Increasing the number of local angel investors has been the goal of Metro Startup Launcher from the very beginning. We’ve done a lot of blogs, emails, and podcasts, and now we’ve participated in two different types of crowdfunding campaigns. How’s it going? Well, one of the companies just landed an investor/partner that has agreed to invest up to $10 million and is launching one final $300,000 local investor round.
So what’s working and what’s not working?
If you look at angel investing in our area, here’s what’s happening:
1. Companies like Edj Analytics, MobileServe, and SentryHealth (formerly Edumedics) are raising millions of dollars in capital. They’re raising capital the “classic” way, using a Regulation D 506(b) SEC exemption. Under this type of exemption, you can raise an unlimited amount of capital from accredited investors, up to 35 non-accredited investors per year, and you must only raise capital from people with whom you have an existing relationship. Generally, an accredited investor is defined as a person with an income of $200,000+ or $1,000,000 net worth (excluding the value of their home). You cannot use any form of public advertising. This method of capital raise is still very successful, IF you know the right people. You must find a lead investor to help you set up your capital raise, get all the right paperwork in place, and encourage all of their friends to invest. Typically, they shoot for $25,000+ investments from each investor.
2. One local company, Cuddle Clones (https://cuddleclones.com/), has utilized the Regulation CF exemption for equity crowdfunding. This is a newer method of crowdfunding that allows anyone, accredited investors or non-accredited investors, to invest. It is very similar to Kickstarter in that you can publicly advertise as much as you like; however, you can actually sell equity investments in your company. Investments can be very small, as little as $100 per investor, so just about anyone can afford it. You can raise a maximum of $1,070,000 per year using this exemption. To use this method, you must utilize one of the licensed online equity crowdfunding portals (such as WeFunder, StartEngine, or SeedInvest). They provide great online resources for walking you through the process and for collecting your funds. But, they’re not so great at marketing the capital raise for you. You must be prepared to execute a significant marketing effort (and dollars) in order to make this work. Your capital raise also is limited to a set period of time. If you haven’t completed your full raise, you’re out of luck. Finally, with most of the portals, you cannot access any of your raised funds until the full capital raise has been completed. However, if you perform an amazing marketing campaign for your capital raise, this process can be very effective. Over $100 million has been raised using Regulation CF since it became legal in May 2016.
3. Finally, another local company, Blue222 (https://blue222.com/), has been successful in utilizing the Regulation D 506(c) SEC exemption. The 506(c) exemption allows a company to raise an unlimited amount of capital from an unlimited number of accredited investors only. You can publicly advertise as much as you like. The one caveat is you must prove that each investor in an accredited investor. The great thing about this exemption is that it is easy to set up, and you don’t need to go through a licensed portal to collect funds. You can deposit the funds directly into your account and utilize the money immediately. In the first trial run of this method, Blue222 raised $214,000. Blue222 has intentionally chosen to raise capital in small chunks using the 506(c) exemption. Each small chunk of $200,000 to $300,000 is being sold at higher valuations. This allows earlier investors to get more bang for the buck and encourages people to move quickly to get involved. I believe that this type of fundraising has a lot of advantages for startups, as I explain below.
(By the way, full disclosure, I’m the CEO of Blue222 and the Director of Metro Startup Launcher. When Metro Startup Launcher was started, I fully intended to use Blue222 as a test case to learn more about the various methods of online capital raising that are promoted by Metro Startup Launcher.)
How has the Regulation D 506(c) exemption worked well for Blue222?
Blue222 started with the Regulation D 506(b) exemption. The company raised capital from the founder and friends. This allowed the company to begin hiring programmers and developing software. Blue222’s founders have significant experience in the areas of real estate due diligence (environmental inspections, appraisals, building inspections and other real estate inspection services). They saw the potential for creating an Uber or Airbnb type platform that would make the real estate due diligence business more efficient – worldwide. (A $40 billion market in the United States alone.)
Once the company founders ran out of friends and family to invest, the 506(c) exemption made sense. This exemption has allowed the company to reach a much larger audience of accredited investors and to slowly figure out the advertising processes that work to bring in investors with zero time constraints (as opposed to the Regulation CF raise, which has a time limit).
So, Blue222 gradually built up a mailing list using MailChimp, and learned how to effectively funnel people onto the MailChimp list using various forms of social media advertising. The company steadily sends an email with company updates to the entire mailing list, casting a wider and wider net, and continually accelerating the capital raise.
The company has never had a huge pool of capital to work with but has acquired all the capital it needs to steadily build, test, work with customers, and improve. Many experts would argue that this slow, somewhat bootstrapped approach leads to a much better long-term company. I’m calling this type of capital raise and company building process the “Boosted Bootstrap.” The company does raise capital, but only as much as it needs to grow slowly and carefully.
Now comes the really exciting part. Using the steady buildup of an email list has lead the company to a relationship with two Michigan based companies that really see the value in Blue222’s model. They see so much value that they have agreed to invest up to $10 million in Blue222. These companies also have very high tech marketing expertise and are helping Blue222 build out the most automated and high tech marketing machine that the Louisville area has ever seen.
So, in my opinion, the Regulation D 506(c) method of accredited investor crowdfunding has a lot of advantages and should be considered by any company that’s raising capital, for the reasons stated above.
Equity Crowdfunding is Good for Startups and Investors
There’s a lot of work to be done, but I believe equity crowdfunding is a better way for both investors and startup companies. Why?
1. Investors can invest small amounts in multiple startups. This is statistically proven to be the best way to invest in startups. In fact, the average angel investor makes a 27% annual return on investment, as long as they invest in at least 12 companies over 5 years. You can download this free ebook to see all the statistics for yourself: http://metrostartuplauncher.com/freebook/.
2. As we build a larger and larger database of “micro-angel” investors, we can spread the risk to a lot more people. It’s very rare that a company in our area raises capital on an “idea.” However, that’s partially what makes Silicon Valley so successful: taking more risk on early stage startups. Of course, Silicon Valley also has a lot more capital, a lot more technology, infrastructure, and other advantages. Statistically, even in Silicon Valley, 1 in 10 startups produces 85% of the angel investor returns. More startups = more wins. More angel investors = more startups.
3. If it’s easier for startups to raise their early “idea-stage” capital, great entrepreneurs can try out more of their ideas. The best entrepreneurs almost always try lots of things before they nail down a huge win. I’ve often heard people say that in our area, a failed company is the kiss of death for an entrepreneur. In Silicon Valley, that’s not the case. Some VCs won’t even invest in an entrepreneur unless they have one big failure under their belt, because the failure forces the entrepreneur to learn a lot!
4. More investors = more startup capital = more startups = more jobs = more wealth for the whole community.
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