On Equity Crowdfunding

In the environment of tight credit that characterizes the global economy’s tepid recovery from the Great Recession, many entrepreneurs are turning to unconventional sources of startup financing. Equity crowdfunding, mediated through registered online funding portals, is one of the available alternatives.

In order to ascertain whether EC would be right for you, there is some basic information you need to know.

 

What is equity crowdfunding, and how does it differ from standard crowdfunding?

Unlike standard crowdfunding, EC involves more than simply donating money to a cause in exchange for rewards, perks, or goodwill—instead, equity crowdfunders acquire an ownership stake in the company-to-be.

EC differs from traditional equity financing in its potential to attract numerous prospective investors offering modest quantities of capital. Conventional equity financing, by contrast, often involves a small number of deep-pocketed investors capable of advancing large sums.

Advantages

•   Democratization (sort of): EC can foster investment opportunities for people of comparatively modest means. However, the rules governing EC (including accredited-investors-only restrictions) vary by jurisdiction, along with the required documentation. The situation is fluid, as governments learn more about a relatively novel investment tool and modify their regulatory frameworks accordingly. It’s a good idea for businesses and entrepreneurs uninitiated in EC to seek legal counsel, so as to ensure compliance with local securities regulations.

•   Breadth of investment pool: Not only can EC enable entrepreneurs and business owners to benefit from a broader pool of potential investors than might otherwise be available; the relationship is a two-way street. As EC expands and develops, small- and medium-scale investors will also have the opportunity to dedicate a portion of their savings to a vast array of endeavours that might otherwise have received little exposure.

•   You set the fundraising commitment. When businesses attempt to raise early funds through venture capital firms, they receive whatever those organizations are prepared to give—usually a small sum, unless you already run a thriving business with a steady revenue stream. EC, by contrast, offers entrepreneurs relative freedom to establish and adjust their own targets.

•   Your funders have a vested interest in the success of your startup. After all, the more profitable your venture, the more lucrative the returns for them. If you encourage equity funders to promote your business idea on social media and within their friend circle, they will likely be keen to oblige.

Drawbacks

•   Legal complexities: As noted above, the rules governing EC vary by jurisdiction. A lot of entrepreneurs just starting out in the business world may not be familiar with financial disclosure rules, licensing, comprehensive business plans, and other requirements, and will need to undertake a lot of advance research and due diligence.

•   Small- and medium-scale investors may lack business and investment experience. Sometimes it helps to be able to defer to the advice of an experienced angel investor, venture capitalist, or business professional, especially when it comes to dealing with adversity and managing the expectations of your funders. In particular, new investors may not fully appreciate the risks associated with online and startup investments.

•   Some of your funders may be people you’ve never met. Obviously, this entails issues of trust and fraud prevention, and there is a risk that disgruntled investors may try to litigate against you in an effort to recoup a portion of their losses if your business doesn’t pan out. This is another reason why seeking legal advice is a good idea.

To equity crowdfund, or not to equity crowdfund?

EC may not be suitable for startups that lack a strong social media following, or that don’t offer a product or service that is marketable and compelling. For example, many of your Facebook friends may be interested in funding a bicycle store or a pet daycare; relatively few will be keen to support a more esoteric or specialized venture, like a business that designs refrigerator door hinges.

If you’re still interested in EC, I recommend this article in the Globe and Mail, by SeedsUp.ca founder Sandi Gilbert, as a basic guide to help you get started.

Equity crowdfunding portals, and useful links:

SeedsUp.ca—one of the first EC portals in Canada.

ncfacanada.org/equity-crowdfunding—a page devoted to EC, from the National Crowdfunding Association of Canada.

CloudFund.ca—another Canadian EC portal, in development at the time of this writing.

Alixe Cormick is a securities and small-business lawyer with expertise in Canadian EC regulations. She has penned an informative blog post on the subject, available here.

