Sherwood Neiss and Jason Best, along with a third partner Zak Cassady-Dorion, spearheaded the writing of crowdfund-investing legislation in the 2012 JOBS Act ratified by President Barack Obama. They have also authored “how-to” guides for entrepreneurs and investors looking to raise money from the crowd and invest in crowdfunded opportunities.
Since regulated crowdfunding was legalized in the United States — the third prong of the crowdfunding legislation that allows many more people to invest went into effect in May — the serial entrepreneurs have continued to champion crowdfunding. Working with governments and stakeholders in Mexico, Colombia, Turkey, Canada and the United Arab Emirates, they are helping to educate the world about harnessing the multibillion-dollar crowdfunding movement. Regulation crowdfunding allows any American startup or small business to raise up to $1 million on debt and equity crowdfunding platforms registered with the Securities and Exchange Commission.
Their company, Crowdfund Capital Advisors, is a partner in the U.S. State Department’s Global Entrepreneurship Program. Neiss and Best have testified in front of the U.S. Congress and presented at South by Southwest in Austin, Texas, the World Economic Forum in New York, the Global Entrepreneurship Forum in Istanbul and the Global Entrepreneurship Summit in Dubai.
In September, Neiss and Best conducted a daylong workshop on crowdfunding at Venture Hive, an entrepreneurship education company in downtown Miami. “The two of them saw this incredible need and have been fighting all of our battles to make it happen,” said Susan Amat, founder of Venture Hive. Venture Hive partnered with Neiss and Best on one of the first accelerated education programs for entrepreneurs navigating crowdfunding.
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Neiss shared his own war stories about raising money the traditional way for one of his former startups, FLAVORx, when he spent months knocking on rich people’s doors and meeting with venture capitalists around the country. “It’s exhausting, and it totally takes your eye off the ball of your company.”
While crowdfunding can be a far more efficient tech-enabled solution to raising investment funds, Neiss is quick to point out that it’s not for everybody.
Crowdfunding is not a fishing expedition. You have to know your crowd.
Sherwood Neiss, Crowdfund Capital Advisors
“Crowdfunding is not a fishing expedition,” Neiss said at the event. Instead, crowdfunding is raising money from friends, family and followers who are already engaged in what the entrepreneur is doing, he said. “You have to know your crowd.”
Best said he was happy to see that the final regulations contained significant measures aimed at lowering risk, such as income and investment caps and a test on risk tolerance. But make no mistake, he said: equity crowdfunding is a risky business for investors. While the rewards could be rich, the reality is that the majority of startup companies fail.
While donation-based crowdfunding has exploded in popularity, critics of regulated crowdfunding warned of a wild wild west of fraud. Yet, since May 16, when Title III (which opens regulated crowdfunding to the masses) was approved, more than $10 million in capital has been committed to campaigns, most of that into California companies, according to a new index that CCA publishes on its website, crowdfundcapitaladvisors.com. About a third of the 120 offerings so far have been funded. So far, the process has been slow and measured, Neiss said.
Here are excerpts of history, best practices and tips for success that Neiss and Best shared with workshop participants and in follow-up questions from the Miami Herald.
Q. When most people think of crowdfunding, they think of Kickstarter, but you saw this as just the beginning. How did you get started?
A. Kickstarter and Indiegogo (unregulated, donation-based crowdfunding) can be incredibly powerful if you have a prototype. You can test the market and see if there is truly a customer for your product, as well as raise money to produce your product. As the product is up there, people are giving you valuable feedback, and you can use that product validation to go to retailers to sell your product.
The opportunity we saw was to create crowdfund investing not just for consumer products you can pre-sell through Indiegogo, but maybe you have a B2B startup or a traditional business and you need to expand your operations. In August of 2010, we asked ourselves, “If you can give away money on Kickstarter and lend money to entrepreneurs in developing companies via Kiva, why can’t you invest in businesses with products you use everyday?” That was the jumping-off point for us.
But setting out to change securities laws that haven’t changed in 80 years … takes equal parts stupidity and naivete, which we brought loads of to this process to make change. In 2011, we created the Startup Exemption Framework and began walking the halls of Congress and talking to anyone who would listen. … By opening the opportunity for regular Americans to invest in businesses that they know and trust, this could help spark job creation, innovation and American entrepreneurship. … In 2012 we were in the Rose Garden when President Obama signed the JOBS Act into law. It was a surreal moment.
Fast-forward, and in 2014 Title II of the JOBS Act went into effect. In 2015, Title IV, and in May of this year, Title III went into effect. In August, our firm launched an index that tracks crowdfunding on a day-to-day basis. We and Venture Hive are looking at the data results over time to continue to hone and build best practices. Now we are working with 37 countries around the world to change regulation in other countries, we are working with fin-tech companies in the industry, and we are investing in tech companies that are building this infrastructure.
Q. What are the differences between the three crowdfunding JOBS Act titles?
A. Briefly, Title II provides the ability to raise money from accredited investors or wealthy individuals. Instead of having to know someone to know someone, I can go to one of these platforms. It saves the entrepreneur time, energy and money, cuts down on the funding cycle and brings the process online. … It can be appropriate for tech startups looking for connected investors.
Title IV, also called the Reg A-Plus, offers the ability for companies to raise up to $50 million, from accredited and non-accredited investors, but the documentation costs are substantial. It is more appropriate for large, sophisticated companies, such as a regional brand looking to expand nationally. … It allows for what is essentially a mini-IPO … But the reality is that most companies aren’t ready to do Reg A-Plus offerings, and the majority of them fail.
Title III offers the opportunity for regular investors to invest in companies they use every day or entrepreneurs they believe in.
