Whether you’re inclined to defend ‘MAGA Country’ or exclaim ‘Black Lives Matter,’ new research suggests your crowdfunding campaign should exclude your politics.
A group of academics recently researched nearly 20,00 Kickstarter campaigns. They found those who were overtly political raised less money than apolitical campaigns—although the distribution wasn’t even. Companies using conservative speech garnered 9% less money and those with liberal speech 17%. Relying on “expectancy violation theory,” the researchers found the political messages turned off potential backers because it created a negative expectancy and harmed credibility. According to the researchers, this theory, “assumes that behaviors are a rules-based system grounded in society’s psychological or cultural standards and that individuals develop normative expectations about the appropriate behaviors people should use during communication.” In settings where political speech violates expectations, the speakers come across as unprofessional.
Millennials mix crowdfunding and politics
The research runs counter to certain demographic and social realities. Post-COVID, more companies have engaged with crowdfunding for less conventional reasons as shutdowns upended people’s lives and the economy. Further, Millennials have become heavily involved in crowdfunding campaigns as they’ve entered middle-age and are more likely to let their political flags fly than previous generations. One study showed three of four Millennials had donated to a crowdfunding campaign during the pandemic. And many of these were political in nature ranging from held ‘Build the Wall’ to #metoo.
Of course, crowdfunded startups aren’t the only companies dealing with political landmines. Millennial Alissa Heinerscheid famously drove Bud Light off a revenue cliff with her promotion of transgender influencer Dylan Mulvaney. Other public companies receiving pressure from Wall Street’s ESG/DEI fetish have become targets including Harley Davidson, Tractor Supply, Coca-Cola, and Netflix.
Those companies have the ballast and built-in good will to survive political scandals. Startups in an already challenging funding environment do not. Thus, the message is clear for founders. Talking politics to your apolitical funding crowd comes with risks you may not be able to afford.
Crowdfunded startup survival more likely amid VC pullback
“Startups are dying amid a historic drought in venture funding,” began one recent Wall Street Journalarticle. “The pace of startup shutdowns, fire sales and sharp business-strategy changes is picking up,” began another. Yikes!
Higher interest rates, macroeconomic concerns, and unsettled geopolitical events have all contributed to a shaky environment for startups recently awash in cash. A startup “mass extinction event” is underway, as the head of one capital fund remarked. This is due partly to belt-tightening measures among venture capitalists. Startups seeking capital raised $37 billion the first quarter of this year, a 55% decline from last year. Indeed, according to Pitchbook, in 2022 the -7%, the return rate for venture capital firms was its lowest since 2009.
VC-backed startups are struggling
Anecdotes back the numbers. Once unicorn-potential startups with massive valuations are flatlining as market realities sink in. Hopin, an events startup once valued at $7.8 billion recently sold for a measly $15 million. Zume, a robot pizzamaker, once valued at $2.35 billion couldn’t turn pies into dough fast enough and is winding down. WeWork a hotshot of yesteryear whose valuation peaked at $47 billion is headed for a Theranos-style downfall. The list of lesser knowns failing to keep afloat grows daily.
Startup survival has always come with long odds. 7.5 out of 10 venture-backed startups fail. Only 16% went public or had a successful acquisition within seven years of getting their first VC check according to one study.
Crowdfunded startup survival more likely
But those that choose equity crowdfunding (Reg CF) over or in addition to the whales are more likely to survive. Unlike VC partners, Reg CF are more likely to be patient with startups trying to find their footing or pivot due to market conditions. By definition, they are casual, passive investors, investing disposable income. With lower stakes comes less pressure and more willingness to support a further round. Reg CF investors also tend to be more loyal as they are more likely to already be in the founder’s extended network and are often investing in part to support the founder personally. Further, for consumer-facing businesses they are more likely to already be customers or clients engendering further loyalty.
These factors matter when times get tough as they currently are in the present startup environment.
Crowdfunded startups add extra benefits beyond survival
Beyond surviving tough times, here are other reasons founders should consider a Reg CF round in place of or in addition to VC money:
Broaden your investor base: Unlike other funding models, Reg CF can diversify your investor base from both a financial and geographical standpoint. Portals can accept investors from anywhere in the US, giving your business a potential foothold in all 50 states.
