3 Reasons Why Crowdfunding is like Trick-or-Treating

In case you haven’t been paying attention, the latest trend in raising capital for early stage businesses is Crowdfunding. Crowdfunding involves taking small contributions or investments from a large number of people to raise capital, usually enabled by the Internet. Done correctly, it may provide access to early stage capital for entrepreneurs; done incorrectly, it may just be illegal and a recipe for failure in subsequent financing efforts.

In honor of Halloween, I offer up three ways that Crowdfunding is like Trick-or-Treating:

1.      You need to dress up: If you’re like many companies, your business isn’t something with broad mainstream appeal that can be quickly digested and understood by the masses. The same way that my kids agonize over their costume choice for Halloween (my 8-year-old will be a pink leopard and my 5-year-old—wearing a paper bag; don’t ask—plans to be groceries), you need to find the right way to dress up your deal so that it can be understood by the masses in two to three sentences. You won’t likely get more than just a few words to set the hook on why people should want to help you, so choose them wisely.

2.      If you’re not careful, you might get burned: When trick-or-treating, keep your costume away from fire or the results can be catastrophic. When you engage in Crowdfunding, you also need to be careful. If you raise capital from investors who expect to receive a return on that investment (rather than just making donations), you are likely in violation of federal and state securities laws that require registration or an exemption from registration for offering of a security.

While there has been much written about Crowdfunding, and even proposed legislation to make Crowdfunding work for raising capital, it doesn’t work under currently applicable regulations. In part, this is because of: (a) the number of investors that likely would be involved in your Crowdfunded deal, (b) the way that they found your deal through what the SEC would call a general solicitation, and (c) the inadequate disclosure you may have provided to them before they made a decision to invest. If you, instead, narrowly tailor your Crowdfunding so that nobody who gives you money expects anything in return (or at least anything that is tied to the performance of your business), it won’t send your business up in flames.

3.      Standing out from the crowd is critical: Remember, in 1977, when you showed up in your really cool Darth Vader costume and you ended up in line behind a half dozen other kids with the same mask (and a few Princess Leias)? There are a lot of people residing in—and even more noise emanating out of—the Crowdfunding universe. You’ve got to find a way to stand out from the crowd.

Showing up at the neighbor’s door wearing a sweatshirt from your favorite team and claiming you’re dressed as a “couch potato” isn’t likely to get you a full-sized candy bar. Showing up with an amorphous “app” that works in “the Cloud” and involves social networking on a SAAS model (which may guaranty that VCs will be salivating over it once you’ve developed it and built some market acceptance) isn’t likely to cut it with your Crowdfunding audience. Telling them how you’re going to build something really cool and providing an example of how they can use it to change their daily lives will.

Here’s to hoping you don’t get too many rocks in your bag when you’re ringing doorbells…