Finding the Right Type of Investment Crowdfunding

Crowdfunding – the practice of financing a business by raising relatively small amounts of money from a large number of people, typically via a web platform – comes in several forms. While donation and rewards-based crowdfunding such as Kickstarter can be the right choice to get your business rolling, small businesses are increasingly turning to marketplace lending and investment crowdfunding platforms to finance their growth.

Differing Approaches to Investment Crowdfunding

Investment crowdfunding platforms such as Crowdfunder and AngelList focus on tech startups. CircleUp takes a somewhat different tack. It’s a marketplace that matches consumer companies with individual investors. However, CircleUp, like the others, is oriented toward accredited investors and fundraising amounts of more than $1 million – hardly in the sweet spot for human scale businesses needing tens or hundreds of thousands of dollars. Localstake seeks to fill the void by helping consumer businesses raise amounts ranging from $50,000 to $500,000. GO TO LOCALSTAKE

Lower Offering Costs Enable Lower Offering Amounts

Localstake helps businesses raise money in the form of preferred stock, convertible debt, and revenue share loans. In the not-too-distant past, the “private placement” of such securities (i.e. outside of a registered public securities offering) was typically only realistic when offering an amount in the millions of dollars. Restrictions on how such offerings were communicated to potential investors and other costs of compliance with Federal and state securities laws required a lot of expensive, specialized labor. Transaction costs in the hundreds of thousands of dollars were the norm. If it costs that much to raise capital, you’d better be raising millions. Over the last few years, emerging technologies and more relaxed regulations have lowered the upfront cost of raising money as well as the ongoing cost of managing relationships with dozens of individual investors. That’s what makes offerings of less than $1 million plausible.

A Conversation with Ryan Flynn at Localstake

I spoke with Ryan Flynn, a co-founder of Localstake, to learn more about his company’s investment crowdfunding niche.

Making an offering of preferred stock, for instance, is a much more involved process than is pre-selling a product or getting a bank loan. Regulations must be navigated, deals must be structured and documented, and investors must be cajoled toward a timely closing. In other words, the functions of the investment banker must still be performed. Ryan said, “We are helping our customers at every point along the process of a capital raise.” That help comes in several guises throughout the fundraising journey:
  • Analyzing the appropriate type and timing of an offering
  • Developing a business story
  • Managing communications with prospective investors
  • Collecting indications of interest (“soft circles”)
  • Gathering investment commitments (“hard circles”)
  • Creating documents and getting everybody’s signatures
  • Transferring funds, and
  • Administering reports and payments to investors
Ryan says, “We definitely are trying to utilize technology as much as possible throughout the process.” The effect of the application of technology is reflected in Localstake’s current pricing structure:
  • Phase 1: Build a profile and connect with investors – $199 per month
  • Phase 2: Sign investment documents, verify investor eligibility (if applicable), and transfer funds – $499 per month + 5% of funds raised
  • Phase 3: Communicate with investors and distribute funds as necessary – $49 per month + 1% of funds distributed
For example, a $150,000 revenue share loan might mean total payments to Localstake over the life of the loan of around $15,000. That may not sound cheap, but it’s less than you might have paid as a non-refundable retainer to an investment banker a few years ago – in the unlikely event that you could find one to help you with such a small deal.

Converting Social Capital into Financial Capital

Getting the mechanics of investment crowdfunding right is necessary but insufficient. You have to cultivate a network of people who believe in you, and then you have to activate that social capital by crafting and telling a compelling business story. As Ryan puts it, “Using a platform like Localstake can help supplement your network. But, ultimately, having an existing base to work from is going to be a key point of whether or not you’re going to have success.” Advances in technology, regulatory policy changes, and entrepreneurial innovation by companies like Localstake have made it possible to raise a wide variety of funding at historically low offering amounts. That doesn’t mean it’s easy. A good place to start, as Ryan suggests, is “getting the story out to people and building an audience.”