Turn your customers into marketers: Reg CF allows your customers to become financially invested in your business and see their investment grow as your business grows. This provides a free marketing campaign for your business with every new investor.
Incentivize your investors: Reg CF allows you to provide perks as part of the investment. Depending on the product this could include the product itself, ‘founder’ status on your website, access to events, or anything else that may induce an investment.
Prove value to institutional investors: A successful Reg CF raise can show larger, institutional investors your business is ready for the big money. Many larger investors are now requiring “social proof” of a company’s business model. Your business can show larger investors value and momentum and provide your business “bridge money” while larger investors evaluate your model.
RS Biotherapeutics is a company on a mission. Specifically, to “develop life-changing medicines for the millions of people suffering from diseases characterized by pulmonary inflammation.”
When this exciting new company was looking for extra capital to grow it operations, it turned to Reg CF, the SEC exemption that allows private companies to accept investment from everyone.
The company recently closed its Reg CF round on the StartEngine platform with nearly $200k in extra capital.
Many franchises are struggling right now due to many factors, including residual COVID issues, uncertain economic outlook, high interest rates, and labor shortages.
Those looking to start or expand their operations are struggling with limited financing options.
One option many franchises have not considered is Reg CF crowdfunding. Reg CF allows private companies to raise capital and sell securities to the public within certain limits. This law or “exemption” is tailor-made for the franchise industry.
Franchises have natural advantages for Reg CF crowdfunding raises
First, franchises tend to be B-to-C. Working directly with the public means franchisors and franchisees contact potential investors every day by serving them as customers. If you keep in touch with your customers through email and/or social media, you already have a ready-made crowd to tap for investment. You can tailor your raise to suit your existing customers.
Through the Reg CF crowdfunding campaign and after, franchises enjoy further benefits including:
Broaden your investor base: Unlike other funding models, Reg CF can diversify your investor base from both a financial and geographical standpoint. Reg CF portals can accept investors from anywhere in the US, giving your business a potential foothold in all 50 states.
Turn your customers into marketers: Reg CF allows your customers to become financially invested in your business and see their investment grow as your business grows. This provides a free marketing campaign for your business with every new investor.
Incentivize your investors: Reg CF allows you to provide perks as part of the investment. Depending on the product this could include the product itself, ‘founder’ status on your website, access to events, or anything else that may induce an investment.
Prove value to institutional investors: A successful Reg CF raise can show larger, institutional investors your business is ready for the big money. Many larger investors are now requiring “social proof” of a company’s business model. Your business can show larger investors value and momentum and provide your business “bridge money” while larger investors evaluate your model.
What franchises need to know before a Reg CF crowdfunding campaign
First Reg CF law is somewhat unsettled when it comes to franchises. For example, your raise as a franchisee could be “imputed” to the franchisor. This could complicate things for the franchisor and limit raise capacities. For example, if two franchisees were to raise using Reg CF the aggregate limit may apply to corporate, limiting how much they could offer. This is because Reg CF limits raises through “control.” As the franchisors “control” operations through the franchise agreement it may limit Reg CF’s availability.
One possible workaround is for the franchisor to disavow “control” related to the franchisee’s capital raising in the agreement. But this is yet untested—although less likely to raise SEC concerns absent fraud or misleading statements.
Overall however, Reg CF is a useful financing tool for franchises. One that is bound to become more prevalent in the future, simply because it makes good business sense.
In 2014 some physicists at the CERN research institute in Switzerland batted around an idea, privacy-based email. As Andy Yen, CEO of what became Proton would later say, the company was not likely to entice venture capital:
In 2014 our pitch was very simple. We’re going to compete against the world’s largest tech company, and charge people for something that Google gives away for free.
So instead of taking their pitch to Silicon Valley, they took it to the internet through a crowdfunding campaign. As they discovered, a market did indeed exist for their idea. They raised over $500k from 10,000 backers. And a dream was born.
