Crowdfunding Under The Best Investment Terms

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Essays

The cheapest possible investment a company can get: customers paying more for the product than it cost to build the product. This throws off the cash to grow, keeps equity intact, and avoids accrual of interest. Happiness is positive cash flow. How do we apply that to equity crowdfunding, the new wave of private financing marketplaces. Today, people who are concerned about equity crowdfunding point to two major problems:

– If your equity crowdfunding platform is aimed at high-growth startups who are meant to return multiples, you run a very serious risk of losing everybody’s money all the time. Venture investing is a hard business that doesn’t return well, even for professionals. There’s no evidence that the crowd will invest any more wisely. Plenty of people believe that they won’t.

– If your equity crowdfunding platform features lifestyle business, what’s the payout, or return on investment? Just administering the dividends alone might cost more than the actual profit margins. Bars and coffee shops don’t make enough money to pay lots of people out. And if they do, if it’s only a dollar a month over 20 years, I don’t know if I’m that excited, as an investor.

One interesting feature that has emerged from Kickstarter getting to scale is this phenomenon of “pre-sales” for gadgets. In this model, the business start-up costs are paid for by customers waiting for their product, thereby charging future customers for current costs, but transparently and (more) ethically.** What about pre-sales for beers, or coffees? What if I raised a quarter million dollars of start-up capital for a restaurant by giving every ‘investor’ a free meal, or free set of meals, assuming an appropriate markup for COGS and operations? I’m giving my investors a return that they care about, I’m guaranteeing a certain amount of customers from day one, and I’m raising start-up capital without giving up any equity or paying any interest. Does the math work? What do you think?

** There’s still a risk that the company wont fill the orders and go under. Kickstarter gadget projects are feeling the burn here. But there’s always risk in investing, and this is a more easily mitigated risk than most, given the stage.

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