Formulating your offering
Clearly Articulated Returns
Most entrepreneurs misunderstand the relationship between the small-business investor and investee. They are customers of your future success, not your product or service. This section is intended to help entrepreneurs understand the investor point of view, so that you can market the investment effectively.
Start with a strong business plan and then decide how much funding to seek.
Your business plan is an essential requirement for your legal paperwork and critical for marketing the investment. Regardless of the total dollar amount you seek, you must be able to explain when and how investors can hypothetically (realistically) expect a return.
It is totally fine to start your own business for personal reasons like steady employment, or because you love the product… But when you seek other people’s money for your venture, you owe them an explanation of why they can expect their money will grow with you. Investors do not want to pay off your bad-debts or hire you to chase your dreams.
You must show them you have an investable
business and that you are the right person to do it.
You may end up with supporters with non-financial motivations (***See Investor Motivations), but you should not start with that assumption. Remember, you are investing heavily in your business with hours of your life, lost employment income, and opportunity cost of other financial investments that you could have made.
Lead by example and take the returns seriously.
Investors have many places they can “put their money to work”. Imagine the money is a person that is seeking a new job: This desirable candidate will have many job-offers, so you must
recruit them with a compelling salary (return on investment) and assurances of stability.
Show them why their money has a bright future with you, but also protect your reputation by having a plausible plan to fulfill your promises.
When marketing to obtain investment, other types of investment “compete” with your offering… so your returns must be attractive. Investors expect a return that is in line with the risk they are taking.
On one side is low risk/reward bonds, and on the other end of the spectrum are new ventures… very risky, but with huge potential returns. See the chart below for comparison.
By the way, startups are often expected to return 25% plus!
p36 returns chart
Understanding the professional investor’s needs can be a helpful predictor of their behavior. Much like a successful business must stick to a budget, professional investors must achieve targeted returns on the money they deploy. They are ruled by business math, and may be legally bound to seek returns matching specific criteria. No matter how exciting or important your offer may be, if it does not help them meet their targets: e.g. triple their money in five years, they won’t invest.
As you may know, venture funds invest or “place bets” in multiple companies at the same time. Their strategy is to have at least one wildly successful investment cover the costs of all “bets” of a fund in their portfolio. Because of this, winning the attention of an Angel or Venture Capital investor comes with an aggressive return expectation. It is not unusual for VC’s to expect valuation increases of an early stage startup of 8x or 10x. This is a return of 25% or more.
Dilution of the cap table [ownership share] is typically 10% to 30% with each funding round. Average is about 20% for early stage companies. After 3 rounds of funding, a company cap table can often be diluted by 50%. Early investors will often see their share shrink quickly over time.
Behavior of VC’s:
- May be driven by valuation more than other factors
- Are less motivated by solid businesses than by very large outcomes
- Look for fast growth e.g. billion dollars in 10 years, the length of most funds
- Have patterns/profiles of entrepreneurs they seek out
- Bet big – fine with a massive failure versus a successful, smaller outcome
The chart below illustrates possible returns based on compounding interest. In the lower right-hand corner you see the 25% return allows investors to triple their money in five years.
p37 chart native to ID?
Investment Crowdfunding has an advantage over traditional funding because you can assemble a crowd of regular people who are able to invest for a multitude of reasons, not just good math.
However, it will be much easier if your investors believe in your
Confirm your business plan explicitly states your proposed return, and verify the return amount/percent is attractive.
Ask yourself “If I didn’t know me, would this dollar amount and this return make sense?”
Research Comparable Projects / Companies
If you have convinced your investor that your project is “real” they may be curious enough to Google comparable projects. You don’t want to lose them at this step! Research comparable projects, so you can show mastery and tell a good story. You may be able to find something nearly identical to your
business, or you might have to settle for a few points of overlap.
Try and anchor on as many factors as possible:
- Industry / Product
- Value Proposition
- Geography or Regulatory Oversight
- Revenue Model
- Business maturity
- Team experience
- Funding type
Describe your product, project, or business in three words and Google it. Record the names and URL’s of the top three most similar or notable. Make a note of how many there are total.
p39 Three keywords chart or interactive data entry table
Using the Comparables
Worksheet, make notes for each of your top 3 comparable companies/projects. Note their fundraising history including their actual offering, expected returns, etc.
Comparable Results – Fields in the Comparables Worksheet
p40 Comparable results table example
These details help you formulate a competitive offering, suggest how to promote your campaign, and provide realistic expectations to act on.
Below is an SEC chart giving highlights/distinctions of various exemptions. This is not the full set of info needed to make an exemption decision.
Work with us and your securities attorney to make this choice.
p41 – Updated needed – Reg Exemptions chart – Link off site instead?
Although the SEC does not place a maximum limit on Intrastate campaigns, individual states have their own rules. In the cases where those rules are not superceded by the SEC, the state rules will apply. For example:
Limitations on investments for MNVest offerings [Rule 147/147A]
“The amount you can invest in a MNvest offering is partially determined by whether you are considered an “accredited investor.” The term “accredited investor” is defined in federal law to include natural persons who have a net worth of $1 million or more, or who have earned a yearly income of $200,000 or more (or $300,000 jointly with a spouse) for the past two years and expect to continue to earn a similar income in the future. (The full definition of accredited investor is in Rule 501(a) of Regulation D adopted pursuant to the Securities Act of 1933.)
If you do not meet the definition of an accredited investor, you may invest up to $10,000 per MNvest offering.
If you are an accredited investor, there is no regulatory cap on the amount of money you can invest in a MNvest offering. However, a MNvest issuer can raise no more than $1 million in any 12-month period (or no more than $2 million in any 12-month period if the issuer’s financial statements have been audited or reviewed by a certified public accountant).” – as of 9/15/20 **** Date check
p42 Table Per SEC website – ***Add link info here
Milestones, and Minimum
The Maximum dollar amount you raise in this format is limited by the
regulatory exemption. You may choose to seek a smaller amount than the maximum allowed under the exemption. For example: a Reg CF Campaign is limited to a maximum around $1 Million dollars. You may want to raise “as much as possible” and set your maximum at $1 Million OR you may have good business reasons to “only” sell $250,000 of equity in your seed round.
p43 Map images above
Business Location vs. Investor Location
Both in Same State, plus using Self-Reported Books
Both in Same State, plus using CPAReviewed Financials
Investors in ONE state or a few select states
Investors all over the United States
Campaign Type/ Reg. Exemption
State-Based e.g. “MNVest”
State-Based e.g. “MNVest”
National “REG CF”
This decision depends on many variables.
Your securities lawyer will provide valuable,
Milestones are not required by the exemption laws, but work to remind investors that you have a plan for how to use the money effectively. Things don’t always go as planned so you should also have an idea of what you will do if your “Plan A” falls through, i.e. if your target real-estate is purchased by someone else where is “Location B”