Monday, June 18, 2012

Why Accredited Investor Requirements Don't Measure Financial Sophistication

With all of the excitement about the JOBS Act and the legalization of selling equity in private companies to unaccredited investors, I have to ask the question: Does qualifying to be an accredited investor really qualify someone to make better investment decisions than someone that is not?

Here is the definition of an accredited investor: he/she makes more than $200,000 per year or has a net worth of more than $1 million, exclusing personal residence. I have met a lot of people that meet this requirement that have and continue to make horrible investment decisions. So why are income and net worth the only requirements? Probably because just about any other requirement would be too hard to measure.

The accredited investor requirements are exclusionary. Before the SEC Act of 1933, anyone could sell and buy stock in any company to anyone else. The income and net worth threshold set by the 1933 Act exclude some who are probably really smart, but the Act takes the position that it's better to exclude them and only allow those with money to lose to be accredited.

It's faulty logic, and it is at the core of the CrowdFunding movement. In January of 2013, when equity and debt-based CrowdFunding become legal, unaccredited investors will no longer be excluded from buying stock in privately-held companies that crowdfund. Unaccredited investors will have annual limits they can put into crowdfunded companies, but at least they can get into the game.

Friday, June 15, 2012

The Slingshot Business Strategy

At Yesterday's UVEF luncheon, Ryan Caldwell of MoneyDesktop shared an idea that was really powerful and relevant to everyone in the room. It's a business strategy, and the context and analogous manner in which he presented resonated with everyone in the room as one of the main take-aways.

When the space shuttle flies to the moon, it doesn't pick the straightest path to get there. It uses the earth, the largest point of leverage, or gravity, to slingshot itself to the moon more quickly and using less fuel. This means that the space shuttle doesn't actually head toward the moon when it launches. But when it slingshots around the earth, it is on a direct course.

This concept has so many business and personal applications, and it has been a big reason why MoneyDesktop has gotten traction. They started by beginning to approach some of the 14,000+ banks and credit unions in the U.S. But Ryan quickly realized that they are slow to make decisions, late to adopt new technology, and clueless when it comes to how software can make things better. His research found a much better point of leverage around which he could slingshot into all of the banks...through the software companies that build and run the online banking portals the banks use.

The main point of the slingshot strategy has a few elements to it. First, the best way to get to who you think your customers are is not always a straight line. Second, research the industry and all of the players to find your greatest points of leverage. Third, find the entrenched players, the massive parties that are too big and encumbered to change. Fourth, use those entrenched players, their mass, their inability to innovate, and their slow decision-making abilities, to slingshot yourself to your customers. Fifth, execute. It still takes a lot of work, and you need to continually pivot your trajectory, speed, and direction all along the way to make sure you hit your target!

Here are some of the tweets that tried to capture Ryan's comments:

@_KenKaufman: U may have to move a different direction first to get where u want to go #uvef #slingshotspaceshuttle

@izattapps: Leverage large entrenched players as partners. Key to capturing large user groups quickly. #uvef @RyanCaldwell

@_KenKaufman: Find a planet u can slingshot around...where can u get the most leverage, even If it's not the most logical first step #uvef #slingshot

@utahguy: Ryan Caldwell, @MoneyDesktop, use the gravity of entrenched players to achieve a slingshot affect. #uvef

@izattapps: Path to market depends largely on which players you align with and which ones you don't. #uvef

@izattapps: Not always the direct path is the best path. Long way around can leverage partners to get 10 times as much done with 1/10 the effort. #uvef

Wednesday, June 6, 2012

The Next $300 Billion Industry

Crowdfunding. Here's why:

In 2011, about 1.2 million projects were successfully funded through CrowdFunding platforms, totaling about $1.5 billion.

Projections for 2012 by industry experts reflect growth to $2.8 billion, and that's with many sitting on the sidelines, waiting for the SEC to codify the recently passed legislation that will open up the floodgates of equity-based CrowdFunding. As I write, entrepreneurs are pivoting to the most efficient business model (and they are years away from finding it) and business leaders are tackling the SEC Act of 1933 (more on that later).

So why does venture capitalist Fred Wilson predict CrowdFunding will grow to $300 billion? Among other reasons, advances in technology, social media infrastructure, and payment systems along with democratization of capital markets create a perfect storm for growth.

Technology. The ability for online platforms to create an efficient, low-cost mechanism to bring multiple small-dollar investors together did not exist very many years ago. The reality is that equity-based CrowdFunding, or the concept of raising money from people in your network, has been happening for years, but mostly without the benefits of technology and automation.

