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.

The Building Blocks of a Top-notch Presentation

At least as important as a general knack for public speaking, is the ability to deliver a persuasive presentation. Business leaders are regularly called upon to inform and enlighten (among others) employees, clients, and prospective investors, and the ability to convey one’s ideas successfully to a wide variety of stakeholders is a hallmark of exemplary leadership.

The most important guiding principle is to know your stuff; if you have done your research in advance and know the topic you’ll be discussing inside-out, you’ll be able to both cover the essentials, and readily respond to questions and comments from the audience. That said, it sure helps to know what sort of people you’ll be addressing.

Familiarize yourself with the audience.

The best presentations take shape well in advance of a speaker’s scheduled appearance. Ideally, not only should a presenter be physically ready (i.e. well rested, nourished, and properly equipped); s/he should also have conducted a reasonable amount of advance research into the audience. What are the wants and needs of the people who will be listening to you? What are their priorities? What are they optimistic/anxious about? What information will they be most interested to hear? If you’re a presenter who likes to sprinkle in the odd joke, what sort of humour do you think will elicit a favourable response from this crowd?

Start strong.

Some presenters like to begin with a short anecdote; others prefer a punchy opening statement, rhetorical question, or a description of a commonly held belief that, to channel 19th-century wordsmith Mark Twain, “just ain’t so.” (You could even open by laying out the aspects of the misconception, asking “How often have you all heard this story?”, and then explain why it is erroneous.)

Your immediate priority should be to grab your audience’s attention. If necessary, introduce yourself and establish your qualifications. But keep this preliminary step brief (one or two sentences), and then get right to the point.

Punctuate your presentation.

Once you have captured the attention of the audience, your next challenge is to maintain it until you’ve finished. Inexperienced presenters often make the mistake of bombarding viewers with information in large tranches, rather than breaking it down into digestible fragments that leave listeners a moment to process what they’re hearing, and try to reconcile it with their pre-existing views.

A strategy that works fairly well is to partition major concepts with quotes, either from inspirational figures, or from experts in a field of knowledge that is relevant to the content of the presentation. Quotes can also be used as evidence or testimony that reinforces the message you hope to convey.

Encourage participation.

The question is a valuable item in the toolkit of an effective presenter. Questions can be open-ended, require a yes-or-no response, or take the form of a multiple-choice poll. (“Raise your hand if you believe X? What about Y? What about Z?”)

However, not all questions are useful. Avoid loaded questions unless they contain a misconception you aim to dispel; for example, “How many of you think sports cars are fun to drive?” already suggests a reply. Queries with obvious answers will also tend to nullify the participatory effect, since few members of the audience will need to actually pause and reflect before responding.

Tell a story.

Cherokee novelist Thomas King wrote “The truth about stories, is that that’s all we are.” Indeed, human civilization is built on them. The bulk of the collective knowledge we have at our disposal—from scientific theories to news, history, literature, and the arts—take the form of stories, conveyed through a vast array of media and languages, that have evolved and been modified over time.

With that in mind, it should come as no surprise that one of the most effective ways to engage an audience is through narrative. Financial advisor Suze Orman, a denizen of the cable networks, likes to recount her personal rags-to-riches journey during her speeches, which has the added benefit of establishing her credibility as a surmounter of major financial obstacles. Alternatively, your story could offer a description of an experience you had, an account of a significant historical event, or the anticipated result of a policy change you advocate. In any case, choose a narrative that is relevant to the topic at hand, and that is likely to resonate with your audience.

Expanding Beyond Your Core Business Model

History is laden with examples of businesses that have broadened their repertoire of products and services, yielding both remarkable successes and monumental failures. On the other hand, there is really no such thing as “playing it safe.” Just as many companies have foundered by deviating too far, too fast from their traditional business model, others have lost their edge by hewing too closely to convention, like old dogs that failed to learn new tricks. A famous example of the latter is Smith-Corona, which by the 1980s had firmly established itself as the world’s premier manufacturer of typewriters, only to watch its signal technology fade into obsolescence due to the advancement of the personal computer.

Of course, the prospect of expanding a business model is daunting, and the temptation of risk-aversion is strong. But the choice to “stick with the core” entails its own risks. There are no guarantees. But there are strategies companies can employ that will enhance the probability of a successful transition or expansion.

Assess your current capabilities. Where does your business excel? What can you do better?

If you’re running a profitable business already, it’s a sign that your clientele values what you have to offer. Take the time to realistically determine your strengths and weaknesses as an organization, and where they stack up against your major competitors. Equally important, stay abreast of any new techniques, technologies, and business opportunities that your competitors may be exploring.

