This is the title of an article just published in The New York Law Journal (I’m one of the authors). It’s a cautionary tale about fundraising. It gives relevant details about the JOBS act and how that applies to fundraising – and it’s not the panacea many are mistakenly making it out to be.
It’s also about losing focus on the prize – moving your business forward – while distracted by the dazzle – the allure or promise of raising capital any way you can. The article details what’s legal and not legal in the world of raising money for your company. I hope you use it as a guide to do your fundraising the correct way so you can avoid the fate and outcomes (jail time?) of this unfortunate company.
If I build it they will come.
This is the title of the first chapter in my book, “Lies Startups Tell Themselves to Avoid Marketing.” The chapter basically deals with the idea that if you aren’t sitting around waiting for the latest “thing” (fashion, technology, gismo, app etc) to walk through your door and land in your lap, then chances are about 100% that no one else is either.
Here’s a variation on this theme that’s dedicated to fundraising and a key aspect to fundraising that a lot of entrepreneurs and startup businesses fail to recognize. Or if they recognize it, the concept is so foreign to them that they can’t even get their minds around it. And that’s the issue of scaling. When you build your business and business plan, if you are planning to raise money, then building it is not enough. The money won’t come. Why not? Because most startups and entrepreneurs don’t recognize the value of scaling their company –the value to them but more importantly the value to the investor.
Often the first question an investor will ask is ‘how fast can I get a return on my investment?’ And they don’t mean dollar-for-dollar. They mean $10 for every dollar. If you don’t show them plans to scale the company, then you can’t answer that question. If you can’t give a map (or better yet a spread sheet showing the exact details like timeframe, expenses, projections to profitability, personnel and equipment being brought on), then you’re probably in a lot of trouble. If I’m investing in your company, why would I want to give you money unless I’m going to see the company grow (“scale”) and give me multiple times back my investment. If you’re a one or two person shop determined to keep it that way, then that just isn’t going to happen. Those kind of companies are called “lifestyle” companies, where the entrepreneur is making a success just for themselves. Big difference (see http://thinktraffic.net/startup-vs-lifestyle-business) . You may get investors, but it’s that much more difficult. You are more likely going to be eligible for a bank loan than investment.
Some issues around scaling, such as when is the right time to scale and do you scale out or deep are discussed by Geri Stengel in her Ventureneer blog (http://ventureneer.com/vblog/business-plan-nonprofit-growth-planning-scale). Don’t let the fact that Geri deals with non-profits scare you off – these tips work for profit companies as well. Other tips can be found on CNN’s blog “Pop Quiz: Is Your Business Scalable?” (http://www.inc.com/karl-and-bill/pop-quiz-is-your-business-scalable.html) .
Important tip to remember: “If I scale it, they WILL come.”
Sandra Holtzman teaches CEO 035: Licensing.
She is the author of Lies Startups Tell Themselves to Avoid Marketing.
Crowd Funding has been around for a while. In very simple terms, you sign up with a crowd funder (such as Kickstarter), list how much money you want to raise for your project, company, etc. and then use social networking to get people you know and others to contribute. This is in addition to people who will visit the site looking for interesting projects. If you reach your goal you get your money. If you don’t, you don’t.
The good news about crowd funding for your business is that you don’t have to give up a percentage of your business to the contributors – when you use other fundraising methods, you always have to give up a percentage of your business as well as a percentage of control. Because of the good will involved with those who make crowd funding contributions, many people who are raising money offer something in return (like a product sample, a coupon, admission to a film screening if you’re making a film, etc.).
It’s a great process if you succeed. In order to succeed, however, you may have to give up huge chunks of time you would normally be devoting to your company.
The bad news is that crowd funding is not regulated officially so there’s ample room for fraud. BE CAREFUL WHO YOU DEAL WITH. If you decide to investigate and use this route, make sure you go with a known name like Kickstarter.
This link will provide a good primer on crowd funding and other information that you may find of help.
Sandra Holtzman teaches CEO 035: Licensing.