WORD ON THE STREET

[fairstreet-blog]

Is an Idea Enough For a Business?

By Lyneka Little

You found a solution to a problem and you’re thinking of quitting the day job to spend the next six months stalking a coffee shop looking for the money man that will fund your great idea. 

The next stop in your future: San Francisco. You’re dreaming of a snazzy office in the Mission District, a million dollar paycheck, after work beer gardens, and checking out your favorite indie band at the Independent. Every night seems like a good night, and all thanks to one brilliant idea.

Not to be a dream stealer but ideas are a dime a dozen. It takes more than just an idea to make a successful business.  The daydream must end and turn to passion for your idea.

Beyond passion, here are a few important things necessary for turning an idea into a success: 

A business plan.  This will communicate and clearly outline your vision for the company. See our recent post, Six Words to a Quick and Tight Business Plan

Talent. Not a coder or designer? How about a marketer or salesperson? If you don’t have the skill set required to launch your business, then you’re going to want to hire the best talent to bring your idea to life. Try going on a founder date.

Funding. In order to get funding to launch your company you will need talent and a business plan. Reid Hoffman, LinkedIn’s Co-Founder, annotates the company’s 2004 investment pitch deck and would be founders everywhere said a collective thank you, we’re sure you will too.

Let’s look at an example.

Recently, Google’s stock price hit $1,000 for the first time. The search juggernaut’s record breaking feat was courtesy of quarterly earnings report that had investors rushing to buy the stock.

Google has carved its niche over the years and become synonymous with search. But, the idea of search wasn’t a dorm room idea conceived solely by Larry Page and Sergey Brin. At the time of conception, Altavista, Yahoo, Dogpile and a host other search sites existed. It was the duo that mastered it.

Entrepreneur and venture capitalist Eric Paley put it succinctly when he penned “A Great Idea is Never Enough” for Inc. magazine: “Amazon wasn't the first company to sell goods online. Google didn't invent search, and Dropbox wasn't the first server-based storage offering. Pick a successful company, and you can almost always point to the sad story of a failed predecessor that had the same core idea.”

It takes more than being first and even, dare I say, innovation, to create a successful company. Look at the business savvy and talent of tech companies like Google and Amazon to better understand how to turn an idea into a business with staying power. And, maybe write that business plan on your cross country trip to San Francisco.

Lyneka Little is a freelance writer who has written about personal finance and small business for such publications as MainStreet.com, Walletpop.com, and Young Entrepreneur. You can follow Little on Twitter @Lyneka.

[fairstreet-blog]

Investor Eric Steiman Talks Investment Opportunities

Word On The Street presents Investors and Innovators, an Interview Series with founders, small business owners, angel and vc investors sharing their funding experience and exploring the JOBS Act.

Investor: Eric Steiman

By Lyneka Little

Forget predictable investments.

Eric Steiman invites a little more risk into his approach to investment by focusing on undervalued opportunities.

Steiman, a model investor at Covestor.com (an online marketplace to discover portfolio managers) buys underappreciated stocks that offer high returns. He then uses the Covestor platform to offer play-by-play instructions for individuals or companies looking to copy or replicate his trades.

Does it work? Well, an investment in Tesla, netted the Brandeis graduate returns of 400 percent. Quite an impressive feat. However, the markets aren’t new to Steiman who works as individual trainer and whose resume includes Chimera Securities, Investor's Bank and Trust—and even a brief gig as an intern for the Boston Red Sox sports.

FairStreet spoke to Steiman, whose top holdings include Yahoo! and Facebook, about the Jumpstart Our Business Startup Act and investing.

Here’s an edited version of our conversation.

The JOBS Act recently lifted the ban on general solicitation. How do you think this will change investing?

It can definitely help a lot more because, I think, obviously, you don’t need the venture capitalist as much, and family and friends can definitely add value. The scary part is there could be more family money getting involved. As an accredited investor, you should understand what you’re investing into. I think it’s a huge positive for small businesses because it gives you more opportunity to raise capital.

Have you ever invested in friends and family? If so, why?

Right now just the stock market. In the future, as my business gets off the ground, I’ll certainly look into doing more private deals.

What should you look for before investing in a startup?

