Is Crowdfunding a startup a bad idea? | Sidebean

0:00College football is back. So, Hilton called to me the superstition concierge to make your fan rituals a reality. Need a room to match your lucky number? We got you. Want to make sure our team doesn't wash your lucky jersey? Oh, that smells lucky. Hilton's unmatched hospitality can keep up with any superstition. Even a marching bandwick up call it 555 and 55 seconds. Hit it! When you need a team that will do whatever it takes on game day, it matters where you stay. Hilton, for this day. This episode is brought to you by PayPal. You know how a mom's bag has everything? Sunscreen, snacks, a stapler, the new PayPal app is like that, but for your money. Shop, pay, manage your account, and earn rewards all in one place. And with purchase protection on eligible items, biometric security and pass keys, you're protected at every step. Download the new PayPal app to get started. See PayPal.com slash protection terms. This episode is brought to you by Nordstrom.

1:02For 125 years, Nordstrom has been part of your story. The stylist who found the perfect outfit for your big interview. The first pair of walking shoes for your one-year-old. The tomato soup you shared with your sister at the cafe. These are the moments that make Nordstrom. Nordstrom. Bigger a small. We're here for all of it. Celebrating 125 years with new moments still add. Discover it all in NordstromStores and at Nordstrom.com. Crowdfunding is an option. It's an option to raise money for your company. But for the longest time, it has come with this reputation. If going to VCs or angel investors fails, then crowdfunding is a plan B. And then this has been mostly true since IndigoGo first popularized crowdfunding in 2008. But the landscape is kind of changing. This is no longer just the last resort sort of thing. With some new legislation, new companies, and investors are taking a new interest in crowdfunding and the numbers kind of confirm that now it's more popular than ever. So for this episode of Starbiz 101, I want to do a quick overview of your crowdfunding

2:04options, how they work, and which might be best for you and for your start. So crowdfunding really took off in the started world with reward-based crowdfunding. Now, these campaigns rely on receiving money in exchange for a reward. Usually it's a product, sometimes a service, and again Kickstarter and IndigoGo are some of the biggest references in this space. And you probably own or at least have heard of a crowdfunded product. You have some winners and some losers that of course ended up in our forensic episodes. Now, one of my favorite examples of using crowdfunding to your advantage is a company called Peak Design. We absolutely love we can't get enough of their gear and it'd be great if you guys could send us some free things. Anyway, Peak Designs funds the production for all their product launches with a Kickstarter campaign, which is just incredibly clever. It's like a pre-sale that funds their manufacturing process so they don't have to come up with the cash themselves. So, reward-based crowdfunding is ideal for creating a community of early adopters, is ideal for companies that have physical consumer-oriented products and niche markets. Because you're essentially getting people to prepay

3:05for your product and to fund your manufacturing. So you don't have to come up with that cash. Now, I funded my first startup with a Kickstarter campaign and it did set me on this journey that I am today that came to Slythby and I told a little bit of that story of my first company and how it failed in last week's video on New York. Anyway, reward-based crowdfunding comes with its issues and the first one is copycats. Now, there's this army of Chinese companies carefully following campaigns that get traction to essentially rip off the products and beat them to market, which is very much a douche move. Now, on the software side, you also have the problem of perceived value of these digital things. Credit in the app or free downloads or a free subscription of a future product, they're not really as exciting as a limited edition signed by the founders type of package that you can do with products. Of course, software can usually raise less money. Now, on exception here, of course, is NFTs and just the madness that we're seeing with how the crowd is essentially funding these NFT and crypto-based projects. But that is topic for next week's video on NFTs. Still, the Kickstarter campaign that I ran in 2011

