Two of the biggest challenges entrepreneurs face are raising enough capital and proving market demand. In fact, 42 percent of small businesses fail due to lack of market demand and 29 percent fail due to insufficient funding. Many turn to personal funds, bank loans, and borrowing money from friends and family to support their business endeavors. These methods provide a small cushion for a budding business. But they do not provide a framework for sustainable growth, nor do they prove market value.
What if there were a way to secure significant funding while simultaneously proving the need for your product?
Equity crowdfunding platforms like Localstake and Wunderfund do precisely that. Through these platforms, entrepreneurs can connect to accredited investors and raise significant capital for their businesses. As local developers build platforms to bring investment crowdfunding online, Charlotte entrepreneurs can raise the money they need and prove market demand.
Investment Crowdfunding as a Business Strategy
Before the Jobs Act passed in 2012, the Securities Exchange Act of 1934 dictated that only accredited investors could legally invest in private placements. Only 10 percent of the population fit the definition of an accredited investor. And only 10 percent of accredited investors actually invested in private companies. This created a stifling and discouraging environment for entrepreneurs as they struggled to fund their ideas.
After the economic calamity of 2008, Congress realized that tightened bank credit was causing small businesses to virtually evaporate. As a response to the country’s financial turmoil and a desire to reignite the American Dream, Congress passed the Jobs Act of 2012. This allowed both accredited and non-accredited investors to legally fund private companies.
Another significant change came in 2015 with the introduction of Regulation Crowdfunding, a set of rules for entrepreneurs to follow when crowdfunding. Chief among these regulations are the following:
- Companies may raise a total of $1,070,000 through crowdfunding during a 12-month period.
- Individual investors may only contribute a limited amount during a 12-month period.
- Full disclosure of information filed with the Commission and to the investors and intermediary facilitating the transactions.
- All transactions must be performed online through an SEC-registered intermediary, either through a broker-dealer or funding portal.
Taking Advantage of Crowdfunding
In North Carolina, the amount individuals can invest is doubled thanks to the PACES Act, which was unanimously passed on April 1, 2017. Currently, LogicBay’s FundingStack™ is the only intrastate funding portal in North Carolina that’s authorized by the NC Secretary of State under the PACES Act. Through this portal, entrepreneurs can build issuer profiles and easily connect to investors.
Despite easier access to investors through authorized platforms, only 2 percent of small business owners used crowdfunding as a means to raise capital in 2018. John Panaccione, president and CEO of LogicBay, urges entrepreneurs to see the value in investment crowdfunding beyond raising capital.
“It really is not an alternative way of raising money,” Panaccione explains. “[Entrepreneurs] should view it as a business strategy itself. Investment crowdfunding — if done right — is the only way of raising money where you’re proving market value at the same time because the users of the product are also the main source of investment.”
Starting Out with Investment Crowdfunding
Investment crowdfunding platforms like FundingStack™, LocalStake, and Wunderfund make participation easy for both entrepreneurs and investors. Different from “pledge crowdfunding” platforms like Kickstarter and IndieGoGo, these are specifically designed to support securities-based investments.
“Crowdfunding is democratizing access of capital to startups and we’re able to bring community along in the process,” says William McGuire, senior crowdfunding officer at CrowdfundNC. Partnering with investment platform LocalStake, CrowdfundNC helps startups build comprehensive issuer profiles to match them to potential investors.
“Imagine a social media page profile, but with a more robust pitch deck style,” McGuire explains. In order to build an issuer profile, however, entrepreneurs must first go through the proper legal channels to qualify for a capital raise using investment crowdfunding.
How to Do It
First, issuers must develop a bulletproof business plan (what McGuire refers to as a “pitch deck on steroids”). This step is the first impression hopeful entrepreneurs will make on potential investors. Then, startups need an attorney to create a securities agreement and an escrow agreement. A disclosure document lists all disclaimers and other legal requirements set forth by the Jobs Act and NC PACES Act. Next, an issuer can use a platform to raise capital through investment crowdfunding.
Simply building a complete issuer profile isn’t enough to ensure your startup survives for the long term. That’s where organizations like Wunderfund, INVESTinNC, and CrowdfundNC offer incredible value. Not only do they provide assistance with navigating the tumultuous legal waters of investment crowdfunding, but they are able to help entrepreneurs build successful marketing plans for their securities. This helps prove market demand while providing investors with a realistic timeframe for when they can expect a return on their investment.
“Most entrepreneurs spend months if not years working on their pitch deck,” Panaccione says. “They go around to peer-leading meetings; they’re encouraged to be an entrepreneur; they go to banks and don’t get loans; they go to potential investors and get feedback but no money, and that’s kind of the status quo. After they realize they blew through a lot of their own cash, the big letdown occurs. But what if on day one, somebody started the process of putting together a business plan with their eye on investment crowdfunding? What if they started that, it took them 60 days, but now they have a team helping them and they have a great business plan? Now on day 60, they have a great business plan, can put their business out and get approved for investment crowdfunding, and have one year to prove and test the market.”
It’s this careful strategizing that primes a business for success. But spreading awareness about your business must attract attention from desirable investors. Sometimes what an entrepreneur likes most about their company, and what an investor wants to support, are two different things. Wunderfund understands this disconnect. They work hard to help small business owners identify their value proposition and format it in a way that piques an investor’s interest.
“When it comes to funding a company, it’s hard to get the word out,” says Jonathan Whaley, compliance officer at Wunderfund. “At Wunderfund, our backgrounds are largely in branding. We use this background to inform entrepreneurs on how to approach investors.”
With a robust and marketable issuer profile, entrepreneurs can more easily reach the investors that can help them achieve success. As more investors buy into the idea, product demand becomes easier to prove, effectively solving the top two challenges contributing to startup failure rates.
Crowdfunding Resources for Charlotte Entrepreneurs
Wunderfund, INVESTinNC, and CrowdfundNC provide resources to help educate and get entrepreneurs involved with investment crowdfunding platforms. Through their services, small business owners can create thorough issuer profiles compliant with NC PACES and Regulation Crowdfunding legislation. This help to connect you with the appropriate investors and establish the foundation for company success.
This summer, Charlotte entrepreneurs can attend a panelist event all about investment crowdfunding. It will cover everything from legal requirements and proper filings to the significance of issuer profiles and marketing campaigns. This event is a must for Queen City startups looking to bolster their businesses.