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Before you begin to hunt for capital, it is important to know the kind of capital you need and when and why you need it. There are basically two capital pool types. The first is debt; the second is equity.

 Debt Capital

Debt capital is probably most familiar to entrepreneurs, as debt is often what we know about in personal life.  Bank loans for cars or mortgages on houses, and the use of credit cards for the purchase of personal items, are common debt instruments.

Debt financing for a company is very similar. A lender, be it a bank or individual, will loan money to an entrepreneur with the agreement that it must be paid back with interest over a period of time. As a means of reducing risk, the lender will want to have collateral of sufficient value to cover the amount being granted, in case the company is unable to pay back the loan.

However, for a start-up company, using debt to raise capital is not an option.  Why? Because the company does not have any assets to pledge as collateral; nor does it have any revenues with which to pay off a debt. In such instances, some lenders may insist the entrepreneur pledge their personal assets as secured collateral. Of course, this would only occur if the lender is confident in the business, and the entrepreneur is equally confident in the company’s prospects to pay down the debt.

It is not uncommon for the entrepreneur to use credit card debt to finance a company’s growth, particularly in the early stages. However, in many cases these credit cards are personal debt instruments with their associated high interest rates, and they hold additional personal risks for the entrepreneur. Running up a high personal credit card debt, with no income on the horizon, can keep an entrepreneur awake at night with worry.

 Equity Capital

The second capital pool is equity. This, principally, relates to the sale of the company’s shares in exchange for cash from an investor.

Other people’s money

 Arguably, equity as a financing option seems preferable to going into debt. You don’t have to use your first-born as collateral (something you might want to do if you have a teenager), and fret over whether you can make monthly payments. But having said this, there are issues that have to be addressed, because when you exchange equity for cash you will be “using other people’s money.” When you receive funds from an independent third party in exchange for equity in your company, immediate expectations and obligations are triggered.

To begin with, equity investors own a part of the company. Through the purchase of shares they essentially become new partners. They expect higher returns for the risks they are taking by investing in the company than they would by placing their money into safer and conservative investment instruments. These investors have a “vested” interest in your success because they have contributed their own money toward it.  As a result, you are accountable for how wisely you spend their money.

An equity investor can be involved with your company for a long time, since a liquidity or exit event such as an acquisition or IPO (Initial Public Offering) might take five to seven years to happen, if it happens at all.  Early-stage companies are risky ventures. Therefore, keeping long term investors on side during the good, the bad, and yes, the ugly times in your company’s development is a good idea. Why? – Because you may have to go back to them again if more capital is needed.

Smart money

 Private equity investors can provide more than just money to satisfy your cash-thirsty enterprise. In some cases, they can offer solid business advice. This is particularly true if the investor is familiar with your industry. Private equity investors are also “channels to capital” and expand your reach to other investors by virtue of their existing business networks.

If your “lead” investor likes your company and shares this with others, good news travels fast and can be infectious. Don’t underestimate private equity investors, as they bring more than money to the table. They bring their experience and contacts as well.

 Investor expectations

 What do equity investors want to see before they invest in a company? The answer is simple – they look for companies that have the ability to increase enterprise value over time. This means that at exit or liquidity the investor expects to make 10 to 100+ times his or her original investment.  How you as the entrepreneur strategically spend the capital raised in each round must increase share value.  Investors want to see their shares become more valuable over time, as this translates into a return on investment – a win for you and a win for them.

If your company’s shares do not appreciate in value, the future prospects of raising additional capital will most certainly diminish. To coin a phrase “companies don’t fail; they just run out of money.” To avoid this unfortunate situation, you must create a financing strategy that increases share value and, therefore, the overall value of your company.

Is Crowdfunding disruptive? If you take the word disruptive to mean disturbing or upsetting what is currently in the funding ecosystem – my quick answer is to say no. I think there are very complementary aspects to Crowdfunding in the capital raising ecosystem. In my opinion, it is just another arrow in the entrepreneur’s quiver in the search for capital to fuel their companies.

For example, reward based Crowdfunding might be more logical for a company to pursue at a certain point than a traditional round with Angel investors. Alternatively equity based Crowdfunding might be a good stepping stone in whetting an entrepreneur’s experience with giving up shares in his or he company and priming the pump before proceeding with Angel or VC rounds.

But I do not see equity based Crowdfunding as the be all and end all for raising money for entrepreneurs. Absolutely not!

Now if you look at the other side of the coin (pardon the pun), Crowdfunding allows investors to see more deal flow as the Internet has no boundaries. However, the traditional Angel investor tends to want to be closer to their investment in terms of geography to provide “smart money” advisory support. Will this “smart money” support disappear – maybe? Yet, with technology innovations, such video conferencing, could very well support mentoring at a distance.

I also see that the many existing and new equity based Crowdfunding platforms will allow investors to quickly vet what is aligned to their risk and interest profiles. It creates an “always on” financial marketplace for them.

