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Is crowdfunding investment capital right for your business?

In previous columns I introduced three crowdfunding sources including donation fundraising, startup transactions, and lending. Now let’s talk about the fourth and most problematic method: raising capital from investors.

Historically, small businesses acquired investor capital from two sources: venture capital and angel investors. So when crowdfunding popped up on our radar, many in the entrepreneurial universe got excited thinking the Internet could be used as a lever for investor capital as it has for other business applications. Here are four reasons why I was not among this group.

1.  Securities Laws
Remember those two crowdfunding markers identified in my previous columns, “innumerable and anonymous?” Well, they’re the most problematic in raising investor funds because, by definition, the public (people you don’t know) has access to Internet offerings. U.S. securities laws are enormously restrictive about selling investments to the public, and the approval process is prohibitively expensive for most startups. Plus, even as part of Obama’s 2012 JOBS Act, the Securities and Exchange Commission (SEC) has yet to approve crowdfunding for investors and won’t say when rulemaking will happen.

2.  Financial reporting
One of the essential markers of investing is financial reporting. Alas, one of the markers of the small business sector is poor financial recordkeeping. When small businesses learn the level of disclosure required for crowdfunding investment, most will not pursue this path.

3.  Minority shareholders
Investors become shareholders. A crowdfunding offering is likely to create many shareholders. When small business owners understand the maintenance expense and effort to comply with mandated reporting to shareholders, most will seek other capital sources.

4.  Exit strategies
Small business owners love their businesses, but most don’t have an exit strategy. Since capital is not romantic, it’s unlikely that a small business owner’s idea of an exit will align with that of crowdfunding investors. And with no after-market for these shares, crowdfunding creates an inherent exit expectation conflict, which will be a non-starter.

When and if SEC rulemaking occurs, crowdfunding equity will benefit some entrepreneurs. But I predict this capital source won’t be a high percentage option for most small businesses. Crowdfunding is part of the future of small business capitalization, but it’s not for everyone.

Write this on a rock … Don’t count on crowdfunding to replace your banking relationships.

Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”


RESULTS: What should we do with the thousands of children who’ve crossed the U.S. border illegally from Central America?

The Question:

What should we do with the thousands of children who’ve crossed the U.S. border illegally from Central America?

6% — Take them in and let them stay here permanently
67% — Take care of them only until we send them home
27% — Send them back across the border to Mexico immediately

Jim’s Comments:
Regardless of how quickly, 94% of you think the thousands of illegal immigrant children from Central America who’ve been in the news lately should not stay here. Over the next few weeks I’m going to ask about your position on a few other illegal immigrant issues, and then I’ll report back to you about what our community thinks.

Thanks to all who responded to last week’s poll. Be sure and participate in this week’s poll below.

How to spot entrepreneurs in their natural habitat

If you venture into the marketplace jungle, you may be able to observe that rare wild creature, the entrepreneur, in his or her natural environment (darting is not necessary, entrepreneurs are very gentle - just rub their stomachs). As you study them, you will find levels of vision, curiosity, courage, tenacity, and faith. Here’s what to look for in order to identify this elusive critter:

Vision: Entrepreneurs see things and consider the possibilities before they exist, even as the world is telling them, “It won’t work.” When entrepreneurs are deep into their vision they go into what their families call a “zone,” which is when it’s easiest to slip up on them.

Curiosity: Entrepreneurs ask questions other humans don’t. They can’t help it. If someone asks you a question and you have no idea what they are talking about, you are probably having a close encounter with an entrepreneur. Don’t be irreverent; you might be at ground-zero of the 21st century equivalent of Velcro or the micro chip.

Courage: Entrepreneurs attempt things that other human species won’t. As you peer through the triple canopy at your subject, look for death-defying acts in the face of conventional wisdom. Entrepreneurs eat conventional wisdom for breakfast.

Tenacity: Entrepreneurs keep trying when other humans give up. They have a high pain threshold, which when combined with a visceral desire that can only be compared to the maternal instinct, delivers a primal display of tenacity which often is frightening to other humans. If the entrepreneur you are observing is crouching, lie down quickly. You probably aren’t in danger, but fainting is a possibility.

Faith: Entrepreneurs believe in themselves and their vision. The great writer and even greater curmudgeon, H.L. Mencken, once said, “Faith may be defined briefly as an illogical belief in the occurrence of the illogical.” That’s our entrepreneur! If you see someone demonstrating an inordinate commitment to an “illogical belief,” congratulations. You’ve found your entrepreneur.

Catch and release, please.

Is a crowdfunding business loan right for you?

In my last column I introduced the concept of crowdfunding — the new word and online methods of fundraising and capitalization. The two crowdfunding examples I described were contributions and business transactions doubling as fundraising.

Let’s continue with the third type, which is, crowdfunding structured for loans.

