Wednesday, November 12, 2014
Finding The Secret To Success With Crowdfunding, With Chance Barnett
Story by Benjamin F. Kuo
What is the secret to a successful crowdfunding effort--and how should you conduct a crowdfunding campaign? We spoke with Chance Barnett, the CEO and founder of Los Angeles-based Crowdfunder (www.crowdfunder.com), to learn more about how to make an equity crowdfunding successful, the importance of celebrity in crowdfunding deals, and more.
Explain to us what Crowdfunder does?
Chance Barnett: Crowdfunder is an equity crowdfunding platform. We help early stage entrepreneurs in technology and digital media raise early stage funding rounds. We have funded deals from seed stage all the way through Series C, and have a growing pipeline of notable, celebrity technology and celebrity entertainment investors coming onto our platform. As an example is Neil Young's Pono Music, his new digital music hardware and software venture, which is restoring sound quality to digital files. They had previously raised rewards-based crowd funding on Kickstarter, and turned to us to offer its backers the ability to actually become shareholders. That's what Crowdfunder uniquely does. We've raised a significant amount of investment commitments for companies.
You mention celebrity investors, why is that important?
Chance Barnett: We are finding that, although we have a significant portion of technology deals from the kinds of investors you might find on Angellist, we find that AngelList is not a great platform if you don't have a lead investment or syndicate led by a super angel like Ron Conway. It's challenging to get a broader set of people to invest in your company. We're finding that we are adding value to entrepreneurs who come to our platform, and have great co-marketing partners. We also find it's useful to have notable investors and celebrities like Neil Young, to help you promote your fundraising and investments to a broader set of people.
You recently raised a round of funding, what is that going towards?
Chance Barnett: We raised $3.5M in a recent Series A, which is going into three main areas. One is product and development, where we're continuing to build out a better product to serve entrepreneurs and investors in a better way. Second, it will go to scale our growth efforts, and help acquire both entrepreneurs and investors to our platform. The third, is we are creating our own fund, where we have set up a special purpose vehicle, a small fund just for the purpose of investing in a single company. We did that with Pono, which makes Crowdfunder an investor and shareholder in Pono through the fund. We're doing all of this to scale out the business, get more and more deals, and build a portfolio of value at this company.
Did you use your own service for your own funding efforts?
Chance Barnett: We did. We ended up taking in investors about three quarters of the way through the round, when we already had a lead investment and investors, and took in aout $600,000 from our own platform. We went out fairly quietly to exiting investors on our platform, and got a great response.
From your perspective, where are we nowadays with crowdfunding?
Chance Barnett: I think there is some confusion in the marketplace, where people are thinking that we are still waiting on crowdfunding rules from the SEC. However, over a year ago, they finalized rulings for Title II of the Jobs Act, which opened up a brand new market and opportunity for entrepreneurs from accredited investors online. We've been executing our core model around that, only addressing accredited investors, and we're growing very rapidly. We've helped close 34 seed and Series B deals over the last nine months, and we're growing really rapidly. There'a a regulatory window which we're waiting for right now, and which has some challenges going through regulator's hands, which is Title II and Title IV, which will bring non-accredited investors into this market. That's not necessarily a core business for Crowdfunder, but it's an added new opportunity if and when that becomes available.
Finally, what makes for the most successful crowdfunding efforts you see?
Chance Barnett: There are three main parts of a successful campaign. The first, is entrepreneurs really have to know how to create a story and pitch. I can't understate the importance of this. You have to be able to connect with, communicate with, and stimulate the two sides of an investor's brain. One is the rational side, the part that cares about the investment return equation on how to make money. The other side of the investor is the nonrational side, which cares about the meaning, purpose, and vision behind a company, what it means to invest in a company. It's really important to get that story right, particularly in a world which is not a board room, where you aren't pitching and investor one-on-one. It's worth pointing out the investment equation changes in our world for the investor. It's a very different opportunity investing in a Series A alongside a VC, putting only $5,000 to $10,000 into a company. That changes the amount of risk an investor has to get into a deal. That's why telling a story is really, really important. The other important part of a successful campaign is the first money in, or the lead investor. There is five to six times more engagement with our community of investors, if the deals already have a lead investor or notable investors. There's five or six times more engagement from just that alone. The third part of a successful campaign, are ones where entrepreneurs don't look at crowdfunding as and all-or-none deal. They've already been raising funding elsewhere, and continue raising funding elsewhere. We're a fantastic way to accelerate and augment funding, and to create momentum around existing efforts. Crowdfunding is not zero to funded, crowdfunding today is fantastic for validating and raising 20 to 75 percent of your round in a much more efficient way. We see entrepreneurs who are fundraising both online and offline having the most success.