So what main trend do I see – it seems the approach to raising equity capital through Crowdfunding is currently so focused on the paper exercise to ensure regulatory compliance. And this seems to be the main focus of equity Crowdfunding these days particularly in Canada and the United States.

Reviewing the companies that have received significant sums of capital from equity Crowdfunding in the UK, for example, there appears to be one discerning trait about these companies and that is they can demonstrate they are not just preparing campaigns or compliance documents … they are demonstrating they are building investment value. A business that is attractive to investors.

So what will be important for entrepreneurs wishing to get involved in equity based Crowdfunding is that they have to ask this one basic question at the very beginning of any capital raise journey.

Is my company fundable?
To help answer this question, there will be a trend toward a deeper education of entrepreneurs in the “art of the start” or the art of building a company that is fundable. We will see a shift from current day bricks and mortar incubators, accelerators, advisory support to more digitally based delivery mechanisms to help entrepreneurs engaged in Crowdfunding to build better businesses.

So to summarize it basically boils down to doing the things necessary to get capital and what I call creating “investment curb appeal”. It goes well beyond just having a business plan in hand, all the regulatory documents prepared and a landing page on an equity Crowdfunding site.
It boils down to the fact that the entrepreneur must demonstrate in every way that he or she is building a sustainable business and advisory support from all corners will be necessary to help them to do this.

“90% OF ORGANIZATIONS FAIL TO EXECUTE THEIR STRATEGIES SUCCESSFULLY.” Kaplan & Norton

A frightening statistic!  Yet we have been trained that without a strategic plan a company is doomed for failure.

“STRATEGIC PLANNING AT A POINT IN TIME DOUBLES THE LIKELIHOOD OF SURVIVAL AS A CORPORATE ENTITY.” Noel Capon, James M. Hurlburt, Columbia University

So then, if companies can get the implementation right then the failure rate will go down and the survival rates will go up. Sounds like a plan (pardon the pun) but let’s really get to the root of the problem if we can.

I am sure you have heard of Murphy’s Law, Moore’s law and other similar laws which are based on relationships or concept translated through ratios. Well, here is one for you it’s called …

“Blanchard’s Law”, why not, and it relates to the key factors necessary for successful strategy implementation.

Here’s it is:

An organization’s success at strategy implementation =  

 The organization’s ability to effectively mobilize its resources and focus on strategy/ The organization’s ability to reduce the resistance in achieving buy-in and accountability

This means that the implementation of an organization’s business strategy (direction) is equal to the ability to mobilize the people, processes, systems and technology in an organization (power), divided by the organization’s ability to achieve buy-in, discipline and focus on the implementation of the strategic plan (resistance reduction).

What does this mean?

If an organization has the ability to actively mobilize all of its resources at 100 units and yet is held back by resistance to implementation by a factor of 10 units the resulting quotient or outcome is 10. In other words, if the level of resistance goes up the ability of the organization to implement strategy goes down. In this case, the organization is relegated to the lowest common denominator of strategy implementation of 10 units.

However, if the same 100 resource units faces a resistance factor of 2 the result is a 50 unit implementation factor. Thus, if the level of resistance goes down then the effectiveness of strategy implementation goes up.

The take away, reducing resistance is the key.

Simple huh, but why is it so difficult to address. I mean if an organization can reduce the level of resistance in the way it implements strategy the greater will be its productivity – why just do it.

The big question is how can this be done?

According to a study conducted by Canadian Society of Association Executives (CSAE), it determined there are clear patterns that emerge in successful strategy implementation efforts.

They observed three common-sense tests:

A. Manage to results milestones;

B. Explicitly addressed the people issues within the organization relative to strategy execution, and;

C. Resource properly, not just with money.

The CSAE also found that even the soundest strategies failed to achieve their performance objectives because one of these tests was flunked.

So getting all three tests right is important.

And getting them all right is a tall order if an organization relies on 20^th century tools for implementation. How can an organization expect to win at strategy implementation using memos, presentations, occasional plenary workshops and performance compensation plans?

These are tools that can be a good start, but we are now in the 21^st Century and powerful, integrative digital tools are now at our disposal. These tools can help to define outcomes, measure and then track strategy as it is implemented.

Using technology for strategy implementation is not just a one-time thing; but an integrative effort to instantly get at the underbelly of how strategy can be managed in an organization.  Not only vertically and across an organization’s structure but to penetrate the very DNA of its culture as well.

I recently encountered a company called Envisio. They have spent the time and money to answer the 21^st century call for a technology to help with strategy implementation. Envisio’s cloud based software can reduce the factors that create resistance holding an organization back. It gets at the very problems of implementation and allows for the revitalization of the strategic planning process as well.

Here are the key points in reducing resistance that makes the Envisio software so unique:

ACTIONABLE

Envisio provides a structured approach in creating and translating strategic plans into individual and team activities with measures. This way the organization can pinpoint resistance points and shore them up to improve implementation outcomes.

