Finding the right investors for your business venture is as much about
personality as it is capital. The Internet has expanded the way companies
seek out investment. Be it disseminating information, building a brand,
or even sourcing investors. Platform or ‘crowdfunding’ seems
to be all the rage right now, but is it right for
your business? In October 2015, the SEC adopted rules that allow companies
to sell securities through crowdfunding sites, and to non-accredited investors. Title III of the JOBS Act created an exemption under securities law allowing
companies to use this type of funding raise money. The rules are meant
to allow smaller companies who are just starting out, to be able to offer
and sell securities through a variety of outlets. What the exemption doesn’t
provide for is the confidence in knowing who your investors are. To this
sense, sourcing and pitching accredited investors is a better alternative,
as these individuals are a more educated and well-rounded investment partner
who will better understand the benefits and risks associated with your proposal.
What constitutes an Accredited Investor?
An “accredited investor” is legally defined under
SEC Regulation D Rule 501, but a more generalized understanding of an individual accredited
investor is a person with over $1,000,000 net worth or sole income in
excess of $200,000 or joint income in excess of $300,000. Besides having
the capital to invest, accredited investors are more educated about the
markets and the types of funds they choose to invest. While investment
banks and venture capital firms strategize to invest in a particular market
sector, individual investors are a more flexible alternative that can
bring the same amount of capital to your business, with less invasive
oversight requirements and headaches that may arise with a VC partner.
Finding the Right Investors
If you don’t already have an accredited investor list, you can purchase
them from various firms. But unlike a VC firm, you don’t get a peek
at what their investment strategies are or their tolerance levels. Most
accredited investors work with an established investment firm, who may
have spent years building up a strong relationship over the long term.
Some investments may have worked out, and some may have not, but the
relationship is what allows your offering to be presented and immediately considered.
So, while finding a list of accredited investors can be a relatively simple
process, there are still some important questions to consider. What do
you know about these investors? What are their tolerances and investment
activity levels? Will you have to spend more time pitching the offer and
building trust than is worthwhile? Over a period of time, any company
can develop relationships and begin forming an active list of accredited
investors. But, your time may be better spent strategizing with an experienced
investment firm who can more easily tap into their list of organically
developed experienced, educated, and savvy investors who will quickly
understand the process of participating in your business venture.
Who Should Represent Your Offer
Many enterprises that seek project or venture funding are torn between
whom best will present their offering. After all, it’s their baby.
Who knows more about the offering than those who wrote it, right? But
sometimes the excitement that is generated by the venture owner and tone
of the pitch to the prospective investor can appear as an oversell. Educated
investors are smart investors. They know what they want and how to sense
risk. An oversold pitch can make people nervous, and can be interpreted
by a savvy investor as an unrealistic assurance of returns. Often, it
is better to allow a ‘person of trust’ to present the offer
to their accredited investors. Investment firms are not keen on alienating
their investors by pitching investments with sunshine and lollipops, and
then having their investors feel ‘burned’ if the venture fails.
Therefore, the likelihood of a strategic firm over-promising on your project
is not likely. The strategy will pay dividends by generating more immediate
interest in your venture, and by helping to prevent a backlash if the
project gets off to a slow start, or begins to head south.