4:11or 10 years ago, it raised most of its money from advertising inside the app for some t-shirts, app pre-sales where maybe $5 each and getting thousands of people to back you to make up for a decent crowdfunding campaign is not easy on $5 tickets. But in my experience, which again, was a decade ago, the key to crowdfunding was promotion. Just being on Kickstarter does not get you back. You have to hustle with press and with blogs and even I've even seen Facebook ads on Kickstarter campaigns, which I'm assuming must work as they still happen. Now, the key here is economics. So many failed Kickstarter projects happen because of that because they forget about the cost of fulfilling the rewards or the cost of marketing their campaign. So yes, you are relying on community. Yes, there might be an advocate's organic aspects to a crowdfunding campaign. The truth is you have to convert traffic just like converting traffic to your website or your landing page. But more important than that, my take from these reward-based campaigns

5:13is that they are good old MVP validation. Your MVP in this case is a video pitch and you're testing whether or not the market cares about it. It's lean starter all the way. Now, back then, we managed to fund potatoes because it was very little money, but it was still a cool and sexy, but mostly because it was a mass audience product. If you're building a B2B or maybe an enterprise software, then there aren't any cool rewards that you can give. You can't get hundreds or thousands of people to care about it enough to back you. So your option might be equity graph. So this was not a possibility in the early 2000s. We could very well argue that the Kickstarter of the world helped pave the way for equity graph funding to become a reality. But the biggest detonator though, was the 2008 housing crisis and how much small businesses struggled after that to raise capital for their renters. So in 2012, the Jobs Act loosened a bunch of regulations for startups and one of them was allowing companies to be public about their round. So before the Jobs Act, it was actually illegal for a company in the US to solicit,

6:14that is to advertise that they were raising money online. So the Jobs Act allowed not only to be public about the fundraising, but to raise from investors that are outside the US, which was also a mess before then. Now from 2016 onwards, this actually had a pretty good fast track to growth. From 16 to 21, crowdfunding increased by $514 million. And last year, the SEC implemented even more relaxed rules. The annual limit for crowdfunding went from 1 million to 5 million and they increased the limits for not accredited investors, which means an investor that doesn't have a minimum net worth. And it also allowed investors to invest through syndicates. But I'm gonna get to this in a second. Before that, I want to talk to you about the original point of crowdfunding being this last resort sort of thing. So people have often doubted how far a crowd funded company can truly get. The CEO of Pebble, for example, this company raised millions of dollars on crowdfunding, said that crowdfunding was a last resort for them. And that was a common perception at the time that the company is going to crowdfunding, we're just desperate for capital, which is honestly not necessarily wrong.

7:15For years, I would agree that this reality extended to equity crowdfunding as well. You'd find companies that try to close their rounds with angel investors and with VCs, the traditional way, but failed to do so. And you can find plenty of sites with small rounds. College football is back. So Hilton called to me the superstition concierge to make your fan rituals a reality. Need a room to match your lucky number? We got you. Want to make sure our team doesn't wash your lucky jersey? Oh, that smells lucky. Hilton's unmatched hospitality can keep up with any superstition. Even a marching bandwicker call it 555 and 55 seconds. Hit it! When you need a team that will do whatever it takes on game day, it matters where you stay. Hilton, for this day. This episode is brought to you by PayPal. You know how a mom's bag has everything? Sunscreen, snacks, a stapler? The new PayPal app is like that, but for your money. Shop, pay, manage your account, and earn rewards all in one place.

8:16And with purchase protection on eligible items, biometric security, and pasquies, you're protected at every step. Download the new PayPal app to get started. See PayPal.com slash protection terms. This episode is brought to you by Nordstrom. For 125 years, Nordstrom has been part of your story. The stylist who found the perfect outfit for your big interview, the first pair of walking shoes for your one-year-old, the tomato soup you shared with your sister at the cafe. These are the moments that make Nordstrom. Nordstrom, bigger, small, we're here for all of it. Celebrating 125 years with new moments still add. Discover it all in Nordstrom stores and at Nordstrom.com. One million dollar cap, which made it even more difficult for startups to raise a decent amount of money in a short period of time from the crowd.