CLEAR

Everyone within the organization is assigned a role and responsibility to bring the strategic plan to life. It means that people become strategic thinkers making their contributions meaningful and accountable toward a common purpose. There is no room for ambiguity.

IN CONTEXT

Dashboards provide a view of individual activities and measurement that connect them to the plan. This allows the people in the organization to understand how they fit into the strategic plan and how they can reach strategic objectives.

DYNAMIC

Plan updates are automatically recorded and communicated to teams and individuals. Strategy implementation means all hands on deck working together in making things happen.

MANAGEABLE

Intuitive reporting revolutionizes management’s ability to track progress against the strategic plan and make adjustments when circumstances dictate. Remember there is no such thing as a perfect strategy so managing strategy under fire ensures management has its finger on the pulse.

I invite you to check out Envisio’s website to learn more about their technology and the unique opportunities it provides organizations. Envisio developed, markets and supports an easy-to-implement web-based strategy implementation software that flows from an organization’s strategic plan. I encourage you to visit – http://www.envisio.com/ for more information.

“If you always do what you’ve always done, you’ll always get what you always got.” – James P. Lewis

Why do strategic planning? Is it really helpful to plan when things around us are changing so rapidly? Look at the current business environment that is changing as fast as quick change artists in a theatre show.

 The rate of change as we have discovered is so fast that traditional planning horizons just can’t keep up and current planning techniques are obsolete. This means organizations are often caught with their pants down before they can realize on their previously planned outcomes.

 So what has to shift in how organizations approach strategic planning? The answer –they must leave behind their attachment to traditional strategic planning approaches and move toward a lean and iterative strategic management process.

 Here are five principles to help an organization create a strategic adaptation culture.   

 Focus on one goal at a time – Abridge

 Focus is essential in any activity. Confusion results when there are too many directions undertaken at once.

 For example, in the sport of football the single focus is to bring the ball into the end zone and score. Note I was very specific to indicate that it was not to score a touchdown because a field goal could very well be the way to score points as well. During a game the players focus on bringing the ball down the field concentrating on crossing the line of scrimmage consecutively. The goal is to reach the end zone and score – how it is done is a matter of tactics and team work.

 For organizations the same is true. Having a clear and defined goal to focus on means that everyone in an organization will know what is expected of them and what is needed in getting the goal achieved. Keeping the goal simple and focussed allows organizations to create a rallying call for what ultimately matters strategically.

Build a culture that anticipates near term trends – Anticipate

Drawing again from sports, Wayne Gretsky once said, “I skate to where the puck is going to be, not where it has been.” This insight speaks to the element of anticipation. In the context of strategic implementation it means every person in the organization should be responsible for predicting future outcomes and brace for them. A strategy conscious organization should build a culture in which anticipation is encouraged and practiced regularly.

 Empower employees to make decisions based on context – Adjudicate

 It is virtually impossible for any executive or manager to make every decision in an organization. What is necessary is that employees be given the right and freedom to make decisions within the context of a single overarching goal. This means that they must have the ability to make decisions on the fly when changing circumstances dictate. This ability to adjudicate allows for a nimble and focussed organization that implements through the collective wisdom of its members.

 Adjust and pivot in response to new circumstances – Adapt

 The “Ready, aim, fire” business principle was changed in the ‘90’s to “aim, fire, aim, re-fire”. Why? Because it is always best to adjust to changing circumstances using a test and fine-tune mentality. If something isn’t working make changes to get it right and don’t stay long with a losing approach.

 Tactics are stepping stones that provide the pathway to achieve the ultimate goal but also must take into account environmental dynamics to make adjustments. In business environments that are constantly changing, adaptation is essential in shaping a lean, iterative and adaptive plan for an organization to follow. 

 Constant motion toward the designated single goal -Activate

 Finally, organizations are in a constant state of motion relative to their changing environments. Albert Einstein’s theory of relativity is, so to speak, relevant here. (Smile). He postulated that the faster an object is moving, the slower time progresses for that object in relation to a stationary observer.  In other words keeping up with the changing environment requires an organization to be in constant motion – adjusting and adapting to fluctuating changes in order to keep on top of the things that are impacting its success. 

 Keeping in motion means an organization is learning and adjusting to decisions that are in many instances both wrong and right at any given point. Adjustments or deviations from the path are okay as long as the goal is being focused upon.

Okay, we have seen this before. Business executives hustle off for a strategic planning retreat with their briefing binders in hand and the burning desire to come out of a planning session armed with a revitalized and innovative business direction for the company.

Didn’t this happen last year?  

Remember the sacred strategy document that was produced. This plan espoused the direction needed to unlock the company’s future advantages and represent the flint for change, prosperity and success. Nirvana at last!

Sounds exciting.

But sadly the swirl of enthusiasm drops off rapidly after the days following the retreat and the many weeks after the strategic plan is written.    

So why do organizations repeat the same strategic planning processes year after year believing they are loyally continuing a traditional planning cycle that will lead the company to the Promised Land?

