5 Tips For Successfully Building A Business With Crowdfunding, From Kiva’s Cofounder

When the president signed the JOBS Act into law a year and a half ago, believers like me rejoiced. This legislation includes an exciting crowdfunding exemption that will fundamentally disrupt how start-ups and small businesses raise capital in the United States.

What will change exactly? It will no longer be illegal for an entrepreneur raising start-up capital (less than $1 million) to reach out to everyone she knows–from old and new friends to social networks and beyond–and even to people she doesn’t know, to invest. It won’t matter if those investors are accredited or sophisticated, and she can have as many as she wants to contribute. (My ProFounder cofounder Dana Mauriello did a great job summarizing what the legislation means for entrepreneurs here.)

For the last decade I have been about as pro-crowdfunding as a person can be. My first company, Kiva–which provides microloans–launched in 2005, before we called it crowdfunding. After that, I founded ProFounder, a company designed to give U.S.-based small business entrepreneurs a DIY toolkit to raise investment capital from their social networks. These projects only galvanized my confidence in the potential of this space. ProFounder fought for fairer access to both capital and investment opportunities, regardless of investors’ accreditation or sophistication, and I believe we helped push the crowdfunding conversation forward (plus some other Lean In-esque conversations about parenthood/work), including helping to influence the design and passage of the JOBS Act. In the end, ProFounder was too early, and the regulations of a pre-JOBS Act world made it necessary for us to wind things down. But I’m still a believer.

However, we haven’t gotten to see the JOBS Act, or the crowdfunding exemption, in full force quite yet.

The exemption can’t be used until the SEC interprets the legislation and creates rules that will allow people to actually take advantage of all the good stuff the JOBS Act offers. The SEC has yet to finish its rule-making process, so we’ve been holding our breath under the restrictions of virtually the same legal environment that we’ve had for years. (Exceptions include no-action letters to AngelList and FundersClub in March).

Every once in a while there’s chatter about what sort of progress the SEC is making; hopefully the meeting today will result in some progress, which would offer start-ups broader access to capital.

I’m not holding my breath or making predictions about when decisions will be made about the other rules relevant to the JOBS Act, but I’m optimistic we’re getting closer. Too often, as I’ve searched for news of progress within the SEC on this topic, I have found myself with the lyrics to “Waiting on the World to Change” stuck in my brain. Unfortunate for many reasons. Please, SEC, I need to get this song out of my head.

So, if anyone out there feels like I do–optimistic but impatient, and frustrated but not surprised at this long wait–then I hope this note serves as an encouragement and a reminder not to drift off-course while we all, well, wait for the world to change.

In the meantime, let’s remind ourselves what we’re waiting for. This will be an important moment in time, especially for crowdfunding platform entrepreneurs and others invested (literally and otherwise) in this space. Let’s remind ourselves what works, and what will win, in crowdfunding.

1. Simplicity

Ask yourself everyday: Is our product getting more complicated? Don’t let it.

Why might this happen?

  • You’re bored waiting for the SEC. You start to tweak things that don’t need to be tweaked.
  • You want to differentiate from all of the other platforms you see cropping up so you add bells and whistles where they’re not needed.
  • You’re serving only very well-informed early adopters, or only accredited or sophisticated investors, even though you plan to serve everyone when the JOBS Act stuff is finalized. You start to listen too much to them, instead of the people you will eventually serve.
  • Investment-based products are inherently complicated. As your team gets smarter about this and more friendly with all of those devils in the details, your vision can get blurry. It’s easy to feel a need to respond to all of this complexity through your product. This isn’t always the case.
  • Your users are confused, and you want to explain everything to them. At ProFounder, we saw there was still a huge learning curve for the average new, unaccredited, unsophisticated investor; perhaps even more surprising, there was just as steep of a learning curve for entrepreneurs who hadn’t raised investment funding before. But don’t just dump information on them. Don’t just provide a nice link to the SEC website or the body text of the JOBS Act. You’re the translator.

Simple products win over complicated ones, period.

