By SBE Council at 3 December, 2012, 3:28 pm
Chance Barnett, Co-Founder & CEO of Crowdfunder, shares his wisdom and strategies for successful crowdfunding. In this Q&A, he explains how crowd investing will revolutionize the environment for entrepreneurs, and helps small business owners understand the mindset of investors, and how to prepare for crowd investing.
When crowd investing hits the marketplace sometime in 2013, online platforms will allow entrepreneurs and small business owners to access potential investors from anywhere in the country. Although the Securities and Exchange Commission (SEC) is still writing the rules that will govern crowd investing, entrepreneurs and small business owners have an opportunity to learn more about funding from the crowd and what they can do now to prepare for the new online platforms. (Join us for a “How to Crowdfund Your Business” webinar on December 4, 1:00 p.m. EST. For more information or to register, click here.)
Chance Barnett, Co-Founder & CEO of Crowdfunder, has joined us for Business Success Strategies to provide important insights about crowdfunding, and strategies for raising funds via online platforms.
Chance is the Co-Founder & CEO of Crowdfunder – the social network and business crowdfunding platform for small businesses, social enterprises and startups. He is a successful internet entrepreneur who has started and bootstrapped several companies from inception to over $58,000,000 in revenues over the last 13 years. His unique skill set brings together both hands-on technical knowledge and high growth marketing/customer acquisition experience, as demonstrated by having built technology and grown businesses that have acquired over 40,000,000 email subscribers online.
Chance has played an early and significant role in the JOBS Act legislation and its regulatory implementation – engaging across Congress, the White House and the SEC. Chance is a graduate of University of California, Santa Cruz with a degree in Economics. He lives in Venice, California where he is an Advisor or Board Member to a select group of socially conscious businesses and early stage startups, and surfs when the waves are good. He joins SBE Council President & CEO Karen Kerrigan for this Business Success Strategies Q&A.
Q&A with Chance Barnett
KERRIGAN: You are a successful entrepreneur, tech-savvy marketer and systems thinker – did these qualities and attributes play a role in drawing you into the crowdfunding field? What attracted you to this space?
BARNETT: I was drawn to the crowdfunding space for three main reasons: to help democratize access to capital, to educate entrepreneurs and save them time, and to accelerate local investing and impact investing. Here’s what I mean by each one.
Democratize Access To Capital: If you don’t live in Silicon Valley, if you aren’t the hippest new tech company, or you aren’t someone who has a network of wealthy private investors then fundraising can be hard. To make matters worse, small and large banks largely aren’t lending to companies in need of capital.
Crowdfund investing has the power to create a more democratic system and market for any and all promising and deserving entrepreneurs to get in front of a large pool of potential investors and get funded. I believe that there is a shift in finance that will take place, brought on by the JOBS Act, of which we were significant participants with leadership among Congress, the White House and the SEC. This shift will create a gradual but meaningful movement of dollars from Wall St. to Main St.
While 50% of the U.S. economy is made up of small businesses, these companies get a tiny fraction of the capital that is invested each year. Crowdfunding will help in this shift.
Educate Entrepreneurs And Save Them Time: Being a successful entrepreneur often has little to do with being an effective fundraiser. Most entrepreneurs who get their own business started find that while they’re great at executing inside their businesses, they fall flat when it comes to closing investment. Fundraising is it’s own skill. Many entrepreneurs don’t know how to speak to investors, don’t know how to structure a deal. As an Advisor to early stage businesses, and an angel investor, I believe that crowdfunding can and will save entrepreneurs precious time in the fundraising process. This will happen not only through the structured process and standardization that crowdfunding can bring to fundraising, but through education resources that will be available for first time fundraisers to help them learn and succeed.
Accelerate Local Investing and Impact Investing: Because of crowdfunding and its inherent social nature taking place among friends in online social networks, more and more people will soon have the opportunity to find and invest their money in local small businesses- such as a friend’s businesses down the street. I believe that local economies will begin to thrive because of this, for several reasons. Most notably, because a dollar invested in a smaller locally owned business circulates many more times to other local businesses before it leaves the community. Where as, on the other hand, a dollar spent at a large multi-national chain leaves the local area more rapidly and has less local impact.