Let’s explore five main fallacies that need to be changed to make way for a completely fresh approach to strategy development and implementation.  

Lore 1: The more time spent on strategic planning the more successful the business

There is absolutely no correlation between the length of time spent in strategic planning and the beneficial outcomes to a business. In fact, the more time spent on strategic planning the more management will get caught up and it becomes the focus. This promotes planning paralysis and any benefits which could be accrued are eventually lost as momentum declines. 

Lore 2: Diligently analyzing every aspect of the company’s market

Yes it is hard to argue that knowing the market is a good thing, however over analyzing and creating piles of data files or studies can lead to planning paralysis that will stymy strategy development. Furthermore, some analyses can be backward rather than forward   focussed causing a loss of perspective on future outlooks about where the company should be directed.

As the saying goes, knowledge is power but too much knowledge can turn any circumstance into a sea of endless options about which confusion and procrastination reins. 

Lore 3: A solid, good strategy is the key

A well-conceived strategy can be blindsided. It is difficult to predict changes in the marketplace as most strategic planning tends to use past information to predict future states. A good strategy has to be flexible enough to roll with the dynamics of changing external and internal environments.

Strategic plans, once developed, represent perspectives made from the contextual view at a single point in time. The circumstances in the next timeframe can render the plan obsolete. 

In addition, a great strategy cannot come alive without good solid leadership and this leadership has to come from all parts of the organization. Mobilizing a leadership culture around plan implementation is a critical element.  

Lore 4: Strategic thinkers are best at strategy development

The belief that strategic thinking is the privilege of only a few individuals in an organization promotes an exclusionary point of view. It represents an exclusive club mentality where only the elite are recognized as the gifted ones who have the intelligence to create the future direction of the company. 

There is also a viewpoint that to engage a broader group in the strategic planning process will slow it down. The belief is that by relegating strategic planning to an activity focussed more on consensus building is counterproductive when the view is taken that a smaller team can make decisions faster.  Is faster better?  Sometimes, but not always. 

Lore 5: Good communication is the panacea for effective strategy implementation 

Most often communicating the company’s strategic plan resembles a prophet coming down from the mountain top and issuing an edict. Although words like “cascading” or “socializing” the strategic direction with employees is often used, the approach resembles a one way water fall of information.  

Employees of the organization are given very little by way of understanding the reasons why the strategic direction was established – so context is invariably missing. And they no doubt even secretly harbor resentments about how the edict is being delivered to them. Resistance becomes a product of a toxic culture.

There is not enough in the communication plan to ensure employees have a complete understanding of where they fit in, how the strategic plan will be implemented and how it will impact their day to day activities and challenges. It comes across as a strategic plan in a strait jacket.

So with these fallacies identified my next blog will provide a fresh approach to strategic planning and implementation to show how these fallacies can be overcome.

Investment lexicon for entrepreneurs, angel investors and venture capitalists

Isn’t it interesting how words can creep into our business vocabulary and have completely different meanings from their etymological roots?

 Here are a few words that bear little resemblance to their original meaning:

 Traction – defined as the act of drawing something over a surface.  Today in business it relates to a company’s ability to generate revenue or acquire customers. For example, “the company was able to gain traction in the mobile app sector by acquiring customers”.

 Runway – defined as a specially prepared surface along which an aircraft takes off and lands or a raised gangway in a fashion display. Today it means a company’s longevity to sustain revenue or cash flow. For example, “the company has enough cash in the bank for a runway of three years before the next capital raise is necessary”. 

 Don’t you miss Andy Rooney?

 He would have had something brainy to say about our business vocabulary.    You have to love his sarcastic wit. He once quipped – “The dullest Olympic sport is curling, whatever ‘curling’ means”.  How true! Sorry curlers.

 Well, I came across another word that is being embraced in the investment world and it is – “curation”. Curation is the new due diligence aimed at delivering high quality deal flow or investment prospects to investors and backers. It refers to the process of vetting deals to scrutinize losers from winners. 

Although this seems to make sense on the surface, the way I see it the problem resides with those doing the curating. Why? Because if they are not very good at using their curation crystal ball to pick winners then the process is flawed. These gatekeepers to capital have to be really good at screening the good deals from the bad ones to generate positive investment outcomes.

 Due diligence or curation, although a practice that provides a certain level of comfort to investors as a hedge in risk mitigation, cannot be relied upon entirely. The statistics on start-up failures are a testament to how terrible existing practices are in delivering on the promise. We know these top picks eventually result in a whopping 80% plus in business failures. 

 I see interesting differences between the curation processes for Crowdfunding and the more traditional practises used by Angels and Venture Capital Funds.

 In my mind Angels and VCs represent the few that make decisions for the many about who will get funded and who will not. A lot rides on their curation prowess, and the stats prove it is not efficient.

 Crowdfunding takes out the middleman or the gatekeepers and replaces them with the wisdom and the hearts of the Crowd to make better predictions as to the winners that get funded.  Let me explain.

