Financing Your Future

Paper or Plastic?

Fast Company started the article with…”Rather than using traditional loans to fund their businesses, the majority of small business owners dig into their own bank accounts to keep their companies afloat.”

It made me smile, okay laugh. If you’re currently in startup mode or even if it’s a distant memory—you know that a traditional loan ain’t happening. So, it boils down to paper (cash/savings) or plastic (credit cards).

According to the Sam’s Club/Gallup Microbusiness Tracker, more than 60 percent of microbusiness owners rely on non-retirement, personal savings as the lead source of funding for their businesses.

Other popular sources of funding for micros include credit cards and money from family and friends. The research also revealed that less than 3 percent of microbusiness owners rely on government loans, small business loans or crowdfunding to support their businesses. Again, a chuckle for the government or small biz loan – but crowdfunding has changed the pay to play rules over the past year.

Previously Kickstarter made it easy to support an aspiring entrepreneur. Now we can take it one step further, not just supporting an entrepreneur, but investing in them.

In May of 2016, Title III of the JOBS Act went into effect, making it legal for anyone to invest in a private company, opening up investing in willing startups to any American. Now, you don’t need a million dollars to join a fundraising round, you can help a company you believe in–and get a small ownership stake–for much much less.

A wide range of platforms have sprung up to help facilitate this transaction. But while it’s been nearly a year since the new law was passed, equity crowdfunding hasn’t skyrocketed.

That said, there have been some success stories. Indiegogo, which has raised more than $1 billion for the many non-equity projects on its site, launched an equity option in November. Four weeks after the launch, Indiegogo had $600,00 in investments.

However, Tech Crunch says,

“No one will be talking about crowdfunding in five years.”

They feel the term is inherently flawed; it focuses on the wrong side of any investment: the donor/investor. And it’s become too broad to be meaningful. The missions of the leading players are widely misunderstood, even by their own users.

“Crowdfunding” conflates a variety of very different business models, the most prominent being donation-based platforms like Kickstarter and investment marketplaces like Lending Club and CircleUp. To be clear, equity crowdfunding does not encompass Kickstarter. Kickstarter is a tremendous platform, bringing creative projects to life, many of which would never exist otherwise.

It’s equity crowdfunding that is dead in the water. Not because individual investors won’t continue to invest, but because equity crowdfunding is a confusing and misleading term.

Let’s be clear, says Mark Lynn, cofounder of DSTLD, it’s not an easier way to raise money. It’s just a different way to raise money. The bonus is the ability to share that raise publicly and market yourself not just to angels, but everyday consumers as well. Title III made it legal to publicize a fundraising effort. Rather than keeping it behind closed doors, companies can openly solicit for funds from anyone. But there are some challenges. Like any fundraising, it involves extensive hours of marketing the company, liaising with potential investors, and filling out paperwork to meet regulations.

Bottom line, investing is a risky business, particularly in early-stage companies, and equity crowdfunding doesn’t mitigate that risk.

For non-accredited investors Peer-to-Peer Lending may be an appealing option especially if they would rather invest in individuals than in companies or real estate. Peer-to-peer lending platforms allow consumers to create fundraising campaigns for personal loans. Each borrower is assigned a risk rating, based on his or her credit history. Investors can then choose which loans they want to invest in, based on how much risk is involved.

And, it doesn’t take a huge bankroll to get started with this type of crowdfunded investment. If you’ve got an extra $25, you can start funding loans through Lending Club or Prosper, both of which open their doors to non-accredited investors.

Live in Minnesota? MNvest is a 501(c)(4)

nonprofit that successfully advocated for the democratization of investment. Now everyday Minnesotans can invest in private Minnesota companies. The benefits for the companies are manifold, but namely include the ability for issuers (those raising money) to advertise their need for capital, as well as providing a means for nonaccredited investors (97% of population) to participate in private company securities offerings. breaks down the law, its associated rules, and helps businesses in Minnesota grow.