Drilling Down: What Small Businesses Should Know About ...

Dashboard

A weekly roundup of small-business developments.

In this week?s Dashboard roundup of small-business news, we quoted from a blog post in which Ryan Caldbeck gave three reasons why crowdfunding will be good for investors. We went back to Mr. Caldbeck, who helped found crowdfunding site CircleUp, to talk about what small businesses need to know about the sites.

Q.

Can any business raise money through crowdfunding?

A.

Yes. Businesses have two options today. They can try to raise donation-based funds through several existing donor sites. In this model, the crowd is making a contribution to your business usually in exchange for rewards such as samples of your product or services. This can work well for companies just starting out or those looking for small amounts of capital for a new product or service. For larger amounts, equity-based crowdfunding, where businesses sell a portion of the company to investors, is permitted in limited form.

Q.

Which businesses do you think are best suited to take advantage of crowdfunding?

A.

I believe crowdfunding is a great option for businesses that have an established consumer base and an accessible story for new investors. I think of high growth companies with a respected brand presence and products already in the marketplace.

Q.

Are there important differences among the various crowdfunding sites? Any favorites that you would recommend?

A.

Absolutely. Each site has its own focus, unique skills of the management team and approach to helping investors and companies. Some portals are more focused on technology companies, others on design and creative projects. It is important for businesses to look closely at who is behind the platform and who the target company is. Investors will go to the sites where there is trust and quality, so businesses looking to raise capital through crowdfunding should look for the same when selecting a site. We have been impressed with what Kickstarter has done with the donation-based model. We think AngelList has done a good job helping to make the tech angel market more efficient. We also believe that CircleUp will prove to be very helpful for consumer brands because of our industry focus, experience investing in private consumer companies, and post-close investor support functionality.

Q.

Do you think crowdfunding companies are being asked to disclose enough information?

A.

Our view is that there should be a base level of information required, but then the market must determine how much information is necessary for individual investors. The true innovation of crowdfunding is the transparency created between investors and the companies. The companies should be prepared to share more information with potential investors in response to questions during the fund-raising process. The investors should also be allowed to communicate with each other, helping to share ideas and concerns about a potential investment. In the end, more transparency will help the companies, because they will end up with the investors who have a more complete understanding of the business and the entrepreneurs? vision for growth.

Q.

Did the Jobs act leave anything out that you would?ve liked?

A.

I would have liked additional detail on the regulation of the crowdfunding sites themselves. The Jobs act left much of the work to the S.E.C., which will be adopting rules for implementing crowdfunding over the next nine months. It may be odd to hear a C.E.O. ask for more regulation, but we think clear standards are important to protect investors and companies. It is critical that businesses interested in crowdfunding are protected from unscrupulous operators. We support a strong accreditation process for crowdfunding sites. Fundamentally, crowdfunding portals are helping issuers sell securities and should be regulated just as financial firms are in the offline world.

Q.

What warnings would you give a small-business owner interested in crowdfunding?

A.

Do your homework. Taking on outside investors is an important decision in the life of your company. It is important to know you are working with experienced professionals in this process. Make sure you research the different platforms. First, pay attention to the site?s management team and the investors that have invested into the site. Do highly regarded investors believe in the portal you are using? Second, make sure you understand the security safeguards that are offered to you and the investors. Would you feel safe investing through this platform? If not, then it is doubtful other investors will feel comfortable. Finally, how does the site create transparency for you and investors? Transparency helps the investors make better decisions ? ultimately attracting higher quality investors which will be better for you.

Gene Marks owns the Marks Group, a Bala Cynwyd, Pa., consulting firm that helps clients with customer relationship management. You can follow him on Twitter.

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