just did there? We just highlighted the real reason why investment crowdfunding brings more to the table than VCs. The real beauty of crowdfunding isn’t just to test your go-to-market strategy and raise investment capital (there’s at least 8 other reasons but we are only going to list those two) but also to SELL your business’ goods, products, and services; thereby generating a 10x return on you’re “crowdfunding” marketing investment. As ultimately, in a crowdfunding campaign, you’re not just marketing a security but also the products you sell to generate sweet, sweet revenue.
5. Lifetime Value of Investomers
You probably already know what the Lifetime Value (LTV) of one of your customers is. But for sake of others not as familiar a quick refresher on Customer Lifetime Value (CLV):
- Customer lifetime value is the total worth to a business of a customer over the whole period of their relationship. It's an important metric as it costs less to keep existing customers than it does to acquire new ones, so increasing the value of your existing customers is a great way to drive growth.
- The simplest formula for measuring customer lifetime value is the average order total multiplied by the average number of purchases in a year multiplied by average retention time in years. This provides the average lifetime value of a customer based on existing data.
- For example, if a new customer costs $50 to acquire (COCA, or cost of customer acquisition), and their lifetime value is $60, then the customer is judged to be profitable, and acquisition of additional similar customers is acceptable. Additionally, CLV is used to calculate customer equity.
Generally speaking, no sane person should be thinking about or calculating either LTV or Customer Acquisition Cost. However, as an entrepreneur these data points will make or break your business. How? The simplest way is to consider how much you’ll spend on marketing to reach enough eyeballs so that you can start to calculate your COCA or how much your COCA is due to the marketing required.
But before we get there (you can retain economist super nerd George Pullen, email@example.com to help you calculate your COCA) we come back to the question at hand. What is the lifetime value of an Investomer? Actually, we might have to first define “Investomer.”
Investomer = Customer who invest in your business.
An Investomer is any customer who invest in your business. Granted before RegCF became legal in 2016 Investomers as a thing did not exist. Yes, whales, sharks, angels, and other fairy creatures of finance may have invested into business but when a Shark invest $10M, they’re only 1 shark and half of that $10M goes directly into marketing. That’s not a joke or hyperbole. 50% of VC money goes to Facebook and Google ads. You can read about it here: https://techstartups.com/2019/10/26/startups-spend-almost-50-percent-investments-facebook-google-ads/ Why does 50% of VC funding go to advertising? Cause Sharks are not actually your customers and if they are they’re 1 customer. Turns out any business, especially your business, needs more than 1 customer to survive and definitely more than 1 to be profitable.
That statement was so mindboggling that it sorta got us off track, as your brain is like, “I gave up all that equity for marketing? TF?!” Yes, yes you did. But don’t. Instead, as you consider investment crowdfunding and the opportunities it presents keep this in mind. When a Customer become an Investomer, their Lifetime Value is an exponent because an Investomers are more likely to tell other Customers AND investors about your business’ goods, products, services AND RegCF offering.
We don’t actually know what the Lifetime Value of an Investomer is. We’re still collecting data on that but we’re pretty sure that instead of giving up whatever equity you’re about to for marketing (remember 50% of VC funding is spent on marketing trying to get you customers) skip that diluting strategy and engage your Customers as potential and actual investors into your business via RegCF.
Unless you have a rich auntie, who is going to write you a check because they love you, you make want to consider Regulation Crowdfunding (aka RegCF) as a funding option for your business or startup. Keeping in mind that even if your rich auntie writes you a $5M check, congrats! Your auntie not only wants a 10,000x return but you’re going to spend the bulk of that investment trying to get Customers. Kinda crazy after you say it out loud, right? Well, as we wrap this up one last thing to blow your mind.
Customers have more money than VCs.
Before you start to a profanity laced tirade because no one has ever said that obvious statement to you take a breath and realize, you should always be wary when Sharks write the rules. Sharks know customers have more money than they do. A as a matter-of-fact Sharks are keenly aware that their money comes from two sources:
- Retail Investors who invest in IPOs
Guess who Sharks use to access customer’s money? You. You my fearless entrepreneur are just a middleman between a Shark and a $20k check that 10 years later turns into a $100M exist.
In closing and as a reminder, Entrepreneurship is so hard I only recommend it to my enemies. If you can get a 9 to 5 that enables you to live your life to its maximum potential, I strongly encourage you to do that. That, and raised money isn’t earned, you’ve got to pay it back. Oh, and finding that raised money, raising that investment capital is even harder than being an entrepreneur. So, you best be prepared to be a workhorse before you can ever begin to dream about being a unicorn. That aside, weigh all your options. Part of weighing all your options is knowing what they are. For the record when it comes to investment capital there are really only 4: bank loan, Sharks, Angels, crowdfunding. They all require the same information and pitch decks; though the process does differ a bit. For one, the bank is going to tell you that they’ll lend you $1M if you have $1M to begin with and then charge you 14% to borrow your own money. That’s crazy right? Don’t fret. Entrepreneurship isn’t for the faint of heart but as least now you know what your options are and as GI Joe says, “Knowing is half the battle.”
Good luck! And may the odds and the algorithms forever be in your favor.
About the Author
Samson Williams is a serial entrepreneur and accidental investor. When not starting business with his enemies (“Entrepreneurship is hard. I only recommend it to my enemies.”), Samson is an Adjunct Professor at Columbia University in NYC and University of New Hampshire School of Law where he teaches on blockchain, cryptocurrencies and the Space Economy. Samson is also President of the Crowdfunding Professional Association and investor into two investment crowdfunding platforms Brite.us - Crowdfunding Done Brite and GoingPublic.com. For more information on Samson visit www.SamsonWilliams.com and follow him on social @HustleFundBaby.
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