While the CrowdFunding market continues to grow at a phenomenal rate globally (an $34+ billion funds raised world wide in 2015), there are far too many spectacular and expensive failures. In fact, in the last year, a few unfortunate and well-publicized disasters (see Zano and Razor) appear to show that the more capital raised, the more likely a dramatic loss will occur.
When an entrepreneur raises capital through crowd investing (Equity CrowdFunding or Regulation A+), the required preparation is more demanding, and typically the management team have more experience. Yes, exuberance can still be irrational here, but it’s rare.
When a project gets great funding and switches from being a neat concept to being a seriously large amount of work and responsibility, then as the money soars higher, the odds of the business succeeding actually reduce.
Here’s why: With many of the very successful products that get huge CrowdFunding donations, the inventors and entrepreneurs have very little business experience and weren’t really planning how they’d manage great success when they launched their CrowdFunding project. They were challenged enough with creating their new product and all the marketing they needed to do to get their project in the public eye. So when the scale takes off and the demand goes ballistic, are they ready? Do they have concrete plans in hand to deliver on their promises at the scale their customers require? The lamentable answer is “rarely.”
It’s like trying to convince an 18 year old to buy health insurance. They don’t see the need until it’s too late. So, rather than pontificate here about what startup crowdfunders “should” do in great detail – with the yawns that would get –I came up with a simple set of rules, built upon my experience – I call them the CrowdFunding Law of Four – because the name is memorable. They are easy to adopt, as follows:
In summary, take these guidelines to heart. Avoid the overnight flash and burn. Temper your visions of easy success and take these simple steps to prepare your crowdfunded business to perform, and stay alive to keep on delivering on a long term basis. It will be worth it.
Photo by @BIUK_Tech
Rod Turner is the founder and CEO of Manhattan Street Capital, helping successful mid-stage and high growth startups to raise the capital they need to scale faster under the newly-approved criteria of Regulation A+. Turner has played a key role in building six successful companies including Symantec/Norton, Ashton Tate, MicroPort, Knowledge Adventure, and ArtSlant, Inc. He is an accomplished investor who has built a Venture capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris, Ask, and eASIC.