2. Scope

With few exceptions, even crowdfunding platforms that seem to be tools for anyone to fund anything are focused. Kickstarter showcases a broad array of projects, yes, but from day one they carefully curated what showed up on the site; they have successfully created a culture and a strong brand that attracts a particular type of “project or idea.”

I applaud the new platforms that aren’t afraid to have a specific focus, like Microryza, a place to fund and follow scientific research, and Upstart, where individuals, not businesses, can raise capital in exchange for a small (and limited) share of their future income.

Focus is important in any company, but especially in a marketplace, survival depends on high transaction volume, which requires a density of supply and demand. A sharp focus will attract the right people to your community first and fastest.

3. Spend

The JOBS Act will let companies raise up to $1 million from as many investors as they choose. This means, technically, that a million people could contribute $1 each, or, one person could put in the full $1 million. Both of these scenarios are unlikely. I believe somewhere in the middle is best. So what is the ideal amount for each investor to contribute?

That will depend on a lot of things: the amount being raised, the type of venture, the goals of the raise, the milestones promised, the investment terms, the non-financial returns offered in addition to those terms, etc.–and not to be overlooked, the amount that fits best for each contributor.

When we started Kiva in 2005 we heard over and over again that “no one would want to lend money for free.” This feedback came from many smart people who believed a crucial motivator for the average donor was a tax deduction, and for an investor, potential (or guaranteed if you could get it) financial return. Why would anyone part with their money if neither of these financial incentives existed?

It turns out there were a whole lot of people who had $25 (not $250 or $2,500, just $25) to lend at 0% in exchange for the knowledge they were helping a hardworking entrepreneur and the high probability that they’d get their money back. And when a total loan need is just a few hundred dollars, $25 feels like a pretty important contribution.

We wanted ProFounder to serve the average small business and start-ups of all kinds at their earliest stages. The average raise was around $30,000. The average contribution per investor was around $1,500, but sometimes people invested $100, and some put in $10,000. Overall though, that ratio held.

Entrepreneurs will need to understand their investors, and ask for contributions that are reasonable and meaningful relative to the size of the overall raise. The crowdfunding platforms that help their users get this equation right (total raise = appropriate financial contribution x ideal # of contributors) won’t be left with a frustrated community, wondering why it’s taking so long for $1 million to be raised, $1 at a time.

4. Story

Stories take us on a journey, they teach us, they draw us in, move us, inspire us–often so much so that we feel driven to act. My favorite platforms have made this an art form, and have designed their products in a way that empowers every user to share their own story in the process too. Not surprisingly, the crowdfunding initiatives centered around the importance of story are also the ones that have inspired the most people to contribute their funds and participate, to coauthor the next chapter of a story.

Investors do not just contribute because the numbers look good. They do not make decisions solely based on financial motivations. They act when they are moved to act, and a compelling story about the origins, progress, and future of an entrepreneurial endeavor is one of the most powerful tools that I know of to inspire people to get involved.

5. Shared Value

I believe the most inspiring, compelling projects and ventures are the ones that recognize not only the growing demand for blended value, where financial return and social impact (broadly speaking) matter, but those that take advantage of the shift in our economy towards shared value as well.

At the Collaborative Fund, where I currently work, we invest in and champion the visionary start-ups already operating with this mindset, from Taskrabbit to Skillshare to Getable and many more. We see everyday how the world’s appetite to is shifting toward doing more with less, and prioritizing the creation of collaborative access–via renting, lending, trading, sharing, etc.–instead of an insistence on traditional ownership.

Just Hold On…

As more and more companies seek to use crowdfunding to get the capital they need to move forward, my hope is that they offer–and ask for!–more than just a financial exchange, from their backers/investors/lenders, from their customers, and from their communities as a whole.

Hang in there, team crowdfunding. We may not have to wait for the world to change for much longer. And if we do, I’ll just keep telling myself to hold on for one more day (such better lyrics to have stuck in your head), because I believe it will be worth the wait.

SOURCE: Fast CoExist