I also believe strongly that once investing can be put in the hands of more people, that there will be more businesses funded that prioritize social impact, or social good, alongside their profit goals. These are generally called Social Enterprises – for profit companies that have specific profit goals as well as social impact goals like feeding the hungry or being more environmentally conscious.
KERRIGAN: What are the key factors that make a crowdfunding campaign attractive to contributors or “investors?”
BARNETT: It’s really exciting what’s about to happen with crowdfunding now that there’s the potential for actual investment and ownership to play a role. In the past, before the JOBS Act, sites like Kickstarter could only collect contributions for projects in return for a reward like a copy of a product. On Crowdfunder, people help fund a business and will be able to become investors and owners in a company, beyond being just a contributor.
With that, there are three key factors that lead to a successful crowdfunding campaign:
One, social capital – this is the sum and value of all the relationships that exist around you and your company. That includes your Management Team, Advisors, Investors, and any people who decide to support you with written endorsements. Social Capital is an extremely powerful element to make sure you build around your campaign, as the “social proof” that comes from real people who an investor or contributor might already know showing their support for you is one of the most fool-proof points of validation you can have.
Two, pitch and plan – any good pitch, to investors or contributors, has to have both a strong pitch that engages them and catches their attention… as well as a credible plan to fulfill on the commitments made in exchange for funding.
A helpful way to think of this is that you have to talk to the “two brains” inside each potential investors head: on one hand, you have to win over the more “rational” brain that wants to see value or return for their funding. It’s your plan and the value you’re going to bring to them that sells the deal. Thus, your plan has to be credible. On the other hand, you also have to win over the more “emotional” brain. This brain wants to feel good and has it’s own personal reasons for making a decision. It’s the story that you create and tell around your campaign that stimulates this brain.
When you can talk to, stimulate and satisfy both brains, dollars begin to flow.
And, three, investment return – this element is new and unique to the new investment crowdfunding that we’re doing at crowdfunder. If you are looking to raise investment dollars, as either equity or debt, then you need to show investors how you’re ultimately going to return profits to them. Depending on the kind of business you have, that return takes a different form. If you have a steady and stable business with existing revenues, it might make the most sense to offer your investors debt. Here you will give them a return through regular debt repayments for a specified period of time, or up to a pre-determined amount of return above the original loan amount.
If you have a potential high growth company that might require an initial incubation period prior to revenues, yet has the potential to scale and be valued by potential acquirers at many times it’s annual revenues, then equity funding might be a fit.
KERRIGAN: How will entrepreneurs and small business owners need to adjust their thinking and how they do business and communicate if they want to raise capital via online platforms?
BARNETT: Entrepreneurs are going to want to develop three critical areas.
First, a deeper level of fluency and mastery around personal communication. This really boils down to understanding how to pitch yourself and your company to investors, and the core of that is being able to tell a powerful story with a compelling narrative about your business that is credible. Most people fear public speaking, let alone creating a pitch where they directly ask investors for thousands of dollars. Starting with your own personal communication skills is the best place to start.
Second, investors don’t invest in ideas. They invest in people. With that, you have to build some form of history and trust with investors before you will earn their dollars. Inexperienced entrepreneurs try and “sell” investors and ask them for money right out of the gate. Experienced entrepreneurs know how to lay out a plan over several weeks and months that will demonstrate how and why they will earn the investors confidence, and thus their money.
Finally, entrepreneurs need to learn to speak the language that investors speak. If you take the time to sit and listen to two investors talk to each other about an investment opportunity, they describe a business in a completely different way than how an entrepreneur would describe a business. They can size a business up in just 2-3 minutes. That’s because investors talk and think through a specific formula for a business. This formula includes the overall market potential, the management team’s experience, the current and future cash flow and underlying economics, and the ultimate end game or exit strategy for the company and investors.
A quick-start resource to jumpstart your education in this area is a terrific book that a friend of mine Oren Klaff wrote. It’s called “Pitch Anything.” Oren has closed over $400 million as a hired gun for companies and funds looking to raise money. He knows what really works from real world experience.
KERRIGAN: How can small business owners best prepare for crowd investing?
The best way to get started is to simply get started now. You can currently sign up for a crowdfunding site like ours at Crowdfunder and create your personal and company profile. Knowing from my earlier points about fundraising that you can’t just ask investors for money without any trust built, you need to start building a story of traction and progress around your company today, in order to be successful tomorrow.