Got Tax and Financial Stress? Here's How to Avoid It

There is one time of year we all dread. No, it's not going over to the in-laws for Thanksgiving. It's tax day. Whether you pay your business taxes on the due date or in advance this can be a stressful time of the year.

Depending on the circumstances, you could find yourself writing out a huge check to the government that wipes out your cash reserves. It's no wonder your blood pressure spikes and the headaches come on.

The good news is that it doesn't have to be that way.

Yes, you'll still have to pay taxes but there is no reason why you should stress out about this part of your business. First thing to understand - everyone is in the same boat. Beyond that there are some tactics you can adopt to help manage your small business finances and avoid getting on the government's bad side.

Make a Plan

A business's success is built on the back of meeting deadlines. That comes with shipping products to customers and paying the bills. It's important to have a well thought out plan for your entire business. This is not something that should be "kept in your head."

You should be using a written calendar that covers all your responsibilities both to customers and to the government. If you know a payment is approaching you won't feel burdened or surprised when it comes time to write the check.

It comes down to a matter of making priorities. And yes, there is an app for that!

Don't Do it Alone

Feelings of stress go hand in hand with feelings of being overwhelmed. When was the last time you asked for help? As a small business owner there are a lot of new aspects of your business you thought you wouldn't have to contend with. Sure, you knew you'd be paying the bills but keeping up with your company's Facebook page and generating original content for your website? Did you budget time for that? More importantly, do you know what you're doing when it comes to optimizing search engines and social media?

You don't have to become an expert because there are plenty of experts out there in cyber land willing to lend a hand. Even your kids could probably be a big help posting notices or even cleaning up around the office. Start asking for help and watch the stress melt away.

Take Time for Yourself

All work and no play? We've heard it before and it has meaning for the small business owner. The first few weeks or months of your start up will be grueling. No doubt about that. However, that doesn't mean running yourself into the ground. You certainly can't pay your tax bills that way. Leave some relaxation time for yourself and/or with your family every week. Schedule it like a business meeting and hold it with the same level of importance. You'll find that approaching your business after taking a "time out" won't be a struggle. 

Investors Have Given You Money For Your Business. What's Next?

After working diligently on your business plan and targeting potential investors, you’ve managed to snag some much-needed capital.

Good work. Now what?

Essentially, you have to live up to the promise of your pitch and deliver the goods. How you involve your investors in the early phase of your startup will set the tone for the rest of your relationship.

The goal is to make sure you can remain on solid ground with the money people. This will help improve your relationships throughout the business community and open up the possibility to return to those investors for expansion down the road. Before you get there, consider these proactive steps for involving your investors:

Set a board meeting calendar. By setting a board-meeting calendar you're letting your investors know that you're serious about the business and about getting their input. You should actually set the schedule for the entire year. You might have to rearrange some future meetings but at least your calendar will be a start for this process.

Have an investor dinner. Before the first official board meeting, you might want to think about having an informal gathering over dinner for all of your investors and board members. This is a great opportunity for everyone to get to know each other. Then when you head into those board meetings you can dispense with the small talk and introductions and get right down to business.

Plan an offsite meeting. This should be a full-day affair. You can break up the day with some recreation like playing golf at a hotel but most of the time you'll be in conference to discuss all the matters pertaining to the company and the direction it is headed. You should save this marathon meeting for the third or fourth meeting of the year. During this meeting you can also have members of your staff come by to make reports or presentations about the growth of the company and problem areas to work through.

Schedule one-on-one meetings. Hopefully your board of investors will be frank and honest at all of the company meetings. However, there might be a huge benefit from maintaining these relationships outside of the boardroom. The occasional one-on-one lunch or dinner meeting is the perfect opportunity to keep those lines of communication open and uncover any "hidden agenda" issues.

Stay out in front of bad news. It's not all going to be "rainbows and unicorns." You'll have some dark days ahead. When trouble happens don't try to bury it in a company report. Get out in front of the bad news and let your investors know you're in top of things. No matter how bad it might be they would rather hear it from you then from Twitter!