 In James Surowiecki’s book “The Wisdom of Crowds” he maintained that large groups of people, even non-expert people, are very often smarter than an elite few no matter how brilliant those few may be. The author provides numerous examples of when groups have proven better than individuals at solving problems, fostering innovation, coming to wise decisions and most notably, predicting future outcomes. Intriguingly, group members don’t need to be particularly smart on an individual basis in order to be very smart on a collective basis.

 Here are some interesting trading platforms that use the power of the crowd as prediction markets. 

 Hollywood Stock Exchange (HSX) 

 The HSX is a virtual, online stock exchange where traders buy and sell virtual shares in upcoming movies. The HSX sells the data collected from their exchange as market research to entertainment, consumer product and financial institutions.

 Since 1996, the HSX has accurately predicted the box office receipts of thousands of movies. According to a study the correlation between the HSX’s predictions and actual opening box office receipts was calculated at 0.93 – not bad since a perfect correlation is 1.0.  The HSX has also been used to predict Oscar winners, and so far they’re averaging about 92% accuracy.

 Wouldn’t this number be refreshing when it comes to predicting positive start-up outcomes?  

 Although people self-select to be involved, meaning they choose to be involved. There is no screening mechanism to ensure these “traders” should be ardent movie or entertainment experts. This crowd is large and represents over 1.6 million traders. Such a large sample can be said to be statistically correlated.   

 Iowa Electronic Market (IEM)

 The faculty at the University of Iowa developed the IEM to be an Internet-based teaching and research tool. It allows students to invest real money ($5.00-$500.00) and to trade in a variety of contracts. The use of the IEM is best known for the prediction of political election outcomes.  

 The University of Iowa has found that even 100 days before an election, the market price predicts the winning candidate about 75% of the time.  Political polls predict only slightly more than 50% of the time, and political pundit predictions are way worse. A 12-year analysis of IEM trading indicated that the IEM consistently out-performs political polls in terms of not only choosing the right candidate, but also predicting the margin by which he or she will win. 

 These examples demonstrate the power of the crowd to make predictions. They do not just indicate the capability to identify winners and losers, but also the overall statistics provide evidence of their accuracy in doing so.

 Crowdfunding works on the same principle. Backers vote for their project and they will use their own money to do so. They will back a project if they feel it is aligned with their interests, needs and beliefs. The collective demonstration of social proof is more powerful than any process of curation can ever be, as it elevates winners by using the collective shoulders of the crowd.

 Crowdfunding backers, like customers, vote with their wisdom and heart. The current reward based platforms are showing that curation or due diligence does not have to get in the way of positive capital raising outcomes. Although some platforms do vet projects, this is more on the basis of suitability rather than financial metrics. In the end it is the people with compelling projects who motivate crowds to get on their side and provide them the needed capital, which is proving the disintermediation of due diligence.

What I mean is, due diligence is not necessary in predicting winners, and one has to contemplate whether it is necessary at all given the track record of the capital gatekeepers in the traditional investment arena to produce winners. Tapping into the wisdom of the Crowd may be much better.

The success stories of Crowdfunding may have inadvertently branded it as the sure-fire method to raising capital. At a time when the traditional methods have become increasingly complicated, ambitious entrepreneurs are now looking at Crowdfunding as the platform for them to achieve their dreams.

The overzealous entrepreneur could hastily jump on the Crowdfunding bandwagon and overlook certain factors that can easily make or break her campaign. The rules are many, but the key principles are a few. Here are five winning tips that all Crowdfunding enthusiasts should abide to when planning their campaign:

1. Passion, not hype
This may be the most advocated principle of successful Crowdfunding, but it can never be advocated enough. The value of genuine passion is innumerable. Talking about your journey and the road to starting your Kickstarter or Indiegogo campaign can make the mere participation in your project the ultimate reward. Sometimes all the backer wants is to be part of your journey, and that depends at how you are able to passionately convey it.

2. Know who your audience is
Perhaps the indisputable factor to successful Crowdfunding is clearly defining your target audience and the channels to reach it. Once this is in place, you are guaranteed that the most meaningful reward for your backers would be to see your project vision come to fruition, and any other reward on top of that would be the icing on the cake.

3. Calculate the costs of rewards
When setting the financial target of your Crowdfunding project, it is important to include the cost of rewards. This will ultimately give you a clear picture of the finances needed to mobilize your campaign. By overlooking the cost of rewards, you could find yourself using the money raised from your campaign to distribute rewards, and in effect eating up capital that can be otherwise used for your project. This raises the risk of eventually not having enough capital to mobilize the project after all funds have been raised, and nothing is more detrimental than the backers not seeing their funds transpire into the end goal of the project they initially believed in.