Passion and a business plan. What have they done in the past? Have they been entrepreneurs for the last five years? What other things have they done? Have they failed? I wouldn’t say failing is bad. Did they fail, did they succeed, have they learned?

How should new investors protect themselves?

Do the due diligence. Meet the founders and get a better understanding of where your money is going.  Find out what they’re going to do with the capital and how they think it will grow their business.

As a seasoned investor, what do you look for in a good investment opportunity?

Businesses need to have a demand advantage. For example, Google has an unbelievable search business online. It’s a very difficult task to try to steal the company’s business. 

And, [I look] for a changing area: Tesla Motors. It’s a new field, a new industry that hasn’t been established, yet. Electric cars are looking to change the past. For the last 80 to 100 years and there hasn’t been a change beyond gasoline cars.

I look for growing demand and new ideas and new technology.

What type of returns do you look for in a company before deciding to invest?

When I look to invest in companies I look for returns in excess of 30% over a 1 year time frame.

What has been your best investment and why?

My best investment was in Tesla Motors at around $31 a share.  I was a big believer in CEO and founder Elon Musk.  I looked at his past track record, his current successes with other businesses, and the growing brand of the business.  I currently own the stock and have 1 year returns over 400%.

How do you know when to throw in the towel with an investment?

I'll give up on an investment relatively quickly.  If my original thesis is not playing out and there are warnings from management, I'll sell and look to re-evaluate the business at a later date. 

Lyneka Little is a freelance writer who has written about personal finance and small business for such publications as MainStreet.com, Walletpop.com, and Young Entrepreneur.  You can follow Little on Twitter @Lyneka.

[fairstreet-blog]

Investors and Innovators Series: Rich Theriault Knocks Out Annoying Ads

Word On The Street presents Investors and Innovators, an Interview Series with founders, small business owners, angel and vc investors sharing their funding experience and exploring the JOBS Act.

Innovator: Rich Theriault, Founder, MYTVCHOICE

By Lyneka Little

Commercials are annoying.

And, that’s why tech veteran Rich Theriault wants to solve live televisions biggest problem using the app MYTVCHOICE.

Unlike Google TV, Apple TV, Roku, Samsung Television, who all seek to change the way we experience television on demand or a la carte, Theriault wants to change how we experience scheduled programming.

Theriault is banking on the app that allows users to skip commercials while watching reality television, scripted series and sports. Instead of fastforwarding through commercials, the MYTVCHOICE app allows users to program an alternate channel to flip to during commercials before returning to your scheduled television program. No need to hold tight to the remote.

Fairstreet reached out to Theriault, who has raised $1 million in private funding for the app, to talk about winning investors and disrupting television.

Here’s an edited version of the conversation.

What made you to decide to disrupt television?

When it comes to experiencing the media, consumers don’t get to drive the bus. The whole world is going flat, and, there is an opportunity in TV to be responsive to consumers. Sports want to be seen live. While television is trending away from real time or scheduled viewing, live sports is one exception. People are dissatisfied with ads, offended by ads and concerned they are hurting their children. We’re at a very interesting place in our history and time. In a flat world, that means consumers get to drive the bus.

Can startups compete with bigger companies like Google and Apple?

You can always compete based on speed. Speed of execution. Speed of innovation. Companies like Apple and Bose had strong personalities leading them. They enforced a level of innovation that was very unusual. Most that get beyond $10 million in sales become operationally focused. They lose the ability to innovate. Because you tend to be flatter you’re closer to the market and that’s the major competitive advantage.

How were you able to raise funds through private fundraising using an app that is cutting out ads?

The old model was get a plan, raise money professionally, and go out and build a business. That is fine but is missing an important component. I wanted to raise money from people that believe in what is being done.

I was able to raise money because of the personal experience of our investors. They were either in the highly offended category or annoyed category. Rather than go to a source that is wired up in a groupthink, I went out to the marketplace.

I talked to people to see if they wanted to invest money. I raised money from about 35 people. In an ideal world, I would have raised money from 1,000 people. I couldn’t advertise. I had to do it my own through private introductions explaining the vision and value proposition. I had a very good business model that was in tune with the platform. In a flat world, it’s important to be close to the market - if your customer and investor are one in the same then that’s pretty close.

There’s something called a conversation and there’s something called the reality of it. Have investors and customers that are as closely aligned as possible.