Overall you want your investors to feel that are a vital part of your company's success. That's not a stretch. All you have to do is honor their commitment with honest communication. 

Government Financing Programs for Canadian Environmental Businesses

“Going green” is not just for residents who recycle. Many companies are taking proactive steps to develop and implement environmentally friendly business practices. The Canadian Government is fostering this atmosphere by providing numerous resources to not only help a business go green but to provide limited financing for entrepreneurs who are getting into the environmental business.

The go-to site for any small business should be the Canada Business Network. There is a wide range of government-backed loan guarantee agencies designed to help a small business that might be having difficulty securing a loan from other creditors. Among the agencies are:

Canada Small Business Financing Program: This is a program that can help a business owner secure up to $500,000 from an accredited lending institution by offering a loan guarantee. These loans are meant for direct improvements to a business such as purchasing equipment or property for the company. For these loans a small business is defined as any company making less than $5 million a year.

Eco-Financing: This program applies to businesses operating in Quebec who are associated with the environmental industry such as acquiring carbon credits, research and development for greenhouse gas reduction or acquiring offset credits.

Export Guarantee Program: If your business will be involved in export related activities or foreign investments then you could find a benefit of a loan guarantee from this agency.

Canadian Agricultural Loans Act Program: This is a loan guaranteed program that assists farming businesses in securing credit. It applies to start-up farmers or for a farmer taking over an existing business with a maximum loan guarantee of up to $500,000 that can be applied towards land purchase and construction.

There are also many funding and incentive programs being offered to Canadian businesses who adopt “green” technologies or practices. These include rebates for installing solar energy panels, and helping agriculture business produce their own renewable energy sources.

Additional resources offered by the Canadian Business Network are for environmental technology verification. This allows businesses to get any environmental system they are using to be certified. That will help the business secure those loans which are geared towards eco-friendly businesses. In other words, you might have to prove you’re eco-friendly before getting the loan.

The Energy Management Information Systems Planning Manual helps business owners audit their company’s use of energy. Armed with this information, a business owner can make adjustments in their energy use that could save them money in power costs.

The FleetSmart program offers incentives and resources for companies who want to switch their transportation fleets over to more fuel efficient models. In some cases, companies are making a complete switch to electric cars with the help of these incentive programs.

Bottom line: whether you want to make your business more eco-friendly or want to start an environmental related business from the ground up, the government of Canada is a terrific place to start.

Small Business Financing - It's All About Who You Know

Believe it or not there are plenty of folks out there looking to invest in a small business. Your challenge is to get your business plan in front of them. Easier said than done, right? Actually, if you apply yourself you’ll find that it’s quite easy to build a network of potential investors. First, make sure you have a rock solid business plan ready to go. It makes no sense to seek out investors unless you’re ready to pitch. You might get only one shot and you have to be ready. Here are some tips for building up a network of investors.

1)      Go Online

There is a huge social network waiting for you to explore that is only a few mouse clicks away. LinkedIn is the most obvious choice to start your campaign to connect with potential investors. Here you’ll have a chance to build up a professional profile and find other business professionals who might be able to help. A connection you make on a site like LinkedIn might not be in a position to write you a check but they could connect you to someone who can.

2)      Try Crowdfunding sites

Beyond the direct networking possibilities of social media, there is another burgeoning source of investors you could find online and that would be with group funding. A site like Kickstarter is bringing together pools of small investors who are willing to share their funds with a business that looks promising. Once again, you have to be ready to fire up your business machine and answer any question in a competent matter.

3)      Ask your family and friends

It’s amazing the amount of help we can get from our family and friends if we just ask. You might have a favorite aunt or uncle who is willing to take a shot at investing in your business. As long as you treat them as you would any other potential investment then there is no reason not to present them with a business plan. Just as your online network could help you bridge the gap to meeting potential investors, you might have a friend who works for a company or has their own relationship with a potential investor. Throw a friendly dinner party and make your pitch. Keep it honest and sincere and you’ll reap the benefits.