4. Monetary rewards never work
Giving out rewards in the form of money is ineffective. As a principle, rewards should always be related to the product your project is about, and consequently monetary rewards usually do not bear any relevance. But the biggest pitfall of monetary rewards is how they can make you look uncreative and not managing funds well. Contributors do not want their money to go back to them, since that’s how monetary rewards are usually perceived.

By Mo Saiid and Lyn Blanchard

What does Crowdfunding and dating have in common? Please read on.

The Crowdfunding ecosystem is very simple. It is comprised of the Crowdfunding campaign owners who are entrepreneurs or individuals looking for capital, the backers or funders that look to support specific Crowdfunding campaigns and the Crowdfunding technology platforms that act as intermediaries for these participants.

But why does Crowdfunding work? What makes it possible for complete strangers to share a common bond?  In today’s blog I’ll explore the reasons why Crowdfunding works and the reasons behind the power of the Crowd.

 The world is getting smaller – not that our planet is shrinking, but our knowledge about what is going on in the world is really influenced by “6 pixels of separation”. That is technology now can deliver events, information and news at a heightened pace allowing us to learn instantly about what is happening on our planet.

 We learn more, we emote more and we just well, engage more. And sometimes, we even tune out more.

 Crowdfunding is based upon the principle that people want to help each other. They want to share like-minded values, goals or ideals with those to which they feel close.  This primary connection is rooted in motivations which are triggered by three expected outcomes or returns.

 Social Return

 For Crowdfunding campaign owners and their respective funders or backers, motivation seeds the passion and interest for a cause or product which is aligned with shared social value. There is satisfaction to be obtained when engaging with something that helps others, improves a circumstance or makes a difference.

 A social return holds a certain pleasure and contentment relating to a participant’s involvement where monetary or material rewards are of secondary importance.

 Social returns are obviously prevalent in donation based Crowdfunding; but more often now Crowdfunding campaigns are being backed because they can lead to the betterment of society or a community of interest. The funder or backer seeking to engage in a Crowdfunding project does so for a deeper emotional affiliation that holds intangible and intrinsic value for them. 

 Material Return

 In addition to the social returns, backers may also look for a material return. In these instances backers will support a product concept and may wish to – a) receive the offering first thus giving the opportunity for bragging rights, b) get behind the offering because it might be viewed as worthy or cool or c) help a company in its early years of growth.

Crowdfunding campaign owners will take great care to design incentive schemes that will satisfy the material reward motivations sought by backers. These schemes are usually designed as a progression of rewards with the highest valued reward offered to a limited number of backers – such as only four premium rewards offered for those contributing $1000 each.

 For example, a Crowdfunding campaign representing a new bicycle locking product could have as its highest reward an engraved product delivered to the backer and the product being named after the backer for his or her anting up the largest contribution.

 The combination of reward schemes are endless, however one principle remains constant – the schemes must motivate the backer in return for their financial support and what is offered must have of perceived cherished value.

 The campaign owner also benefits. This participant will get information of material value on such variables as pricing, product features and function sought by early customers, market segmentation and all sorts of marketing information that will help with commercialization plans.  Early customer traction creates a direct link to customers and can also support follow on capital raise efforts beyond the current Crowdfunding campaign.  

 Note I have not used any reference to equity or lending based Crowdfunding for the reasons I have cited in my other blogs. 

 Financial Return

 The financial return to the Crowdfunding campaign owner is obvious. However, little has been mentioned of the motivations of the Crowdfunding technology platform owner that provides the intermediation between backers and campaign owners.

 There are literally hundreds of Crowdfunding platforms in operation around the world. Why?  Because it’s about the money.

 The backers and campaign owners drive profits for these platforms that ultimately take a percentage of whatever is raised. This can be 4 – 9% depending upon the platform’s policies. The motivations for Crowdfunding platforms are simple, provide an environment for those with ideas that need funds to meet those people that are looking to back them – and then take a piece of the action.

 It’s the same principle behind why dating sites are so popular. Dating sites constantly spring up on the Internet because singles are looking for fresh approaches to establishing personal relationships. There is the hope of improving the odds of securing a “loving and happily ever after” mate through the process.

Crowdfunding does the same thing. It allows capital raising relationships to be established by improving the odds that entrepreneurs can raise capital from motivated members of the Crowd to eventually turn their dreams into reality.

One of the most successful Crowdfunding campaigns last year was the “Pebble” smartwatch Kickstarter campaign, which was launched on April 11^th 2012. For those of you not familiar with the smartwatch, it wirelessly connects Android and iPhone smartphones to display email, calendar alerts, social media updates, run apps like GPS and, yes, it even tells the time.

 Dick Tracey you gotta get this watch!

 The “Pebble” reward based Crowdfunding campaign was an outstanding success. By May 18^th 2012 the company raised $10.2 million from approximately 70,000 backers. Astonishingly $1 million was reeled in during the first 28 hours of the campaign and the rewards were various watch offerings which generated pre-sale orders of the watch proving market demand. The founder’s also used the campaign for product validation – testing colour choices and feature refinements.