How do you see the JOBS Act changing the startup the world?

I see it changing it dramatically. The traditional world was venture capital funding, highly structured conventional management, and sophisticated investors. But, now there is a great way of funding with the JOBS ACT. This is really exciting because all that wealth building -- which creates job and distributed opportunity for people to gain wealth --gives more people the opportunity to gain wealth. This is bigger than the industrial revolution. There’s going to be some fraud but the upside is enormous.

What should a new investor know before investing in a startup?

A new investor should really believe, if possible, they are the customer.

There are other people placing their vote [in the idea] as well.

The company can give them a return on their money without having some huge equity event.

How important is the founder of startup when it comes to raising funds?

You have to passionately believe in what you’re doing. It has to be about more than money. You can’t just be happy that you’re going to make people money. If your CEO/Founder is lacking that passion, I don’t think it makes sense.

Lyneka Little is a freelance writer who has written about personal finance and small business for such publications as MainStreet.com, Walletpop.com, and Young Entrepreneur.  You can follow Little on Twitter @Lyneka.

[fairstreet-blog]

Traditional is Dead? Digital is Dead? START Marketing.

Guest Post by Chana Ginelle Ewing

The traditional view of marketing, “the sum of activities involved in directing the flow of goods and services from producers to consumers,” and the 4P’s (price, product, promotion and place), continues to be flipped, annexed and even dismissed. The internet has risen to become the get-viral-quick marketing playground for many. Yet some large corporations have travelled the digital marketing distance and now write its eulogy:

"…try and resist thinking about digital in terms of the tools, the platforms, the QR Codes and all of the technology coming next. We [Procter & Gamble] try and see it for what it is, which is a tool for engaging people with fresh, creative campaigns...the era of digital marketing is over. It's almost dead. It's now just brand building….” said Procter & Gamble's global brand building officer Marc Pritchard at the Digital Marketing Exposition & Conference (dmexco).

When there’s no consensus on the definition and execution of marketing in a digital world, what’s the small enterprise to do?

Pritchard’s advice is especially resonant for small businesses and startups that maintain significantly lower marketing budgets than P&G (the largest advertiser in the world) - “try and resist” getting lost in the technology. The resource-strapped (i.e. constrained by time, money and manpower) enterprise can’t afford to pile on social media profile after profile OR opt out of online engagement altogether. Marketing that connects to today’s digital savvy and mobile customer is essential, so let’s START.

START (an acronym: Story, Targets, Assets, Relationships, Tactics) Marketing, crafted by the connections studio, littlebigGirl + CO,is a guide that helps the small enterprise leverage online channels via a language everyone can understand - storytelling. The process empowers the resource-strapped enterprise to efficiently move from a value proposition story to online marketing tactics. While START is no substitute for a comprehensive brand and marketing plan, it will enable you to get your business in front of target audience(s) to test tactics and discover what works.

START your story:

STORY:  Every business has an origin story to tell that communicates value. The value proposition story may start with the spark of an idea, a problem that inspired a solution, and journey to the unique delivery of that solution to customers. When did you have that “aha” moment, that early customer experience that provided actionable insights?

The story of why you exist and who you exist to serve is useful beyond crafting the perfect value proposition message to communicate to customers. It also surfaces at least two main characters, your target customer and your business – what kind of relationship do you establish or want to establish with your customer? Here lies an opportunity to chart the emotional experience between the customer and business and discover your brand archetype.

Long ago, a guy named Joseph Campbell, laid out a theory of archetypes which stated that “there are certain basic characters and storylines that appear regularly in myth, fairytale, literature and film; archetypes that represent core aspects of the human condition, and tap deep into our motivations and sense of meaning.  When we encounter these, they resonate in powerful ways that transcend culture and demographics.” (Olivier Blanchard)

Big brands (Nike) and film franchises (Star Wars) have realized the power of archetypes to engage and grow audiences; the small enterprise can also harness brand archetypes to not only inspire teams and customers but also inform marketing activities.

Your early story explains why you exist; use it to 1. Highlight a clear value proposition journey 2. Identify customer(s) and 3. Choose the brand archetype. Revisit your business objectives and create marketing objective that leverages your unique story.

