Crowdfunding is gaining some momentum as a potential investment vehicle for startups. As the traditional Angel Investors and Venture Capitalists have become more careful on the early stage investments and number of investments has dropped dramatically, there is a need for new methods.
But how do you actually run a crowdfunding investment round? There are no tools currently available for this so it may seem like a lot of work. And it is. This means it’s just another challenge to be solved.
The issues you have to consider and solve when running a crowdfunding round (or any investment round):
- How do I find the potential investors?
- Which regulation applies and what can I actually do?
- How do I get the investors’ attention?
- How to deal with all the required documents?
- How can I negotiate all the terms with so many investors?
- What about company valuation?
- What is Due Diligence and why do I need it?
- How on earth do I get all the papers signed by a large number (say, 90) of investors all over Europe?
- How can I securely communicate with all those potential investors without answering the same questions over and over again?
- How to take advantage of a large number of investors, after I got them?
1. How Do I Find Potential Investors?
In most cases you need to find all the interested investors yourself! You can also use some of the crowdfunding initiatives, such as GrowthOS and Vestify, to find those people, but it can take some time before these are the quickest way. You can also consider making a deal with a large bank and make a underwriting deal with them. In any case you have to keep in mind the regulative limits set by the financial authorities of your country, such as SEC, European Union and national laws.
2. Which Regulation Applies And What Can I Actually Do?
This depends where your company is based and where your investor candidates are. Regulation is largely unified with the European Union (excluding UK), USA has its own regulation as is the case with for example Japan and Australia. Due to the legal reasons and as I am not a lawyer, you should consult your lawyer if you are unsure about this.
3. How Do I Get the Investors’ Attention?
If your service or product is on the market and if you’re lucky, they’ll contact you. It’s always the best if you can get yourself and your offering visible so that the potential investors call you (and you don’t call them).
However, if you are really early stage company, or there is nothing in public yet, or if you just are not famous (yet) then you need other tools. One thing we are piloting next month is producing professional-grade “elevator pitches on video”. One of the videos is 100 seconds long and is meant to be public, including publishing it in Youtube. The other video is 5 minutes long and can contain “more confidential information”. The purpose of the videos is simply to get more attention of potential investors and get them in touch with you. We have developed a special “format” with pre-determined questions related to startups and funding to speed up the process. Both shooting the ideo and editing it is done by the professionals, ensuring high quality and nice feeling.
You should, one way or another, have your own “Show Room” with all the videos, screencasts and other material you want to use for showing what you do.
4. How To Deal With All The Required Documents?
In order to raise money you need in minimum
- Business Plan (with an excellent Executive Summary)
- Share Issue Offer, including the Term Sheet
- Shareholders’ Agreement
There are many guides on how to write a business plan so we don’t cover it here. Concerning the Offer and Term Sheet, you may want to take advantage of services such as The Funded (only for entrepreneurs) or consult your lawyer (again:-). Shareholders’ Agreement is discussed in the next chapter.
5. How Can I Negotiate All The Terms With So Many Investors?
The thing is, you don’t (negotiate with all of them). You must have such versions of the key documents such as the Shareholders’ Agreement that it is acceptable for all the parties without further negotiation. It’s “take it or leave it” kind of thing. An if it is not acceptable by the investors, they may “leave it”.
Luckily there are number of initiatives taking place in this field. There are for example already few “Standardized Shareholder’s Agreement” templated downloadable for free. You can always customize these with your own lawyer, but the key thing to keep in mind is that it has to be acceptable by both the investors and yourself.