To do this, start by doing the following:
1. Create a Company Profile on a crowdfunding site like Crowdfunder now.
2. Develop your plan for the use of capital you’re seeking, and how exactly you will use that to grow your business, and then create a return for your investors.
3. Build up the “social capital” around your company by adding in your Team, Advisors, other Investors and build a network of Followers.
4. Post regular updates about your progress, at least monthly.
5. Set clear goals and milestones that you communicate through your updates, and then meet and exceed those goals. This lets potential investors follow along and see your progress. This also separates you from many of the others out there who don’t have a plan, don’t set clear goals focused on the right things, and don’t meet those goals.
6. Prepare your “deal.” If you’ve never raised money before, try and find a mentor who has raised money before, and pick his or her brain. Also, you’ll need legal guidance on exactly how to structure your deal and terms, but there are also free documents to guide you out there on sites like DocStoc.com, showing you actual documents used to raise money.
7. Be ready for when crowdfund investing goes live by having all of the above done, and you’ll be able to have a head start and greatly increase your chances of success.
KERRIGAN: How will crowdfunding and crowd investing shape entrepreneurship and the entrepreneurial ecosystem in the U.S., if not across the globe?
BARNETT: Crowd investing can radically transform the environment not only for small business to have more access to capital, but can and will help local economies thrive through growing local investment. Ultimately, I think a larger pool of people will become engaged in contributing and investing in their local community.
Beyond that, we have opened up http://crowdfunder.mx in Mexico with key partners there, bringing crowd investing to Mexico for the first time. This is our first international expansion, and could spell a much larger opportunity for global funding opportunities, and broader economic development that link the U.S. and other countries for a more stable climate on all levels.
Where I think we’ll see the most transformative effects of crowdfunding and investing globally will be in Social Enterprise – for profit companies that also have social impact goals, along side their profit goals.
KERRIGAN: What words of advice do you have for the SEC as it continues to develop the rules and regulations governing crowd investing?
BARNETT: I wouldn’t think to give the SEC advice, but we did sit down with them immediately following the signing of the JOBS Act and shared an agenda for what we knew were key points to address for crowdfund investing that extended beyond the initial legislation. In that, I think the SEC has been very responsive, and doing well with the significant task of issuing Rulings that further put in place investor protections under the major shift in securities law that is the JOBS Act.
While the industry would have liked to see all of the initial timelines for Rulings met, the Commission continues to make proposals, and is deeply engaged in the task.
KERRIGAN: How does Crowdfunder differentiate itself from the other platforms that have launched, or are planning to once the SEC is finished with the rulemaking process?
BARNETT: We are crowdfunding for Businesses. We’ve attracted over 12,000 existing investors and crowdfunders, and serve three main company types: Small Businesses, Social Enterprises, and Tech Startups. We have many leaders in those industries on Crowdfunder both looking to invest, or building their own company on the network.
In the past, crowdfunding sites have mostly focused on one thing– creating a flashy campaign page in hopes that people throw donations at it. Raising investment takes more than a flashy campaign page. People invest in people, not ideas and campaigns.
That’s why Crowdfunder is more than a crowdfunding platform, it’s a social network for businesses to showcase their company and connect with supporters and investors. On Crowdfunder, each person connects their LinkedIn and Facebook account to import their work experience and identity. Then an entrepreneur can create their Company and connect their management team to the Company.
Beyond that, we have a large focus on community-based investing, where we connect people both locally, and by interest. If you’re a small business in Chicago, being part of a network that allows you to showcase your company to a community of local entrepreneurs and potential investors, some of which might already know you, will increase your success rate. We’ve already onboarded two large local communities through large scale contests that brought on to the network thousands, in both Los Angeles and Las Vegas. Similar contests will be rolling out across the U.S. in 2013.
KERRIGAN: Do you have any general words of advice for the business owner or entrepreneur in terms of how they can succeed in today’s dynamic economy?
BARNETT: Focus on serving your customers by making their lives better, and find profitable ways to reach and acquire them at scale. If you can do both of those things well, most everything can be improved along the way.
For more information, please visit Crowdfunder.