TARGET(S): What does your customer look like? What is his or her occupation? How old is your customer? Use the value proposition story to create Customer Personas. Personas enable you to target your marketing efforts by representing sets of customers via a typical profile, i.e. Jane, 28, IT Professional, reads wired.com, etc. Personas help us ask better questions and make better platform and content choices.

ASSETS: Marketing assets typically refer to activities that “customers can use or engage in many times, and that they can easily spread to other people just like them,” says Joe Pulizzi in a Content Marketing Institute blog post.  Marketing assets can take the form of a blog, white paper, book, podcast, etc.

For our purposes – let’s expand the definition of assets to include team capabilities and budget. It certainly makes sense to align marketing tactics to objective and target audiences, however, resource constraints such as time, money and manpower, are vital to the conversation.

Before drafting a list of marketing assets for your business, ask yourself the following:

What current marketing assets do we have? How long does the asset take to produce, from idea to execution?

What is our marketing budget?

How will marketing assets help us reach our marketing objective?

Who do we have available to create content (internally and externally)? What are their unique skills?

How will evergreen assets complement or extend our everyday activity?

View marketing assets as opportunities to move the value proposition and move the customer journey forward.  Marketing assets anchor your online marketing program and inform the day-to-day engagement.

RELATIONSHIPS: Consistent content and engagement that includes informative evergreen assets supports the relationship between brand and customer by cultivating thought leadership, trust and authenticity. Who are the characters that help you deliver the value proposition to your customer? Who are some of the characters that currently exist outside the world of the story but can influence the target audiences? Establish a plan for how you will leverage other relationships such as partners and influencers to fill in the resource gaps around time, money, and manpower.

Create a supporting cast list and breakdown significant relationships into two categories, production and distribution and then delineate the relationships that can service each area. As your business and audience grows, so should the depth and quality of the supporting cast.

TACTICS: The mix of tactics you execute is entirely dependent on the objective, targets, assets and relationships. It is important to remember that digital is simply a “tool for engaging people.” Your brand, value proposition and the evolving story-based strategy dictates the rules for engagement, such as what tools to use, how to use them and when.

There are countless best practices for both the kind of online marketing and specific platform. Below are a few our favorite tactics for the resource-strapped small enterprise:

Get busy with Keywords: Keywords can do everything from help you optimize your website for your target audience to crafting the perfect blog for that audience. “Through the detective work of puzzling out your market's keyword demand, you not only learn which terms and phrases to target with SEO, but also learn more about your customers as a whole,” states this simple to  understand moz guide.

Optimize EVERYTHING for Mobile: 91% of all people on earth have a mobile phone, %56 have a smartphone. From your website to your press release, consider the person viewing and interacting with your brand from a handheld or tablet device. It’s very likely, it’s their first and perhaps, only interaction with your product. What’s that saying about first impressions?

Boost Content with Ads: Facebook and Twitter now make it easier to add a little promotional love to your posts. Use the ads to A/B test your value proposition message, tagline and brand communications. ALSO, test your marketing assets with your target audiences.

Guest Blog, Guest Blog, Guest Blog: Whether your objective is brand awareness or lead generation, a business blog has become the cornerstone of brand building online. However, do not stop there. Guest blog on relevant blog sites as often as your team can, in order to build vital relationships with other bloggers and leverage their audience. One Founder, used a guest blogging strategy to get to 100,000 users within nine months, his app is now past the 1,000,000 mark.

Reinforce with Email: Email is decidedly not dead. Sure, it is true that many of us are overwhelmed by our inbox but that doesn’t stop us from opening emails from individuals and businesses that have earned our trust and respect. Value is always a strong motivator. “Email provides you the most direct line of communication for conversion to sales … which is why the most savvy online marketers have no intention of giving it up any time soon,” says Brian Clark (Copyblogger) in the introduction to his Email Marketing ebook.

START is a tool to help the small enterprise activate their “why story” to engage and grow their target audience. It is possible to grow an authentic brand while testing assumptions about your value proposition and customers, and discovering which combination of assets, relationships and tactics resonate. Use what you learn via START to iterate a more comprehensive and relevant marketing plan as you brand your way toward success.

Chana Ginelle is the head Girl/Founder of littlebigGirl + CO, a NYC-based connections studio. Connect with Chana on twitter @chanaewing.

