10 Things To Know About Crowdfunding

A Rising Funding Vehicle

The chatter over crowdfunding continues to get louder.

And it's becoming a promising fundraising channel for channel startups and others alike.

Lawyers, bankers and corporate executives gathered last month in Santa Monica, Calif., for the International Bar Association's Silicon Valley From Start-Up To IPO/Exit Conference to discuss crowdfunding among other topics.

What's clear is that while opportunity abounds for this burgeoning investment channel, there are still plenty of unknowns and misconceptions about what it takes to raise capital.

Click through to understand what crowdfunding is, where it's going and what you need to have a successful raise (and maybe even oversubscribe).

10. What Isn't Spent In Money …

You'll likely spend in time.

Before a company even narrows down its fundraising channel options, be prepared to invest time in the process -- whether that's talking to a VC, angel investor or crowdfunding platform.

It's easy to assume a company can slap up a landing page on a crowdfunding site and watch the money come in. Nope, that's not how it works, said Bitvore CEO Jeff Curie.

The Irvine, Calif., maker of big data software raised $4.5 million on crowdfunding site Fundable this year.

"We pretty much went through all the angel networks," Curie said during a panel at the conference. "It's a very time-consuming process. … If you're talking with each angel investor, you're talking to hundreds of angel investors, so being very time-efficient and trying to qualify is this person just burning up my time [is important]."

9. Get Serious

Don't treat crowdfunding as less rigorous than other modes of obtaining money.

Bitvore took all the steps any company would do if it was obtaining angel funding, including find a lead investor, having a term sheet and having an advisory panel that includes former AT&T Bell Labs president and former Lucent CTO Bill O'Shea.

8. And Then Get Real

What's the norm? Oculus Rift raised $2.44 million on Kickstarter in 2012 and went on to be sold to Facebook for $2 billion.

Not every company is going to be an Oculus Rift -- whether it's on a crowdfunding platform or raising money through more traditional channels.

"In the angel world, nine out of 10 investments fail," FocalPoint Partners Senior Vice President Muizz Kheraj said during the panel. "I'm quite sure that in the crowdfunding world, it'll be the same thing. We'll hear about the successful ones and say, 'Wow, crowdfunding is amazing,' whereas the reality is it's just another channel."

The crowdfunding platform Crowdfunder, based in Santa Monica, typically sees companies looking to raise between $500,000 and $2 million in seed or Series A rounds, according to Senior Vice President Rafe Furst. And these are usually companies with valuations of $10 million or less.

7. Have Money To Make Money

If you're looking for money, it's oftentimes because you don't have any as a startup.

However, if you can amass a small chunk, it helps attract other investors.

"A company like Bitvore already has initial capital," Crowdfunder's Furst said, "and it's always going to be the case that the more initial capital and the quality of the lead investors -- people who have done the diligence and set the terms -- the more that that's done, the better off you're going to be when it comes to raising money from the crowd or anyone else."

Crowdfunder sees minimum investments of $1,000 to $5,000. That compares with minimums of $50,000 to $200,000 in the angel world, Furst said.

6. Chilling Effect?

Researchers lately have been looking at crowdfunded companies' abilities to raise later funding rounds. Some wonder if there are negative implications for later raises given some opinions in the investment community that reduce crowdfunding down to a less savory mode of fundraising.

There are lots of opinions.

"I don't know yet," Bitvore's Curie said. "We're raising a bridge round right now and we intend to raise a B round probably in the June time frame and I guess we'll find out. But the flip side is -- and maybe it's because of the PR we got on what we accomplished through Crowdfunder -- but, you know, I get calls from VCs. … I get calls from all these guys, about three a week that are like 'Just want to get to know you, what are you going to do next, what's your B round look like, will you call us when it's time?' So I'm not thinking that they're running in the opposite direction."

5. Educate Yourself

There are different types of crowdfunding.

Parties on both sides of the equation -- investors and the companies looking to raise money -- need to do their homework.

Oculus Rift's rise from startup to its $2 billion sale to Facebook in some ways serves as a cautionary tale on crowdfunding. The company raised $2.44 million from 9,522 backers on Kickstarter. That's a lot of parties. None of those backers got anything out of the Facebook deal and that created a bit of a backlash from some of those investors, some of whom felt they should have.

But here's the deal: Rewards-based crowdfunding platforms, such as Kickstarter, may give an investor a T-shirt or the actual product in exchange for an investment. That's not the same as equity-based platforms that provide an equity stake in a company.

4. Keep It Clean

And after educating yourself, make sure to keep a clean term sheet.

"I have the same terms for every [Series] A investor," Bitvore's Curie said. "Very clean, 1X participating preferred. So whether it has eight people on it or 80 people, the majority of the voting rights rely within five people. It's not difficult to deal with. Yeah, I've got to send out 80 emails once a quarter instead of eight. It's the same email; it's really not that difficult."

3. Think Globally

Crowdfunding opens up the world to an entrepreneur.

Cross-border transactions are happening even as securities laws and regulations are being hammered out with the rise of crowdfunding.

"There are challenges in taking money from investors outside of the U.S., in or around the U.S.," Crowdfunder's Furst said. "It's just not clear whether our general solicitation laws that are so new actually interact with or cause securities violations in other jurisdictions, so we're seeing it on a case-by-case basis."

There are also practical challenges when a company from outside the U.S. gets involved.

"We always think in dollars so even issuing in pounds is a challenge for an American investors," Furst said.

2. You're a Business -- Think Like One

"Nothing sells itself," Furst said.

Crowdfunder sees dozens of new companies join its platform daily, according to Furst, and amid the thousands that apply for fundraising only a small fraction of those are actually investment-ready.

"To be investment-ready, you have to have an inherent value proposition, but then you have to be able to sell it," Furst said. "Even if you're great at selling your product or your company, I've actually only come across one company that actually did not need help in framing their own pitch."

Sophisticated underwriters, experts, bankers, venture capitalists and analysts can play important roles in advising entrepreneurs not only with their pitch but also knowing their own worth. But it's ultimately up to the founders to close the deal.

"It is up to the entrepreneur to figure out how to package their product and sell it," Bitvore's Curie said. "People didn't come knocking on my door and it's a lot of hard work raising money. A lot of hard work."

1. Know Who You're Talking To

There's a difference between pitching a company to a prospective investor, consumer, venture capitalist or angel investor. How an entrepreneur frames the conversation is key.

"It's totally different," Bitvore's Curie said in talking about the difference between selling a product vs. selling an investment in one's company. "It's a different customer. I had many different customers. Each one has a different pitch, so how I sell my product on Wall Street is not how I sell my company to angel investors."