In his influential book Understanding Media, cultural analyst Marshall McLuhan advanced the thesis that technology—including tools, vehicles, and furniture (which he broadly defines as “media”)—are effective extensions of the human body and mind, geared toward a particular purpose. Using this concept as a framework for analysis, we can infer that a successful transition from one medium to another requires organizations to first recognize a distinction between what they provide, and the means (media) by which they provide it.

For example, the best restaurants are not exclusively in the business of serving food; they afford customers a social, environmental, and gastronomic experience. The technology corporation IBM is not merely a manufacturer of computers and software; its primary purpose is to facilitate the storage and transfer of vast amounts of information. Computers are a medium which serves that end.

Think about the primary purpose of your business, and the experience you would like your customers to have. Are there easier, more efficient, or more cost-effective ways to achieve that goal? What are the tools, or media, at your disposal?

Seek out windows of opportunity.

Once you have a clear idea of the raison d’être of your business, you can think about broadening the range of products and services on offer. Amazon, which began as an online book retailer, now distributes DVDs, music, and even fashion accessories. Netflix, once a mail-order DVD rental service that came close to bankruptcy, is now a highly profitable video-on-demand website with an increasingly global customer base. Both companies recognized that they were in the business not only of moving product, but of catering to the lifestyles of busy professionals by providing easy, convenient gateways for shopping and entertainment.

Do your research first.

 

Occasionally, the opportunity to open up a niche or neglected market presents itself, if you are fortunate or imaginative enough to find prospective customers who are underserved, or to devise a technique that hasn’t been tried yet. But in most transitions or expansions to new markets, you’ll find an established group of firms with a strong foothold. Invariably, those competitors will tenaciously resist your attempts to siphon away their clientele, and will have the advantages of experience, skill, infrastructure, existing relationships, and inside knowledge on their side.

This is why advance research is so important. Before you embark upon a new endeavour, survey the terrain. Get to know your prospective customers and their needs and habits. Identify and examine the most prominent incumbents in the industry, and understand why they are successful.

If you’ve done your homework, feel confident that you can offer a better deal than what’s already on the table in your target market, have a viable business plan, and have secured the capital and cash flow you need, then you’re ready to make a move.

Are Women Better Managers Than Men?

According to a Gallup survey published late last year, women in management positions in the U.S. tend to outscore men when it comes to employee engagement—which is a key predictor of productivity, job satisfaction, and employee loyalty. The polling organization concluded that American firms would benefit from promoting more women to positions of authority. This result suggests that not only is the advancement of women important from a social justice perspective; it is also a prudent business decision.

 

Of course, some qualification is necessary here. The world is home to excellent, mediocre, and lacklustre managers of both sexes, and the survey’s findings indicate a trend rather than a universal absolute. The average levels of employee engagement detected by Gallup are also disconcertingly low overall—from 25 to 35 percent. Nonetheless, the scores for female managers are superior across the board.

At least two questions spring to mind in response to the study: why do female managers tend to engage their employees more effectively than male managers? And what are some of the common traits that make female managers more successful, on average, than their male counterparts?

Gallup’s elements of great managing.

Gallup’s evaluation of employee engagement, and the questions it posed in its survey, are based on 12 elements of managing, all of which reflect aspects of employee engagement and productivity. Engaged employees are likelier to feel that they have a clear mission and the resources they need to do their job well; that managers take their opinions and ideas into consideration; that they have opportunities for career development and advancement within the organization; that their colleagues and superiors care about them and are invested in their success; and that they receive regular feedback and encouragement. Less-engaged employees may believe their work is not especially important or not valued by the organization; that they have no real avenue to growth and progress (i.e. that they are in a dead-end job); or that their managers and co-workers don’t care about them, either personally or professionally.

The survey indicates that female managers check in more often on the individual members of their team, provide greater feedback and positive reinforcement, and are likelier than male managers to praise good work.

The downside of manliness.

 The gender binary—that contrived line of demarcation that distinguishes “male” qualities from “female” qualities—informs the individual identity of most people in our culture, along with our social interactions, and our perceptions of each other. In childhood and adolescence, a lot of boys and young men are encouraged to adopt personality traits traditionally associated with masculinity: toughness, strength, dispassion, tolerance for pain and discomfort, independence, and an aversion to betraying any sign of vulnerability. (This is why so many men are reluctant to ask for directions when we are lost: because it would require us to acknowledge that we have a problem we can’t solve on our own.)

These stereotypically “manly” traits are not always useful in a modern office environment. To engage employees requires emotional tact and intelligence, and excellent communication and social skills. On average, women tend to have the upper hand in those departments.

Improving engagement.

Nearly all managers can bring about improvements in employee morale by attending to the core areas of engagement and job satisfaction. The advantages of better engagement include enhanced productivity, and improved chances of retaining highly skilled and desirable workers. The Gallup survey’s implications are clear: if employee engagement is one of your organizational priorities, you’ll improve your chances of achieving it by promoting more women to management positions.