[fairstreet-blog]

What's the perfect age for launching your business?

By Lyneka Little

“Age is an issue of mind over matter. If you don't mind, it doesn't matter,” said Mark Twain. And, really, when it comes to business it doesn’t matter. While the startup scene is generally perceived as a place for young entrepreneurs barely out of college, the opportunity to change the world through technology is open to all ages.

In the United States, the average and median age of a U.S. born tech founder is 39 years old. That’s nearly twice the age of the then baby-face image of Mark Zuckerberg, who became the poster child of young and successful tech entrepreneurs after co-founding Facebook at 19 years old.

At 29 years old,  Zuckerberg is already a billionaire multiple times over after founding the social networking site in Feb. of 2004 .The company was co-founded by three of his classmates including Eduardo Saverin, Chris Hughes, Andrew McCollum aged 22 and 20, respectively. McCollum’s birthday and age is unknown.

The success of young entrepreneurs like the Facebook team has led many looking for the next big thing to look at qualifiers like age, instead of passion, stewardship, ideas and drive. Twentysomething entrepreneurs “see no boundaries, see no limits, see no obstacle that they can't hurdle — it is the most stimulating environment that you can ever be in,” said Sequoia Capital’s Michael Moritz, according to the New York Times.

But, for every twentysomething at Facebook there is a thirtysomething creating a valuable company.

Jeff Bezos was 30 when he created the plan for Amazon.  Leonard Bosack, of Cisco, was 32 years old. Then, there’s Robert Noyce who was 40 years old when he co-founded Intel; so perhaps 40 is the new 30.

FairStreet did its own digging to find the average age of the founders of the most admired tech companies.

Here’s what we did. We took a top ten list compiled by CNN, searched for the company’s founding year, and calculated the ages of each founder at the time of establishment to come up with an average age for some of the most popular tech companies.

It wasn’t 21.

The oldest person founder on the list was  Clarence Flint, who  actually took three companies - the Computing Scale Co., the Tabulating Machine Co. and the International Time Recording - and merged them together to form IBM in 1911. He was 61 years old. The youngest on the list was Bill Gates, who co-founded Microsoft at the age of 19 years old in 1975.

The average age of the founders on our list: 29 years old.* The cumulative years of the 19 out of the 20 founders from the most admired tech companies was 553.

If there is a best age, FairStreet sure can’t find it. What we do know: You can be the leader of a tech company at any age. It’s all about innovation.

* Based on available data found. No age found for McCollum.

Lyneka Little is a freelance writer who has written about personal finance and small business for such publications as MainStreet.com, Walletpop.com, and Young Entrepreneur.  You can follow Little on Twitter @Lyneka.

[fairstreet-blog]

Six Words to a Quick and Tight Business Plan

By Lyneka Little

If you want to launch a startup or corporation the first and most important step in the process, excluding the idea, is creating a business plan. Pull out the big thoughts, facts, research and imagination and get to writing.

What is a Business Plan

No, you can’t use the 15 second Google Hangout pitch you gave your friends three hours after a beer pong competition. A business plan is a comprehensive overview justifying why a business is necessary and how it will deliver value to its owners, investors, customers and even potential employers. It’s a method to communicate and clearly outline your vision and the market.

Where to Write a Business Plan

So find a quiet (or noisy) spot and start being productive. You don’t need to rent space at a co-working space to begin working on a business plan. The key is to make sure you have all the tools necessary for research during the process. For many entrepreneurs that means Web access.

For the CEO of Amazon, Jeff Bezos, the business plan for the leading online retailer was churned out during a move cross country. See. It’s simple. Just find a space where you can write.

How to Write a Business Plan

PSVMMC, PSVMMC, PSVMMC, if you repeat it at least ten times than you will likely never forget the fundamentals for creating a business plan. The acronym stands for Problem, Solution, Value, Metrics, Market and Competition. And, it’s the six things you should include when writing your business plan.

The Problem - The purpose of your product is to solve a problem in the market. In this space, you should clearly identify a problem in the marketplace.

The Solution - How will your product or service solve the problem?

The Value - Have fun in this area. Write a convincing piece on the benefits of using your product or service. This is the section you will address the value your product will add to a customer.

The Metrics - Metrics are little or big goals you set for your company to measure success. Check out the “10 Key Metrics to Take a Startup to the Next Level” to get some ideas for this part of your outline.