Title III offers the opportunity for regular investors to invest in companies they use every day or entrepreneurs they believe in. There are limits to how much you can invest, per investment and per year. Those are put into place to help people understand these are high-risk investments … but they also give you the ability to invest in those deals and participate in making the economy grow.
Crowdfunding can make entrepreneurs better entrepreneurs because it trains them early on on what investors need to make an informed decision. If they do it right, they get the capital that they need from the people that they know.
Q. What are some tips for creating a successful campaign, whether it’s donation-based, such as Kickstarter, or a campaign seeking investments in exchange for a stake in the company?
A. Look for 10 successful campaigns that were similar to yours. What platforms were they using? How did they tell their story successfully? It’s also important to look at a few that failed. Understand where they fell short and what you can do to not repeat their mistakes. Call up the founders; you will be surprised how open they can be.
Your campaign video is incredibly important. Watch a lot of videos to see what has been successful and what has not.
Your video is your front door to your offering. It doesn’t have to be expensive, but it has to look good. Plan 12 hours for filming that two- to three-minute video. No matter how well you think you know your business or opportunity, write a script. Take your time to get it right.
Before a campaign starts and you are setting up the campaign page, begin establishing media contacts. You want to have a big first couple of days. Share your campaign before it is live; that is the way you get PR.
You need to bring your own crowd to your crowdfund. Most of your investors will likely be LinkedIn connections, people you already have a relationship with. You have to be able to connect with them emotionally so they understand what you are trying to achieve. Customer service is important, too. Your crowd already feels connected, so you need to spend the time answering their questions, listening to their suggestions, etc.
If things go wrong, and they will … get out in front of the issue and communicate openly and honestly with your crowd about what went wrong, how it went wrong and what you are doing to mitigate the problem.
Crowds often contain “smart money,” or investors with experience or connections that may be able to help you. Always communicate early and often with your crowd.
Q. You talk a lot about post-campaign. What is some advice on that?
A. It’s really important to satisfy your first customers. They will be your brand ambassadors, and they will give you critical feedback.
Post-campaign, thank your supporters. Then communicate how you will communicate with them — is it emails, a LinkedIn group, Twitter? They need to understand how they can track your progress. You can use video, audio and photographs in your updates to them. You just raised money for your business, and you will need to raise more and build your crowd out over time.
Engage your crowd and you can can return to them over time, whether it’s for money or their expertise or their feedback.
Q. What happens if your campaign doesn’t make it over the finish line?
A. First, thank those people who supported you. Then look at the campaign and the product or service or company and what you were trying to build. One of the the magical things about crowdfunding is the opportunity to understand what your product market fit is before you build thousands of products and try to scale a business. It may be that that product that you fell in love with, that you thought would hit its target, didn’t quite do that. Or maybe it just needs a tweak or a pivot.
Should you try again? The answer is maybe. Look at it to see if there’s a tweak or pivot, or it might be time to move on.
Q. What are some other benefits?
A. We’ve worked with many different entrepreneurs around the world. In addition to learning a lot, they have gained press exposure, they made long-term business partnerships, found other types of investors over time, and they have found new customers.
Q. What does the data you are tracking show about how equity crowdfunding has gone so far?
A. About $10 million has been committed to regulation crowdfunding campaigns since it launched May 16. Based on the number of offerings going live each week and the growth of investor commitments, we estimate by the end of the first year, May 2017, $100 million in capital commitments will be made. We think this represents a logical start to the industry. It shows that investors are being methodical with how they deploy capital and that companies, that otherwise wouldn’t qualify for bank financing or hit the sweet spot of Angels or VCs, are finding capital from engaged communities.
Q. What are some key trends you are seeing in the early campaigns?
A. Looking at all the campaigns, you can tell that those that have well-produced videos — that include the entrepreneur and discuss the market opportunity and how they will use the proceeds — get funded over campaigns that just show videos that explain the product or service.
The data also show early signals that regulation crowdfunding is living up to its expectation that it will help main street businesses that don’t qualify for traditional financing. Those companies that have realistic valuations are getting funded three-times faster than companies that have set unrealistic valuations for their firms. And companies that have robust disclosures are getting funded over those whose disclosures seem almost whimsical.
Nancy Dahlberg: 305-376-3595, @ndahlberg
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Sherwood Neiss and Jason Best
Background: Powerful champions of the crowdfunding movement, Sherwood Neiss and Jason Best helped author the crowdfund investing framework used in the JOBS Act to legalize equity- and debt-based crowdfunding in the United States. They also co-founded the crowdfunding industry trade group that worked with the Securities and Exchange Commission and FINRA as they created the rules for crowdfund investing. They co-authored the ‘Crowdfund Investing for Dummies’ book published by Wiley.
Company: Sherwood Neiss and Jason Best are co-founders and principals of Crowdfund Capital Advisors, which works with clients including governments and banks that are looking for ways to boost economic development in their countries, and investment firms looking for the increased deal-flow that crowdfunding can create.
Neiss’ background: A three-time Inc500 winner whose former company, FLAVORx, won E&Y’s Entrepreneur of the Year. In addition to CCA, Neiss is a partner in Crowd Capital Ventures, which researches, analyzes and invests in promising financial technology companies focusing on all sectors of the crowdfunding market. Neiss is also an adviser to several crowdfunding platforms and crowdfunding technologies.
Best’s background: Co-founded the University of California-Berkeley’s Program for Innovation in Entrepreneurial and Social Finance. Best is also an Entrepreneur-in-Residence at UC Berkeley’s Center for Entrepreneurship and Technology. He has been a successful healthcare technology entrepreneur with two companies in San Francisco. Most recently, he was on the executive leadership team of Kinnser Software.