Seeking community-based investment is exciting. With the right team in place, it can be relatively user-friendly and easy to understand, but it still involves asking people to take real financial risk with you. There will be some serious issues to address and information to provide.
You're an entrepreneur, so you're probably a doer and you like to get things moving, but it's important to make sure you're prepared before you start looking to the community for investment. Want to know if you're ready? Start by answering these questions:
DO YOU HAVE A SOLID EXISTING COMMUNITY OF CUSTOMERS, SUPPORTERS AND ADMIRERS?
Community-based investment is both a financial and social undertaking. Your business should start with a strong existing community presence and an interest in connecting with your potential investors as much as possible. An advisor like Sidewalk Ventures can work with you to conduct an outreach campaign, but you’ll need to start with an open line of communication with your current customers, supporters and admirers. They’re your strongest potential investors, and their investment will determine the success of your campaign.
In fact, our process at Sidewalk Ventures always begins by reaching out to the “inner circle” of supporters that our client has identified. This is one of the reasons we don’t use the term “crowdfunding” much. It’s not about e-blasting the opportunity to invest in your business and hoping to move folks with a video (though videos are a great supplementary marketing tool). It’s about leveraging existing relationships between your business and individuals in the community. That takes time and effort. The stronger those relationships, the more likely they are to turn into investment. If that "inner circle" doesn't exist or is unmoved by the prospect of investing, it's important to stop and think about the likelihood successfully raising the capital you need (critical self-assessment is painful but necessary at all stages, really—with your head in the sand, you'll eventually suffocate).
Existing customers and supporters also validate your business. It’s very diﬀicult to attract community-based investment for an untested concept. An advisor can help convert your customers, supporters and admirers into investors, but it’s important to know that a community-based investment campaign is not a good strategy for testing or drumming up initial support for your overall concept. Your business's track record of success in the community is critical.
IS YOUR COMPANY’S BASIC INFRASTRUCTURE IN PLACE?
Before seeking community-based investment, your company should have the basics in place. It should be operating as a valid LLC or other entity type and should have business insurance, a separate bank account and basic financial control systems.
It’s also crucial that your business have a trusted accountant. Any time you receive investment in your business, there are tax implications, both for your business and for your investors. Your accountant will obviously need to be on top of the tax implications for the business. Moreover, when your investors prepare their own taxes, they're allowed to rely on certain accounting representations related to the investment, which will come from you—the business (but prepared by your accountant). Your accountant should be familiar with your business and informed about your financing plans.
DO YOU HAVE A SOLID BUSINESS PLAN AND FINANCIALS?
There’s plenty of debate these days about the general need for a written business plan. When you seek community-based investment, you need a business plan, period. For one thing, we strongly believe in the inherent value of a business plan, even if the only audience is you—the entrepreneur. There’s a written business plan for Sidewalk Ventures, even though our operation is lean and we don't intend to seek outside funding anytime soon.
A business plan is a compass, a way of checking your daily twists, turns and decisions against a larger strategic course. But that doesn’t mean the plan has to be fixed, or even considered "finished", whatever that means. To the contrary, if you’re finding a frequent disconnect between the daily decisions and the larger plan, then you can choose either to alter your decisions or make some changes to your plan. There is a lot more to discuss about business plans. Perhaps that’s a topic for a future blog post.
Back to the immediate issue of having a business plan in place before seeking community-based investment: You’ll need to share a lot of information with potential investors conducting “due diligence” on your business. Much of that information will come straight out of the business plan, so the justification for having one is pretty simple. The plan should include information about your management team, operations, and marketing. It should also have accurate and complete information about past performance, as well as future projections based on a critical assessment of your business. An advisor can help you frame and communicate your financials eﬀectively, but no one knows your numbers better than you.
HAVE YOU THOUGHT ABOUT HOW MUCH MONEY YOU NEED TO RAISE?
An advisor can work with you to determine exactly how much financing you should seek; however, you should begin with a general idea of how much you’ll need. Most importantly, you should be able to describe how you plan to spend the money you raise. Investors want to know why you're asking for their investment and how it's going to help your business grow.
Remember to build in around 10% for transaction costs for a typical fundraise. If you need, say, $200,000 for your business, you should look to raise around $220,000. That pays for things like filing and escrow fees, technology platform costs, and a placement or success fee for any broker-dealer you are working with (including Sidewalk Ventures).
So...are you ready?
This blog is the foundation for our "Basic Readiness Checklist", which we always review with potential clients. Check it out here.