The Market - The Small Business Administration does a great job summing up this section of the plan:  “The market analysis section of your business plan should illustrate your industry and market knowledge as well as any of your research findings and conclusions.”.

The Competition - While your competition does not necessarily have to be your nemesis, your business plan should be able to identify your competitors.

So what are you waiting for? Find your setting and get started on the masterpiece that will beer pong friends and future investors alike.

Lyneka Little is a freelance writer who has written about personal finance and small business for such publications as MainStreet.com, Walletpop.com, and Young Entrepreneur.  You can follow Little on Twitter @Lyneka.

[fairstreet-blog]

How does Equity Crowdfunding compare to other funding options?

By Fairstreet Staff

All these funding options are possible for small businesses and startups except public markets. We have included public markets for the sake of completeness and perspective.

Loans from Banks and other financial Institutions

Benefits

You do not need to give up equity - you keep all the rewards of making your business successful.

Challenges

Not available to all businesses.

You need to pay interest, which can drain the cash flows from emerging businesses.

May require personal collateral.

Raising funds from family/friends

Benefits

Convenient and can be available quickly.

No written contractual obligations (No need to pay the lawyers!).

Little or no paperwork.

Challenges

One time and limited funds.

Risk of damage to personal reputation and relationships.

Merchant Cash Advance against credit card sales.

Benefits

Quick solution to short term cash flow problems.

Challenges

High effective interest rate

Angel Investment

Benefits

Can provide valuable advice and support.

Can introduce you to people who matter for your business.

Challenges

Difficult to find - you have to rely on your personal network to find angels.

Can be difficult to manage if your business has investment from more than one angel investors with differing perspectives.

VC Investment

Benefits

Can provide advice and help your business scale up.

Can have deep pockets if your business needs more funds.

Challenges

Available mostly to “fast growth” startups typically in technology sector that have shown significant traction.

You lose part of the control over your business. Think of “investor management” as a significant part of your job.

Investors are looking for a well laid out exit plan.

Equity Crowdfunding

Benefits

Can raise significant amounts with less paperwork.

Marketing, idea validation and feedback.

Find investors who can become customers and ambassadors for your business.

You retain more control over your business than other forms of equity financing.

Challenges

Need some effort in developing and articulating your idea.

Can become quite competitive since the barriers to entry are low.

Public Equity Markets

Benefits

Can raise large capital Exposure and credibility in markets.

Challenges

Available only to larger companies.

Lots of regulatory paperwork.

Need to pay (significant amounts) to investment banks.

Subject to market analysts and the dreaded “quarterly earnings reports”.

[fairstreet-blog]

Why is now the right time for Equity Crowdfunding?

By Fairstreet Staff

The purpose of the 80-year-old law that prevented private companies from publicly soliciting investment from anyone and accepting investment from small investors was two-fold.

Prevent private companies from committing fraud since they were outside the purview of most regulatory checks and balances.

Prevent small investors from investing too much in risky ventures without understanding the risk-return tradeoffs.

We believe that technology has changed the business landscape beyond recognition and there are compelling reasons to believe that the risks, which the law intended to circumvent, have

Already Been mitigated to a certain extent

Can be mitigated to further by evolving market mechanisms

Before the advent of Internet and social media it was prohibitively expensive for investors to verify the credentials of the issuer. Even identifying repeat offenders and previous frauds wasn’t an easy task. Now with the increasing penetration of social media it is easier to verify (at least to some extent) the credentials of an issuer. It is easier for genuine businesses to prove their bona-fide nature and it is increasingly difficult for fraudulent businesses to do so.

So if a business is genuine, it will have a website, and possible presence on Twitter, Facebook and LinkedIn. The owners of the business will have their professional profiles on LinkedIn and genuine connections. While it may be possible for a fraudulent business to create these profiles but it’s not easy to create a completely fraudulent online presence that seems genuine and compelling.

Furthermore, if a business or a person does attempt this kind of fraud they will leave too many tracks behind to hide from the law and their reputation will be ruined for a long time, possibly forever. It is amazingly difficult to remove unwanted information about yourself or your business from the Internet.