9:17So this meant that companies had to resort to further crowdfunding rounds or just to finding alternative ways of funding to compliment their crowdfunding company. So in a sense, crowdfunding can limit itself. Growth comes in small bits, and it of course can frustrate founders. Plus, an additional challenge comes in the form of looking for venture capital in the future. Another big issue was that these crowd rounds created this massive, crazy cap tables with tons of investors in them. Imagine having to send an investor report or to answer questions from 50 investors. Imagine having to get 50 signatures to approve an acquisition. So new regulation was passed in 2021 that allowed investors to be merged into what they call a special purpose vehicle, which is essentially a separate company that is formed proportionally to the investor check sizes. And then this company invests in the starter. So you get one investor in your cap table, one company investor, rather than 30 individuals. And that company has its own rules to govern itself and a vote on the start position. Of course, if that's agreed upon, but they vote as a single entity.

10:20So I have never raised an equity crowdfunding round for any of my companies. Our experience here comes from working with the starters that are pursuing crowdfunding, mostly be a we funder who we're pretty close with. Shameless plug, that is what we do for a living, not posting YouTube videos. We help starters pitch investors by helping them write their pitch tags, run their financials, script the way for investors, and of course connect them to platforms like we fund. Hi, I'm Andres Kovarosser. I'm the head of community rounds here at WeFunders. We funders, the largest equity crowdfunding platform. They build the industry and now they're leading the right CF industry. So with ironed technicalities aside, the new regulations have opened this new opportunity, this new secret sauce to crowdfunding. And you can turn your users into investors. What we're seeing with a few companies we're working with is there's not much space for other investors who are customers. When these companies are letting and enabling their customers to jump on board this rocket ship, their customers do. Some invest $50,000 and others invest $100 depending on where they stand.

11:22But that's a super strong and powerful metric we're seeing. So laying out some of my favorite examples. Brutok is this brewery and pop chain that did a 72 million pound crowdfunding campaign. This is back in 2011. Now they're based out of the UK so ignore all these jobs rules because they don't necessarily apply in the UK. Anyway, what they did is they sold 8% of the company on 23 pounds a share. And every shareholder got discounts in their bars and online purchases of their beers. So this is a decade ago. So it's insane what they were able to achieve in the US just seems to be catching up. Another incredibly successful story is Xenifits. This is a payroll company that raised their first round of funding on WeFunders. $50,000 in 2013. Then they went out to raise $500 million dollars. A series C-round in 2015. The last example here is this company called GameStar who closed their round just today. And our interactive close over $5 million in funding. Hey guys, sorry to interrupt today's video but I want to thank our sponsor for today, which is marketer high. Freelancers are vital for companies like us but there's so much talent out there

12:22and it can be tough to find the best marketing candidate for you. And that's where these guys come in. Through marketer higher you can contact expert freelance marketers on a full-time part-time or hourly basis. And you only end up paying for the skills and for the time that you actually need. So you don't waste marketing dollars. You can connect with the best marketers out there today through marketer higher. You can go to marketerhigher.com slash slide paint to try it out. For good or worse, we're also seeing crowdfunding in crypto where tokens are raising millions, sometimes hundreds of millions of dollars. That to me is the ultimate test that there is something here. It is happening and it is growing. Now one key difference with crypto is the shorter nature of those investments. I would bet you a fiat dollar that most of these investors on crypto are looking to flip those tokens within weeks or months. Start of investing takes longer. You might not see an ROI for seven or for 10 years. It's a different kind of investor that can make that long-term commitment. And we are yet to see what's going to happen long. So I'm genuinely curious what your perception about this is.

13:22For guys from WeFundered think that it's changing. They think that it's no longer such a last resort thing, but I would love to see what you guys think of the comments. Remember, I have office hours available. You can book me anytime using the link in the description. But the first five comments on any of our videos get a free session with me. I do one of those every week. So make sure you're subscribed and belled. Of course, again, if you need help with your fundraising, just go to sliping.com and you can help out. See you next week. Push your limits, train with precision, see the results. At Equinox, that's high performance loving. Iconic spaces that inspire personal training backed by real data, unlimited group fitness classes from yoga and Pilates to strength and conditioning. Elevate your post-performance ritual with sonas, steam rooms, cold plunges, and more. Everything you need to lock in and unlock your potential at Equinox.

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