Message from editor : This is a guest post by Krissa Curran, female entrepreneur, serial #sidehustler and mid-20s career girl. In this post she gives us the low down on equity crowd-funding, and talks about how to reap rewards, you have to first dive in!
So when people think about investing, buying shares or stocks in a company, heck when people think about start-ups — especially technology-based ones! — chances are they have some slick, Wall Street banker or Silicon Valley Zuckerberg-type geniuses pop into their heads. The Jordan Belfort wolves and Peter Gregory types from the eponymous HBO hit TV series, “Silicon Valleyâ€�, played by the late Christopher Evan Welch. Slightly eccentric, modern-day mad scientist type “corporatesâ€� who seem to just “get itâ€�. Guys that have been coding or investing in small stocks since their mid-teens (I actually know a few of these!), who can read fluctuations on the NASDAQ exchange like a musician can read sheet music, an anchorman can read weather, or a photographer can read and manipulate light.
But the good news is, thanks to the rising popularity of crowdfunding and most recently equity-based crowdfunding, all this doesn’t have to seem so remote, so abstract, so cold and so intimidating anymore. At least, I hope not after the end of this article. After all, I’m a 27-year old “third culture kidâ€� who owns a travel-tech start-up. Yes, I’m a career woman. No, I don’t code myself. But yes, I do lead and manage a team of very talented developers who do! And not only have I managed to get my head around at the very least the basics of all this, I’ve actually kickstarted my own equity-based crowdfunding campaign as well!So here’s what I know and what I can tell you:
All over the start-up world we’re starting to see entrepreneurs using equity crowdfunding, or “crowdinvestingâ€�, to seek their next round of funding. In short, what these new business owners are all asking their friends, family and friends of friends (potentially the whole wide world) is to give them money in exchange for shares (equity) in their company.Unfortunately, most people still don’t get what this all means. Are there risks? If so, what are they? What are the benefits? And how can I ensure they’re worth it?
Since I – and my wonderful team at Friends of Friends Travel (FOF Travel) – are running our own equity crowdfunding campaign we thought we might as well explain it a little more by answering a few common questions we’ve gotten recently.Friends of Friends Travel – harnessing the power of the crowd!
What is equity?
For the sake of clarity, equity refers to the value of shares issued by a company. Usually this is expressed as a percentage of ownership in the business. And shares, are simply all the equal parts by which a company’s capital (and subsequent profits) are divided amongst the owners of those shares.What is crowdfunding?
You may have already encountered crowdfunding before through sites like Kickstarter in the US and Seedrs.com in the UK – the idea that anyone in the public can put in money into a project and get some sort of “rewardâ€� for it. It has been used worldwide to get financial support for all sorts of projects from play productions to book launches to new technology and massive art installations.The power of this concept is that project creators and entrepreneurs – what you would call #sidehustlers here at Ms. Career Girl – no longer need to convince an elite group of the very wealthy to make their idea a reality. In fact, it’s created a world where the individual with less disposable income has much more power to decide the kind of art that gets funding, the kind of products that go from prototype to production and, generally, the kinds of projects that get a real chance at success.It’s democratic funding rather than aristocratic funding. And you don’t need a fancy degree to understand the basic rules of the game.Crowdfunding puts the power in the “crowdâ€� – and subsequently gives projects more pressure to be socially conscious as they now have a whole lot of everyday people – people just like them! – who have put in their support and are watching their every move. Crowdfunding, therefore, makes project owners and entrepreneurs like us accountable to honest and sincere people who truly wish for them to succeed… for everybody’s sake! Talk about (good) pressure!
So what is equity crowdfunding?
Most crowdfunding, like Kickstarter types for example, involves giving supporters some sort of material reward or token souvenir at the end of it. This could be a pre-purchase of the product being made, some piece of signed art related to the project, a named credit or whatever other creative award the project creator can think of.The beauty of equity-based crowdfunding is that apart from getting something material, apart from helping a project and an idea you actually believe in come to life, you get the additional and long-term benefit of actually owning equity in the business that you’re giving money to. Essentially what that means is that YOU get to own a piece of the company you’re happy to back in the first place!Let’s look at this with a real example!
