Crowdfunding: What are the Odds vs. Conventional Financing?

crowdfunding financing probability of success for cre new construction financing

You are seeking capital for your business or commercial real estate project. You have heard that crowdfunding has changed. You are understandably risk-adverse, but you are already taking a huge risk by starting your business or project. After all, according to the SBA, more than 4 out of 5 businesses seeking capital failed to get it under the old system.

crowdfunding probability of success odds for raising capital financing for businesses and commercial real estate
Business involves measured risk-taking and we all compute the probability of success odds in making decisions on everything – including capital raises.

The new crowdfunding rules passed by the SEC in November of 2020 threaten to upend the capital markets in ways you are bound to like.

The Magic is in the Mechanics of the New Crowdfunding Regulations…

The new regulations have created a new set of considerations, the nature of which you cannot afford to ignore. To help you understand the impact of the new market opportunity, let’s take a simple example of what you used to do and what you can do now. When we are done, just ask yourself which has the potential to work out better for you and then you have your answer – do I want the current 1 out of 5 odds or something else?

Reaching back into Days Gone By…

In days gone by, you went to the bank to borrow money for your business or project. The bank would ask where your down payment or cash to close was going to come from. You would answer that my partners are going to put up that money.

Question: when you told the bank your partners were putting up the money, did the banker ask if they could be a partner too?

Answer: nope, they didn’t. They didn’t because banks don’t lend or invest risk capital. Their business model is monetizing your net worth and charging you for it.

The New Capital Financing Reality…

In the new construct, you can advertise the fact you are seeking capital financing – under strict rules – and solicit prospective investors before you even go into market.

Hmmm… Couldn’t do that before, could you?

Even better, you can participate in virtual deal room presentations called “Demo Day Events” (like the TV show “Shark Tank” where advance advertising has the power to fill the virtual deal room with prospective accredited investors where you can showcase your deal – once again – before you even put the deal into market.

Get a good-faith estimate before you start and see financial investment leverage in action

Hmmm… Couldn’t do that before, either – could you?

What would happen if one or more of those prospective investors offered you financing before you even put up a crowdfunding offering on terms you may like?

Impact Focused Promotion in Advance of Offering Election…

demo day event business plans for crowdfunding raises
The goal is using 21st Century innovations to attract capital for businesses and CRE projects

Hmmm… Couldn’t do that either before, right?

Even better, now you have negotiating power because you are going to continue and do the crowdfunding and if that investor really wants the deal, then they have to get it together.

Hmmm… In days gone by the shoe was on the other foot and that meant you were likely to get hammered. Hmmm… that sounds different, doesn’t it?

Even more interesting is the fact that once your offering goes live you can turn around and solicit those same interested prospective investors who responded to your advertisements before you did the Demo Day events, during the Demo Day events and have yourself a fat prospect list to potentially invest in your business or project once the offering does go up. Remember the bank? Unlike the bank where you have only one shot – maybe a loan – the investor who sees your deal before the offering goes up may also be an investor when it goes up, so advertising pays big dividends potentially – they buy in now or they may buy in later, either way you have the momentum on your side now if you are smart enough to know how to play by the new rules.

Well? Decision Time…

Which looks like a better deal for you?

Remember, the most popular product to sell in America is money. Almost everybody has some of it. Almost everyone wants more of it and almost everyone wants to learn how they can obtain still more of it. The truth is the market for investing in your deal or project will always be an order of magnitude larger than the market of customers your business or project will serve. If you can’t sell the money it is likely because the underlying business opportunity is a dud and would die anyway.

Time to get moving. Start the ball rolling by getting a good faith estimate of the costs and how to structure the transaction for insane leverage and profit-taking opportunities combined.+