Crowdfunding

What are the risks for using equity crowdfunding for a MVP?

Steven Corn CEO at Metis Advantage

June 2nd, 2016

I've been following the growth of equity crowdfunding opportunities.  I am about to begin my fundraising efforts for my MVP.  It falls within the $100k-$1m range which I understand to be the requirement for such crowdfunding.  

I have read the other discussions on this topic.  However, they barely addressed the risks (or downsides) of funding a MVP this way.  I realize that investor communication may be more complex and that there is a risk of a mis-qualified investor.  Aside from these factors, are there any other risks for using such sites?
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Steven Corn CEO at Metis Advantage

June 3rd, 2016

David,

I think that you make some very valid points.  I am aware of the potential investor relations issues.  However, I did not take into account the MVP issues that you raise.  Thanks for your insight.

David Austin Relentless problem solver and innovator.

June 3rd, 2016

Equity crowdfunding is a bad fit for funding an MVP.

One of the few advantages of equity crowdfunding (and they are few) is that the funding process doubles as a marketing effort. You don't want to market your MVP. You want to market your end product. You also don't want to do your marketing until you have a product that you can deliver, that you know has exactly the features your customers want (as determined by MVP testing), and you know your ideal pitch (also determined by MVP testing), within a few months that is not a beta, and is not handicapped.

An MVP can hurt you unless it is billed as a beta (or similar) product. Many startups will in fact completely change all their branding when they build the end product. You want to get as many of those pivots out of the way before you scale things up and start dedicating resources to marketing (wherein crowdfunding might be included).

Equity crowdfunding is not easy money. It has to be incredibly viral to work, and those to whom you pitch need to feel a deep connection not just with the product but with you, with a high degree of confidence that you will deliver. In fact their connection with you has to be far greater than with standard crowdfunding, because they're getting nothing out of it except a piece of you. They're not funding your product or service ... they're funding your success, and if you loose they loose, even if you deliver a great product or service.

Of course that goes for any investor ... the point is that it is much easier to make that close and personal connection when pitching to one or a small group of investors. This is why I think that only once you are able to make that connection in a crowd setting will it be a success.  That may be the case with you, or not, I don't know ... but it is a challenge to make a close and personal connection with people who can't shake your hand and talk to you in person.

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

June 5th, 2016

One big problem is that it can be very bad if it turns out that you run into a delay in manufacturing. One thing that happens with rewards based crowdfunding is that it's very frequent that something will go wrong in generating the product, and in the end, if you create the product, no matter how delayed it is, and you give it to the funder, then your relationship ends. They may be extremely annoyed at you, but once you've given then the reward you two go on your separate ways.

With equity crowdfunding, you now have disgruntled people that will be part of your company forever.

Another problem is that if you deal with a small set of investors, the likelihood that one will be "crazy" and make your life a living hell is small.  With a large set of investors, there is a greater change that someone who gives you insignificant amounts of money will be "crazy" and make your life miserable.  This is going to be a particular problem because it is almost certain that what you deliver will be less than what you promised.

There's also the issue of investor communications.  If you have a small number of close investors, then someone can give good feedback on how your company is doing, and also give you mentorship and help.  If you have a large number of investors, then none of them feel compelled to help your company.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

June 2nd, 2016

Equity crowdfunding is expensive. With rewards crowdfunding you can get by with a video. Selling equity means that you are selling stock. The SEC has rules that can be complex and carry harsh penalties for non-compliance. Investors expect a return on their investment. If you want investors money, you need to be on your game. You need a good product and a good team. I write about this a lot. My partner and I help small companies crowdfund from investors. Connect with me on Linked-in and I'll send you links to some of the articles.

Cameron Snow VP of Subsurface

June 2nd, 2016

The main downside is regulatory.  To do the listing (depending on size) you need to either submit audited or reviewed accounts, then you'll need to report annual results, and you'll need to hold some sort of AGM.

It could also open you up to legal issues a lot earlier.  You could have lots of new shareholders that have high expectations and little experience investing in equity... you might start getting lots of phone calls/emails from this base then you want.

Finally, you don't get the benefit of having the mentorship and support that you would get from a VC.