It is easier to entice and defraud a large number of investors when the potential fraudster approaches each of them individually. Collective investment opportunities have emerged and issuers have to convince a large group of investors. Anyone can point out a loophole in the soundness of the business in public domain and that information immediately becomes available to the whole group that the issuer is targeting. So, the emergent “wisdom of the crowds” is a very important factor in determining which crowdfunding campaigns are successful and which are not.

[fairstreet-blog]

What is Equity Crowdfunding?

By Fairstreet Staff

To understand Equity Crowdfunding, it is important to understand Equity first.

What is Equity?

Businesses can be viewed as the sum total of their liabilities and equity. Equity is the residual claim on the value of a firm after all liabilities are paid.

The debtors of a company have the first claim on the assets of the company but only up-to what they have lent plus interest. The rest of the value of the company belongs to the equity holders.

The payoffs of equity are potentially greater but, as is fair, so are the risks.

The managers of a company are duty bound to act in the best interests of the equity holders. At the same time they should not unduly compromise the interests of lenders. The lenders safeguard their interests in the form of covenants and they can take the managers to court if these covenants are violated.

The interests of the managers of a company are not identical to the interests of the shareholders. If the managers of the company let their interests supersede those of the stockholders we say that an “agency conflict” has occurred.

There are various mechanisms though which these agency conflicts can be minimized such as incentive alignment through compensation structuring, monitoring, regulation and possibility of punitive action. A board of directors takes on the fiduciary duty of safeguarding the interests of the shareholders.

What is the purpose of issuing equity?

Businesses seek funds to scale their operations. They can raise funds by borrowing money or issuing equity.

Businesses can choose to issue equity for a variety of reasons:

There is only an extent to which the businesses can borrow money before further debt becomes prohibitively expensive.

Debt comes with an interest that has to be paid periodically. Indeed the debtors look for stability of earnings more than possible earning potential when they lend to a business. Businesses choose to issue equity rather than take on more debt when their earnings vary across different periods and the kind of payoff that they can provide is more aligned with the kind of risk/returns sought by equity investors.

What is the downside of issuing equity?

The owner of the business who issues equity has to share the potential upside of the business with other equity holders.

If the owner of the business is diluted to less than 50% through various rounds of equity financing, they may risk losing control of the business.

Issuing equity will require an upfront effort in convincing the investors and may impose more reporting and regulatory burden on the company after the equity is issued.

What is Crowdfunding?

Crowdfunding is the pooling of funds by a large number of individuals in an endeavor that promised to put their funds to some constructive use. The funders may or may not seek a reward or return based on their contribution.

Equity crowdfunding is crowdfunding where the promised reward to the contributors is equity in the business of the issuer.

How is it different from issuing equity and investing in the public markets?

The economic rationale for issuing and investing in equity remains the same. The game changer is allowing businesses to issue equity without public listing and publicly soliciting investment and allowing unaccredited investors to acquire equity in private businesses. This lets smaller businesses issue equity and lets smaller investor avail the same investment opportunities that have been available to only privileged investors. This has been legalized by the JOBS act and the SEC is making these provisions available in a phased manner.

What are the unique challenges of equity crowdfunding?

In public markets a lot of the heavy lifting involved in conducting due diligence and proper valuation of the business before the issue and monitoring the business after issue is done by the underwriter, the SEC and equity analysts.

In equity crowdfunding a lot of these functions will fall upon the investors. We believe that market mechanisms will evolve to perform these functions. We have well developed ideas of how these challenges can be met and are working to integrate them on our platform in the most effective manner.

What are the unique benefits of equity crowdfunding?

From the point of view of the issuer equity crowdfunding is an alternate mechanism to raise funds for their business and is intended to bridge the gap in small business financing. It is also a great way of reaching out to a large group of people who become not just investors but motivated customers and ambassadors for the business.

If the campaign is successful the non-financial benefits include marketing, customer engagement, feedback and idea validation. Even unsuccessful campaigns benefit through user feedback and gain some traction that is useful if they eventually pursue the idea through other funding alternatives. Unsuccessful can also act on the feedback that the market provided them and come back to the crowdfunding platform with a modified and improved model.

From the point of view of the investors they get access to investment opportunities (in businesses that have been an active part of the economy) that have hitherto not been available to them. They also give investors an opportunity to take up an ownership stake in a business that they care about.