Gmail killer Proton was born from a dream, now it’s thriving
A decade later, Proton has over 100 million accounts and has expanded its offerings to include cloud storage, VPN, digital wallet, password manager, and calendar. What will they offer next? As Yen states, that’s not up to them. Proton remains loyal to the community that originally backed them and later devotees.
People say your crowdfunding was nine years ago [in 2023], why is it still relevant today? Well it’s relevant today because the entire business, all of us here, all the employees, we now have actually a permanent obligation to the community that supported us early on. So we actually owe it to these people who gave up some general amounts of money nine years ago to bet on a dream . . . As a community-driven company we’re responsive to the needs of the users.
Companies that invite their users into the decision-making process, that feel as much loyalty to their users as the users feel to them are the ones that grow and survive tough times. This is what equity crowdfunding or Reg CF is all about.
Proton joins a growing list of privacy-focused tech companies like Brave and Telegram confronting the data-snooping-and-scraping authorities and tech oligarchs. In fact, the recent arrest of Telegram CEO Pavel Durov has dramatically amplified questions about what right people have to keep their online activity from governments.
However these issues are resolved, Proton is well positioned to keep growing and challenging the Google goliaths.
Wall Street Journal Flubs Crowdfunding by Never Asking ‘Compared to What’?
It does seem the two companies the piece features are struggling to get above water and the founders of one may have engaged in financial subterfuge. (Many of their issues seem typical for startups, design changes, vendors going out of business). Nonetheless, if either have defrauded investors the Securities and Exchange Commission should prosecute them. But the larger question Michaels never asks is, compared to what?
Are public companies free from fraud? Is Reg A+ really a “shortcut”? Is there “little oversight”? Should retail investors be locked out of private capital markets because some startups fail or turn out to frauds? The answer to these questions is emphatically, no.
Reg A+ is heavily regulated
The onerous disclosure requirements the SEC imposes on public companies has not stopped fraud, lying for gain is simply a part of human nature that must be punished when exposed. As professors Stuart R. Cohn and Gregory C. Yadley wrote in 2007: “
[E]xamination of the securities violations that are of principal concern reveals that no amount of technical exemption requirements will hinder the fraud artists from their endeavors. . . . Fraudulent and deceptive schemes have unfortunately continued unabated and independent of formal registration or exemption requirements.
Despite Wall Street Journal assertions, Reg A+ is not a “shortcut”
Reg A+ was part of the Jumpstart Our Business Startups (JOBS) Act of 2012. It is not a shortcut. Congress designed it to be on an onramp for companies headed toward registration to ease into the substantial burdens of being public companies hence its nickname “mini-IPO.” The exemption has proven popular in finance, insurance, and real estate. Community banks, for example, have used it successfully to raise capital from a larger potential investor pool whilst maintaining their private status.
And far from containing “little oversight” the SEC must “qualify” offerings, usually a months-long process. Reg A+ “Tier II” issuers (overwhelmingly the preferred use) must produce an offering circular, annual, semi-annual, and current-event reports. This includes independent audits. Retail investors also face investor limits based on a net worth/annual income scale. If some don’t research their purchases properly the market will soon discipline them and current rules ensure they won’t lose their shirts. In fact, the real tragedy of Reg A+ was that the SEC refused to “cover” secondary trading, preventing markets from arising because of state-level restrictions. A free and open trading market would include price signals that reflect the success or failure of companies and give potential investors real data to evaluate beyond CEO bluster.
Young companies should be able to integrate fans, investors, and customers
Beyond these false claims is a normative one. Is it bad, as Michaels infers that “novice investors . . . behave more like fans than shrewd financiers looking for a solid return on their investment”? No. Being a company fan is part of the allure. It brings people closer to companies they like by becoming investors. Reg CF offerings uniformly come with swag escalating with larger investments. For the company this proves the loyalty of their current or future customers. These small investors are often happy to help advertise the offering or the company’s products for free. As startup capital raising evolves, melding customers and retail investors will become ever more integral.
Despite what the Wall Street Journal and their academic, regulatory, and nonprofit allies believe, ordinary people should be able to risk their money on their favorite startup. Most of these companies will fail, some will be frauds. A few, however, will become giants. The frauds must be punished. But freedom means the ability to take the chance to get in early on the big one.
