Why I’m considering crowdfunding

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I arrived back in Australia yesterday, and spent today at a crowdfunding class sponsored by The Mill House Ventures. They are a local social-enterprise incubator in my hometown. The presenter was the CEO from Start Some Good which is a crowdfunding platform specifically for social-enterprises.

I’ve been considering crowdfunding as a funding option for a while, and it’s not just about raising money. My two major reasons are:

  1. It could validate the market value of my product ideas which will also increase the value of my business; and
  2. It could fund my first mould without having to give away any equity.

The second reason is more important than the first to me as giving away too much equity too early to investors could jeopardise the social mission of the company. I can already hear them asking me why should we make these products from recycled plastic in Australia when it’s cheaper to use virgin plastic in China.

This is something that people have already warned me about as the rights of shareholders apparently overrides any social mission even if I’ve written it into the Constitution.

I considered a not-for-profit model too, but it really limits the ability to raise funds from outsiders. Furthermore, because we are focussed on selling consumer products to achieve our social mission, the business lends itself naturally to a for-profit structure.

After taking the class today, I’m convinced that this is the right way to go for one of my products in particular. It fits the criteria well, and essentially sets me up to pre-sale products before investing further into the moulds. Plus, if I get accepted into the Mill House program, they’ll give me resources and a little bit of marketing money to increase my chances of success.

After the class, I ran into the manager of the local innovation grant which I looked at earlier. I asked him if it would jeopardise my chances of getting the grant if I received a little money for the crowdfunding campaign. He said it might actually increase my chances because it validates that someone else thinks I have a good idea.

With that info, I now have about two weeks to submit my application for both the crowdfunding program and the grant. I just need the final numbers from my manufacturer so I know how much money I need. That meeting will occur on Wednesday next week when I fly up to Brisbane.

How to bring on investors?

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The Constitution template that I used for my company has 20+ different kinds of shareholders identified – from ordinary to founder to nearly the entire alphabet. While I had a few companies in the past, I’ve never brought on investors to help fund the businesses before. So, this is all new to me when the capital required for my new business exceeds my savings.

It’s incredibly common to hear start-ups talking about bringing on investors whether in person or in books and interviews. We also talked about this at business school too, but I naively thought shares were issued in order of the time of when you received in investment i.e. A to Z. This doesn’t appear right.

Why is it that no one really gives you the step by step of how to bring on an investor for your business?

For instance, which of the 20 different shares do I try to “sell” first? Some have voting rights, some have dividend rights and some have both. Also, if I use convertible notes (loans that eventually change to shares), what kind of shares would they normally convert to, and what about employee share options? Which ones should they get?

If anyone knows of a good book, please let me know. Otherwise, I’ll share on this blog as I gather more info. I still have so much more to learn.

Funding via notes

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This afternoon I met with an organisation that’s overseeing a grant opportunity. The challenge is that the funding round doesn’t close until the end of the September, and I obviously can’t depend on it either. The potential max grant is also nowhere near my financial needs even for the first product. So, I really need to become more serious about how I’m going to fund this business should everything work out okay from a product cost perspective.

My contact today mentioned notes as a funding option. I’m familiar with convertible notes which are essentially loans that turn into equity later if I bring on large investors. I’m also familiar with notes that can act as short-term loans, typically with a high interest rate. Both are certainly options that result in debt rather than giving up equity early.

Still, I was really interested in learning more about the SAFE note that he mentioned. After further research, it seems to be a newer way of obtaining financing without giving up equity or issuing debt early. Instead, it appears to offer share options at a heavily discounted rate should an equity funding round ever occur in the future.

I’ll have to ask my private equity friend about this further as this can definitely be an option, but I need to understand it much better before I can make that kind of decision. It’s really good to know that there are other ways of funding this business though.

Investors advice from friends

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Spoke to three female friends today who gave me some good advice about financing my business. One’s a successful entrepreneur who has built and sold a company. One’s an investment banker. And one’s been in the angel investing / start-up world for as long as I’ve known her.

It’s interesting to hear their different perspectives about the risks of taking external money. The big thing is the loss of control including the potential to lose the environmental mission if my investors’ values are not aligned with mine. I’m so lucky to have friends like these as supportive advisers too. I’m sure I’ll seek their advice again when I get closer to that decision point.

Business Accelerator #2 opportunity

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Last night, my parents asked me how I was going on a video chat. I told them I was just working on the product designs still. Suddenly, they went deadly quiet. I realised then that I hadn’t told them that I started a new business. Oops! I’ll write a proper article about this here.

I received an invitation to join a business accelerator program today. This is after I pitched my start-up to them a few weeks ago. It’s a real honour to be considered, and I certainly wish that I did have some help. After all, it’s been a pretty lonely journey so far. Though, I had a quick read of the T&Cs this afternoon, and I’m not convinced that I need as much support at they’re offering, especially for what they want in return in terms of time and comms – though no equity this time. I’ve asked for a meeting to chat.

Moulds – first estimate costs for Product #2

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Received rough pricing estimates for the moulds of my “easiest” of three products (Product #2) from Manufacturer #1. Two options above the $30k mark with GST. Yikes! That’s expensive. The cheaper of the two ($9k difference) combines two parts into the same mould. The other option is for 2 separate moulds. I’m going to need to rethink my funding model. I could go broke with the moulds before I even have a product to sell.

Approved early design work to start for Product #3

When to say no for help

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Decided not to apply for the accelerator program which is due on Friday. I had my application pack ready, but with my business background and experience, I don’t know how much value I’ll get out of all the mandatory workshops, etc. Plus, the cost of entry (equity) is greater than I want to give in exchange right now.

A start-up like mine will appear nearly worthless when it has yet to make or sell one product. I’m not ready to exchange capital for investment dollars yet, but it would awesome if I can still hang out with these smart people and network. There will be a time in the future where I need more help, and hopefully my company is worth a bit more then.