4)      Network at events

This is a no-brainer. There are plenty of tradeshows geared for entrepreneurs to help them connect with investors. Seek them out but don’t stop at the tradeshow. Follow the money. This means going to places where the “money” would hang out: a country club, museum opening, first night at the opera, polo pony matches… wherever you might think that serious minded business professionals would gather you should try to infiltrate. This doesn’t mean barging in with your stack of business plans ready to hang out. Go make some new friends and see where that takes you.

Lessons Learned From Pitching Venture Capitalists

 

Raising money is as much a part of business as the goal of making money. As the old adage goes, “You’ve got to spend money to make money.” There’s an even older adage which posits, “Never use your own money.” One of the most popular sources of funds – especially for startups - is venture capitalists (VC), those who provide money in exchange for large ownership stakes.
 

Due to their popularity, VCs are extremely busy and hear thousands of pitches in a month. Out of that many, they invest in only in handful, hoping for a very lucrative exit in a short amount of time. To pitch a VC for financing requires the founders of a startup to not only be well versed in their own companies, but also do extremely detailed research on their potential investors. Not doing your research will make the difference in getting funded millions of dollars or being delegated to the black hole of has-beens. The following tips are some valuable lessons to learn about pitching VC’s and getting your startup funded.  

            Do Your Homework

Every venture capitalist you’ll be pitching to has their own distinct personality. You need to get as much background information on that potential investor as possible. Don’t just Google them but ask around – especially other investors. Do they have a short attention span? Would they prefer to see the bottom line numbers first and then the “sizzle?” What other successful businesses have they invested in? Why did they make those investments? In many ways, you’ll be giving the same basic pitch to every venture capitalist but if you can adjust to their investment criterias and individual personalities you’ll be ahead of the game.

Be Smart With Your PowerPoint

One of the most popular (and easy to use) skills for any business owner to have is the use of the PowerPoint presentation. This is not something you should be slapping together the night before the big pitch. Instead, it’s something you should be developing since the inception of your business plan. An effective PowerPoint presentation can’t stand alone. You’ll still need to “narrate” to fill in the gaps from your bullet points but you shouldn’t become top heavy with data. If you can make your point with a strong visual then go for it. Before building your PowerPoint, go online and view other presentations. Take note of what you like and “borrow” the idea.

Have a Thick Skin

Every entrepreneur walks into a VC pitch with dreams of walking back out with a check. That’s not going to happen. What will happen is you’ll be grilled aboutyour business. This is a good thing. The more you can engage that investor the better off you’ll be. Make sure you listen clearly to any question and think through the answer before blurting out something you think they want to hear. You’re not going to get the same reaction twice. Don’t let that throw you. Remain confident in your proposal and if they don’t bite move on to the next investor.

 Pitch the Facts

It’s great that you have conviction about your business idea but you can’t let that passion become pie-in-the-sky thinking. Over-valuing your company is the quickest way to turn off an investor. If you’ve got grand assumptions to make about business projections you better back it up with more than sweeping generalities. Just because the dog food industry is a multi-billion dollar business doesn’t mean your brand of dog food is guaranteed success. Sell your passion but back it up with the facts.

 

Financing Options for Start-ups

One of the biggest challenges for many start-ups is to find money to keep the company running. Break even point has not been reached and with expenses exceeding sales revenue , a CEO will soon need to look for financing options.

Where you get your financing depends on:

• what kind of business you are starting and industry you’re in,

• how much money you need to raise and

• what you will use the money for

Here are some of the financing options:

Family, Friends and Personal Savings

Personal savings are one of the easiest ways to finance your business. This option may be the best option in the earlier stages of the business, especially when you don’t have a product or clients. You don’t have to answer to any outside investor who only cares about how soon they are going to make their money back and not about the company. This may be your only choice if you aren’t able to attract investors. Family or friends can also be an alternative source, however be careful if they invest in your business. Is it worth losing the relationship if your business fails?