Crowdfunding debt, AKA peer-to-peer and social lending, is like traditional borrowing: a request for funds comes with the promise of repayment with interest over a specific term. But the former is done online, and the latter is not. Individuals use crowdfunding for personal loans, but our focus here is for business borrowing, which typically involve four crowds:

1. Business borrowers

2. An online crowdfunding platform aggregating loan requests

3. A funding and underwriting source, likely a hedge fund

4. Individuals who invest with #3, knowing it’s for loans to small businesses

Remember the innumerable and anonymous crowdfunding factors from the previous column? These two are also in play with crowdfunding debt, because a large crowd is required to provide a pool of loan funds and dilute the risk, and investors are only known to the funding source aggregator.

Regardless of the funding source, crowdfunding or traditional, small business loans are expensive for the borrower because this sector is considered high risk for two primary reasons:

1. Most small businesses are undercapitalized and operate on a thin survival margin

2. Too many small business owners don’t track financial performance well enough to know how they’re really doing.

And since crowdfunding loans are unsecured, taking the risk to an even higher level, crowdfunding business loans are doubly expensive.

So is a crowdfunding business loan right for you? Here’s some context: If you can borrow from your bank, this year you’ll probably pay an average of about 6% annual interest rate. A crowdfunding loan APR will likely be 15% or more. Any questions?

Crowdfunding business lending has achieved some level of critical mass and is growing.  As I’ve said before, the future of small business capitalization will look a lot different than it does today largely due to this emerging alternative.

Next time we’ll wrap up this series with a tour of the good, bad, and improbable of investor equity crowdfunding. And more tough love.

Write this on a rock If you can borrow money from a bank, don’t borrow from a crowd

Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”


RESULTS: How much do you depend on your smartphone?

The Question:

How much do you depend on your smartphone for tasks other than calling, texting, and email?
24% — Heavy dependence, like social media, newspapers, navigation, travel, etc.
53% — Just a few other tasks right now, but increasingly using it more.
9% — Nothing other than the three in the question.
14% — I don’t own a smartphone.

Jim’s Comments:

There are several reasons why more people - 77% of respondents in our latest poll - are increasingly using smartphones for tasks in their lives.  For example, it now costs no more to manufacture a smartphone than a dumb one, mobile apps increasingly appeal to the

non-technical user, mobile networks encourage them in a number of ways, and perhaps the most important - the cool factor.

I’m pleased to see that small business owners are increasingly owning and using smartphones. When we polled our audience about this not long ago, barely half owned a smartphone. For several years I’ve told you in my articles and on my radio program that if you don’t have and use a smartphone, you can’t keep up with the ever-evolving expectations of your customers.

In my new book, The Age of the Customer, I devote an entire chapter to mobile computing. From Chapter 13, one of the most important points I want you to remember is, “Global computing was not any part of your small business’s past, but it will dominate your future.”

My friend and Brain Trust member, Chuck Martin, has written books about mobile computing and, indeed, has devoted his entire career to the topic.  I encourage you to increase your understanding of the impact of mobile computing with my thoughts and then graduate to Chuck.  Here’s his website where you can find all of Chuck’s information:MobileFutureInstitute.com.  And here’s a link to interviews on mobile computing I’ve had with Chuck on my show.

As a small business owner, using your smartphone for more things delivers two benefits: It will help you become more efficient and productive personally, while providing key insights into what your customers expect from the companies they do business with.

Smartphones and customer expectations

There are several reasons why more people - 77% of respondents in our latest poll - are increasingly using smartphones for tasks in their lives.  For example, it now costs no more to manufacture a smartphone than a dumb one, mobile apps increasingly appeal to the non-technical user, mobile networks encourage them in a number of ways, and perhaps the most important - the cool factor.

I’m pleased to see that small business owners are increasingly owning and using smartphones. When we polled our audience about this not long ago, barely half owned a smartphone. For several years I’ve told you in my articles and on my radio program that if you don’t have and use a smartphone, you can’t keep up with the ever-evolving expectations of your customers.

In my new book, The Age of the Customer, I devote an entire chapter to mobile computing. From Chapter 13, one of the most important points I want you to remember is, “Global computing was not any part of your small business’s past, but it will dominate your future.”

My friend and Brain Trust member, Chuck Martin, has written books about mobile computing and, indeed, has devoted his entire career to the topic.  I encourage you to increase your understanding of the impact of mobile computing with my thoughts and then graduate to Chuck.  Here’s his website where you can find all of Chuck’s information:MobileFutureInstitute.com.  And here’s a link to interviews on mobile computing I’ve had with Chuck on my show.

As a small business owner, using your smartphone for more things delivers two benefits: It will help you become more efficient and productive personally, while providing key insights into what your customers expect from the companies they do business with.