Support FOF Travel, now crowdfunding on Seedrs.com!
In our crowdfunding campaign for FOF Travel, we’re giving away 13% of FOF Travel for (approx. ). That means if you decide to invest just in our company (let’s calL that ) through this campaign, you’re buying 0.00108% of our company.That doesn’t sound like a whole lot does it? But let’s look at it this way – if we do reasonably well, our valuation may go up to something like million ( million). That means that you own 0.00108% of a million ( million) company. That means your () is now worth (). If we do a bit better, and get valued at million ( million), you’re looking at your () becoming (). If we do as well as something like AirBnB, which is currently valued at about billion ( billion), then that () investment suddenly becomes ()! Not bad, eh?Tell me honestly, what are the risks involved?
Of course, as with any transaction, understanding the risks involved in the trade is very important. While our success would be your success when you invest, you also have to realize that our failure would mean an inevitable loss on your part. In other words, just remember that any money you put into a business you’re crowdinvesting in is at risk of being lost – if the company fails. For how can I company reward its backers if it hasn’t made any money itself. And let’s be brutally honest: most startups do fail. Because this #sidehustling business isn’t for everyone! So the team behind the idea is really really important and often a good indicator of future success (or strong potential of that!).Also: you should never put in any amount of money into a crowdfunding campaign that you’re not prepared to lose, because there’s a good chance that you won’t get a return on it. There’s also the fact that when you buy into a company, you may not always be able to find someone to buy your shares from you whenever you want, when the company becomes successful and is on the rise. You may find that you can only sell your shares when the company is bought by another company or floats on the public stock exchange. And this can and often does take time.So why should I support a business through crowdfunding? What do I get out of it?
Well, now that we’ve covered the potential downsides, here’s the upside! Apart from a potentially large and positive return on your initial investment (see our FOF Travel example above or here), which is a more direct and monetary return, from a more idealistic and optimistic point of view: remember that what you’re actually doing is participating in, and contributing to, a system and practice that empowers the people.When companies are backed by crowdfunding, they’re not beholden to just a few shareholders who have chosen to put their wealth behind them. Instead, they’re answering to a whole crowd of every day people that have put their hand up to say, “Hey, I like what you do. And I believe in you!â€�That kind of pressure encourages companies to be more socially responsible, practice business more ethically, and also to take actions that benefit real people and not just focused on making money for their few shareholders. If it helps, maybe try thinking about crowdfunding in these two ways: 1) Yes, it is an investment opportunity with risks that must be calculated and benefits that can be big. But also 2) it is a statement that you are making about the people, the things, and ideas that matter to you, which you believe in. After all, you should never back a project that doesn’t personally resonate with you in some way. So do take the time to understand the team, their motives and what they plan to do with your help.
Why are you personally doing this?
What’s in it for me and FOF Travel? Well, let’s just say we’re not prepared to give up a piece of our company for nothing! As with everything we do, it all boils down to our key and underlying principles and philosophies. Personally, we’re not just equity crowdfunding because we like the idea of sharing our company with anyone who wants in. We’re doing this round of investment through the crowdfunding process because we believe it’s a better way for our company to connect directly with the people we’re planning on serving – and we want to support a system that encourages other companies to do that too.After all, our whole mission and vision is based off of the sharing economy and collaborative consumption. We’re about helping friends, help each other out when traveling. And it only made sense that we offer a piece of our success with honest supporters and travel-lovers like us! The way we see it, if we’re going to be accountable to somebody, we might as well be accountable to people who really would love and benefit from the service we’re itching to provide. A social travel app by the people, for the people… Now imagine that! About the author:Krissa Curran is the CEO and Founder of social travel start-up Friends of Friends Travel (www.foftravel.com). She’s also a Digital Marketing Consultant for various lifestyle and hospitality brands, a part-time and certified Yoga Instructor, Third-Culture Kid and Global Nomad. Find out more about her here: www.krissacurran.com. How to support:If you’d like to know more about Krissa’s social travel start-up Friends of Friends Travel and their current equity-based crowdfunding campaign for FOF, read their personal appeal and newsletter here.FOF Travel crowdfunding on Seedrs.com