Angel Investors (early stage)

Angel Investors are investors who invest only in early stage start-ups and have been known to invest between $15,000 to $500,000 for equity in your business. Angels mostly invest once a business has been proven and has made some revenue. In certain industries, angels invest as a group, especially when they see a great opportunity.

Incubators

Incubators became popular during the dot-com boom, where they provided office space, access to mentors and IT infrastructure in return for a percentage of a business. They have become very popular recently, with an increasing number of incubators popping up around the world. Incubators work very closely with entrepreneurs by mentoring them in every aspect of the business from sales/marketing to operations. This is why many successful start-ups come from incubators. However, the success of an incubator depends on the experience of its board of directors and investors.

Venture Capital

Venture capital has become a popular option for many start-ups, however it is difficult to get financed by VCs . They are very selective in the investments they make, investing in as little as 1 start-up for every 100 proposals they receive. Due to the fast returns expected, VCs look for high growth potential start-ups that can provide them with a quick exit and a return on their investment in a short amount of time. If you feel that your start-up has a lot of potential for a VC, the best way to get in front of a venture capitalist is to network and get introduced by a mutual acquaintance.

Business Loans

Approaching a bank for a business loan is a standard path to fund a start-up. However, with the financial chaos affecting economies, many banks have become extremely risk averse. Although the benefit of getting a loan is that you keep ownership of your business – getting a loan will depend on things such as:

• the type of business that you run,

• the industry you’re in,

• and your credit rating.

However, if your business plan is solid and shows the loan officer how quickly you will produce revenue and break even, you may be able to get financed by a bank. In many cases, businesses use credit lines to manage their cash flow, and business loans to make large purchases such as equipment.

Most businesses will use a mixture of financing instead of depending on just one source. For example, as a start-up you might invest your own money for market research, then pitch investors to invest in the early stage of the company and then obtain a loan from the bank to purchase equipment. Once your company has grown, you may approach venture capitalists to finance your expansion into a larger company.

Ways to Finance Your Business

With so many types of business financing available today, it is advisable to check carefully which type is best for your specific purpose.

The most traditional type of financing is debt financing. This is a straightforward loan that is repaid with interest over a certain pre-determined period of time. Generally, it is not an unsecured loan and will require some form of collateral against default. Debt financing can be either short or long term.

Your business may qualify for a line of credit. This loan is generally attached to your chequing account and can help when your cash flow fluctuates greatly. Some business entrepreneurs have secured lines of credit using their personal assets as collateral.

The easiest money that is available quickly is borrowing from your credit card. Although the cash is available immediately, the rates of interest are extremely high compared to commercial loans. This truly should be a last choice option.

Often, a supplier of equipment or machinery will offer financing for your purchase by providing payment terms of 30 – 45 days or extended payment plans with interest. Merchandise is sometimes sold on consignment whereby the buyer only pays for merchandise that is actually sold.

Equity investing involves funding by investors who, in return for their investment, receive a share in the ownership of the business as well as a percentage of the profits. Generally, equity funds are unsecured against the company's assets. If a business owner is trying to raise a large amount of money, it may be possible to use both equity funding and loans against assets to secure the needed amount.

Depending on the type of business you own, there are various types of equity funding available. Angel investors generally are wealthy investors who invest in small businesses and are looking for a healthy return on their investment. Venture capitalists primarily invest in high-tech or leading edge businesses in return for partial control and management.

Large businesses seeking finance may sell shares of their business on the stock exchange. Profits from the company's growth are shared among the shareholders.

Whichever method you choose, be sure that you and your financial advisor examine all the options carefully before any cheques are written.

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