Social Media Infrastructure. People trust blogs more than brands and advertising. People poll their FaceBook friends to find a good mechanic. People have digitized their networks using social media infrastructure, meaning the crowd is already assembled and ready to "play." One interesting validation is this point: people are starting to pay more attention to and care more about their "social" credit than their financial credit.

Payment Systems. Innovations in payment systems now enable micro transactions, like $20, $5, and even $1, to be completed for a relatively low cost.

Democratization of Capital Markets. The JOBS Act, signed by President Obama in April 2012, represents the first significant innovation to a 79-year-old piece of legislation called the Securities Exchange Act of 1933. Yes, it came out shortly after the Great Depression when many individual investors had been duped into unscrupulous and fraudulent purchases of various securities. The purpose of the Act was to create the SEC, whose mission is to protect investors. The result of this is that if you make less than $200k per year and have a net worth of less than $1 million (excluding your home), you cannot invest in privately-held businesses. The JOBS Act, however, gives the power back to the people. CrowdFunding will empower anyone to allocate a portion of their investment portfolio to privately-held companies, from Startups to thriving businesses. And predictions are that the money will flow quickly and freely into these markets because entrepreneurs are starving for the capital and investors are looking for something more than the stock market returns and less than .5% interest from their savings.

Equity-based CrowdFunding is working well in the UK, Eurozone, and Australia so far, but all eyes are on the SEC to see what regulatory model they employ for this new type of security. The SEC has until Jan 1st, 2013 to issue their guidance. Then the real growth in CrowdFunding will happen.

In my opinion, CrowdFunding has an opportunity to be larger than $300 billion. Fred Wilson came up with his number based on a small percentage of just unaccredited investors's money. That's assuming accredited investors, angel groups, venture capitalists, private equity firms, insurance companies, and other institutional money managers won't put a single dollar into CrowdFunded companies and projects. I just don't think that will be the case. In fact, I could make a good case for CrowdFunding becoming a major source of deal flow for the accredited investment community, meaning the potential size of this industry could be much larger than predicted!

Monday, June 4, 2012

How CrowdFunding Became Legal in 460 Days

A 78+ year-old law needed change. Who better to take it on than 3 entrepreneurs with ZERO political experience!

After meeting Jason Best and hearing their experience, the story of equity-based CrowdFunding became even more compelling. Here is a video he and his counterparts put together to show how they made all of this happen for a lot less money, with a lot less political clout, and in a lot less time than anyone thought possible!


Friday, June 1, 2012

CrowdFunding: Breaking it Down

After attending the CrowdFunding Made Simple conference on May 31st and June 1st, I have gained a new knowledge and appreciation for what has been accomplished so far by the leaders in this industry. I am amazed at the potential growth projected for its future. But more on that in another post. As a point of basis and reference, we need to start with some of the basics.

According to Carl Esposti, the Founder of Crowdsourcing.org and a great guy, CrowdFunding needs to be understood in its four uniquely different categories.

1. Reward/Perk CrowdFunding: This is the most popular form of CrowdFunding today, and it is based on the concept that those giving funds to the project will receive something in return, usually a non-monetary perk or reward. It can range from a postcard signed by the fundraiser from some far-off country to a shipment of the product the fundraiser builds with the money received for the project. The CEO and COO of RocketHub.com participated in this conference (great guys!), and I'll be sharing a lot more detail on how this model works and how to make it successful. Other platforms of notoriety include Kickstarter.com and Indiegogo.com.

2. Donation CrowdFunding: There are many platforms that fall into this category as well, which returns nothing to the givers of funds except the emotional connection to a cause or program with which they have a strong connection. This category fits with philanthropic, charitable, and sponsorship activities and projects. 

3. Equity CrowdFunding: Startup and other companies sell some of their stock to regular folks like you and me, that's the idea behind this category. Givers receive stock and the prospect of financial return that might come with it. It's a revolutionary concept, and here's why. In the United States, it is not currently legal to sell securities in a privately-held business to what are referred to as unaccredited investors, meaning people who have made less than an average of $200k per year for the last three years or who have a net worth in excess of $1 million, excluding their personal residence. However, the JOBS Act, which President Obama signed into law in April 2012, is going to allow this to happen. There are still some things to be sorted out by the SEC and whoever they appoint as the regulatory body to oversee compliance, but that's supposed to be done by Jan 1st, 2013.

4. Debt CrowdFunding: Similar to equity CrowdFunding, this category provides the prospect of a financial return to the giver in the form of interest and principal payments. 

In addition to sharing more content I learned at the conference, I plan to write a lot more on this topic during the coming weeks and months as the industry grows and regulatory bodies attempt to catch up with the current legislation.