 Certainly Crowdfunding was right for Pebble and provided many benefits beyond the capital raised. However, how do you determine if reward-based Crowdfunding is right for you?

Here are some points for and against launching a Crowdfunding campaign that will help you decide if it makes sense for you and your company.

 Pros

 Access to Capital

 Well this point is a no brainer; but there is more to it than just raising money. For those companies that cannot get funding from traditional sources such as banks or angel investors, Crowdfunding is a viable alternative – if, of course, the crowd sees merit in backing the project.

In addition as the relationship between backers and the company is through reward based incentives, in exchange for money, companies do not have to give up equity; therefore, there is a non-dilutive effect on share structures. This means you don’t have to give up equity in your company.

 By having cash, start-ups can do more by way of risk reduction and in validating their ventures before they tap into subsequent equity or debt capital sources. This allows for a complementary pathway along the capital sourcing value chain.

 Crowdfunding campaigns take less time than traditional fundraising activities. Generally a campaign is limited to a maximum of ninety days. Therefore, there are no protracted prospecting, pitching, due diligence and negotiation cycles which is often the case when dealing with banks, Angels or VCs, perhaps even family members for that matter. Companies can get their money faster.

Validates Your Company and Product

As the rewards usually are product based, there is ample opportunity to demonstrate whether the offering is attractive to a company’s target audience and, thus, providing traction through pre-sales. As with the Pebble example above, companies can use the process to infuse the customer’s voice into product design decisions. This feedback is worth its weight in gold, saving both time and money, in the product development process.

 Establishes a Customer base

 We know that getting the first customer is difficult; but when your customer base looks like a ground swell of evangelists that can take your project viral – your customers become your quasi sales force. Furthermore, entrepreneurs can get a rare insight into who is buying their offering and find out why the offering resonates with them. This permits entrepreneurs to create compelling tactics to expand their respective customer acquisition strategies. It also allows for experimentation by finding out what works and doesn’t work from a customer acquisition perspective.

 Unique Marketing Channel

 Crowdfunding forces the entrepreneur to be organized in his or her marketing activities by leveraging social media, public relations, a website presence, list creation, videos and the delivery of a multitude of passionate communications. It forces messaging to be clear, concise and easily understood by the target audience to get an immediate call for action. Marketing exposure is what it’s all about and we know that sometimes early stage companies are not very good at doing this.

Cons

It’s Sometimes All or Nothing

 In planning a Crowdfunding campaign an entrepreneur must decide the fund raising goal – that is how much money to raise through the Crowdfunding campaign. This is an important step. Why? Because many CF platforms stipulate that the funds raised from your campaign are only released when 100% or more of the funding goal is reached.  Therefore, in these circumstances, it is an “all or nothing” proposition. Although there isn’t a formal penalty for not reaching the funding goal, there is still the disappointment and the loss of time and effort which has to be considered.

 In the next blog I’ll cover more on how to select a Crowdfunding platform because not all of them are the same and they vary with regard to this “all or nothing” policy along with other guidelines.

 IP at Risk

 Some argue that putting your Crowdfunding project on the Internet can expose a company to IP theft through the replication of the company’s concept or prototype design by a competitor. If your product is unique and this could threaten your company’s viability, then it is wise not to pursue Crowdfunding.

 Yet, if this did happen, the crowd is able to see that your company was first with the idea and if a competitive brand comes to the market with a similar product the ill will this can create can backfire on a competitor. Of course, the best way to proceed is to register provisional patents, as a date and time stamp, before proceeding with a Crowdfunding campaign. This makes good sense in any event.

 Sometimes by putting a Crowdfunding project out there, companies can establish interesting relationships with people or partners which would not have been possible otherwise. Opportunities can surface through serendipity with a little bit of boldness.  

 Not Right for Business to Business Products

By reviewing a litany of Crowdfunding projects featured on numerous CF platforms, it is clear to me that those projects that successfully receive funds are predominately those in business to consumer oriented sectors rather than business to business sectors.

Remember we are leveraging the benefits of the Crowd. And, Crowds represent a collection of individuals acting from their own personal belief systems and self-interests. They give to a Crowdfunding campaign because they might think it is cool, meaningful, worthy or resonates with their passion. This is in opposition to a collection of like-minded businesses which may have conflicting corporate objectives and represent more depersonalized motivations.

 Simple not complicated

 A Crowdfunding project should be simple enough for consumers to understand and allow them to get behind the Crowdfunding project. Complicated or overly technical projects can be difficult for a lay person to understand leaving them on the side line scratching their heads looking for a reason to support or back a project.   

 Large Capital Needs

 Pebble scored big with their Crowdfunding campaign. However, this bonanza is not the norm for the majority of campaigns. Crowdfunding is ideal for seed capital rounds and by that I mean where capital needs are not in the millions of dollars but more in the less than $100,000 range. If your business needs a lot of capital rethink your capital raising strategy and look to more traditional sources.  

 On the other hand, Crowdfunding could very well be used as part of an overall capital raise strategy as it is just one more arrow in an entrepreneur’s capital raising quiver.  

 Lengthy R&D Projects

 If your business is in the type of sector where lengthy R&D cycles are the norm (i.e., years not months), Crowdfunding is not for you. Backers want to see venture results quickly and be a part of the success within a short timeframe.  

 Crowdfunding has specific rules of engagement. I’ll cover these in my next post entitled – “How Crowdfunding Works” For more information on Crowdfunding read my white paper which I wrote last September. You can download it for free at www.creekstoneconsulting.com

What has been the driving force behind the rise of social media has been the power of the crowd to express satisfaction or dissatisfaction about something by using technology to broadcast messages instantly to anyone willing to listen.

On-line marketplaces such as Kiiji (open market trading), OpenTable (restaurant reservations), Match.com (dating), Ebay and Amazon (products) have eliminated inefficiencies in connecting buyers and sellers by making transactions more accessible through the use of technology. 

 Not surprising then, the power of the crowd and on-line technology have been the drivers in launching a new way of raising money – Crowdfunding. As defined by Forbes, Crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet”. And this is the topic of the next series of blog articles that I will write for you.

With Crowdfunding Platforms (CFP) supporting the raise of an estimated $2.78 billion in project funding in 2012 and forecasted to generate $5.18 billion worldwide in 2013, the sector is particularly strong, boasting double or triple digit growth rates.

With such favorable fundamentals, Crowdfunding just shouldn’t be ignored.  

For those of you not familiar with this rather unique way of micro-financing; let me start with a quick definition and then describe the types of Crowdfunding models in operation today.  There seems to be a lot of confusion about the differences and it’s important to have a good starting point to get at the right facts as a foundation.

Crowdfunding refers to an exchange between a person and/or a company (initiator) that has an idea, project, social/political cause or product prototype and for which they are looking for funding support from third parties (backers/crowd). Crowdfunding is the means by which small contributions are collected from many parties in the crowd so the initiator can reach a specific funding goal. Sometimes the contribution amounts are very small $5 and some can scale to $1000’s of dollars depending on the project.

All parties in this marketplace use on-line Crowdfunding technology platforms to broker these transactions. These platforms have been developed by companies that handle the exchange. Examples are Kickstarter, Indiegogo, RocketHub, CrowdCube, Kiva, FundRazr, CircleUp and hundreds of other sites that have been developed since the Crowdfunding concept got its start in 2005.

Now, here is where the confusion arises with regard to Crowdfunding and its opportunity.

There are essentially four types of Crowdfunding models in the market today. They are very distinct in terms of profiles, risk orientation and regulatory limitations. So if someone talks about Crowdfunding you must seek clarification on what type of model they are referring to because there are important distinctions to consider of each.

Here are the four types.    

Donation based Crowdfunding is philanthropic or sponsorship oriented which is very much commonly recognized. If there is a cause, event or charity a donation is provided by a backer and there is no expectation of compensation or financial return other than the satisfaction of contributing. Well, OK, there might be a tax receipt issued and a financial benefit (Smile).

Reward based Crowdfunding involves the exchange of non-monetary rewards such as gift or the opportunity to pre-purchase the initiators product or service. The backer does not expect a financial benefit in return for his or her financial contribution. These backers are fans or evangelists of the initiators project. This type of Crowdfunding has been the most popular and widely used by entrepreneurs from artists, musicians, film producers to designers of products.

Lender based Crowdfunding is based on advancing a loan to an initiator with the expectation that it is paid back in regular installments which include the original principal investment. Examples of some sites are LendingClub.com and Prosper.com. This is the least popular of the models.

All three of the Crowdfunding types mentioned above are legally employed. The following model is not.

Equity based Crowdfunding is the model where funders receive an interest in the company in the form of equity or shares and may also share in revenue or profit-sharing arrangements. This type of Crowdfunding is being touted as a new phenomenon that will put the current traditional equity funding mechanism such as Angel investment on its head. But, the problem right now is that the various Securities Commissions have yet to approve its use and therefore this type of Crowdfunding is illegal in various jurisdictions.

For example, equity-based Crowdfunding is widely legalized in several countries in Europe, as well as Australia, but not yet in Canada. And although the United States, through the Jobs Act, is working toward a legalized standard for equity Crowdfunding the regulators are slow in implementing a functional law and by that I mean rules employed to implement it into law. The SEC, which is already late with its submission, will probably continue to delay for the unforeseen future. Equity Crowdfunding on ice!  

You can now appreciate why Crowdfunding is often referred to as the democratization of funding. It allows a greater opportunity for anyone to fund a project and participate in turning dreams into reality.

You now know the different types of Crowdfunding models. Why is this important? Because knowing the varying types will allow you to assess if one of these models is the right fund raising channel for you.  

Crowdfunding has several advantages and disadvantages. I’ll cover these in my next post entitled – “Crowdfunding – Is it right for you?”