Crains New York Business: Crowdfunding 101: How to Talk to New Investors

A growing number of entrepreneurs are financing their businesses through new platforms, but they need strategies for communicating about risk.

When Jamie Rosen raised money for DietBetter, a startup he runs in Manhattan, he expected the investors he found to have lots of questions for him, and maybe even want to meet in person. "People want to kick the tires," said Mr. Rosen, who has raised money for several other Internet startups.

He ultimately raised $308,000 from about a dozen private investors for DietBetter, which offers an online social game called DietBet, in which dieters wager that they will lose 4% of their body weight in four weeks and then share the pot of money if they do. Mr. Rosen says he has enough time to communicate regularly with those investors, using digital tools on the site and in one-on-one conversations and meetings. He has built revenue at the business, which launched in 2011, to the six figures so far.

Mr. Rosen is ahead of the game on investor relations. With the Securities and Exchange Commission gradually loosening restrictions on crowdfunding as a financing alternative, more companies are expected to try raising money this way. But, experts warn, many entrepreneurs may not be focusing enough on communications strategy with investors, with an eye to how they'll build on it for the long term.

SEC loosens regulation

Currently, crowdfunders are allowed to sell equity only to sophisticated accredited investors. However, the SEC in July lifted a ban on general solicitations in a decision that will allow fundraisers to spread the word using more venues, such as social-networking sites, which is likely to attract a wider pool of wealthy people with money to invest.

Meanwhile, the SEC is considering opening crowdfunding investments to the average Joe, a move that some observers believe could lead to communication gaps, either accidental or intentional.

Mr. Rosen, whose minimum investment was $20,000, raised his money on New York-based crowdfunding platform SeedInvest this past spring. Ryan Feit, a co-founder of SeedInvest and co-chair of the education and training committee for the Crowdfunding Professional Association, says entrepreneurs need to make it clear to anyone investing in a startup that the investments are very risky, need to be diversified and are illiquid.

"If entrepreneurs are not forthright about it, it's going to be a very big problem," he said.

Crowdfunder raised $2.7 billion

Investor-relations firms are already touting their services to potential crowdfunders-and the market is growing rapidly. Crowdfunders raised $2.7 billion globally in 2012, up from $1.5 billion in 2011, according to Los Angeles-based research firm Massolution. The total, which includes donations and equity crowdfunding, should reach $5.1 billion for 2013.

Startups that can't afford outside help will need to master the basics on their own.

Jeff Corbin, chief executive of KCSA Strategic Communications in New York and author of Investor Relations: The Art of Communicating Value, says that entrepreneurs will have to invest time in getting a correct valuation of their businesses so they can price shares appropriately and learn how to communicate a company's value outside of a thick prospectus filled with legalese.

"If I go to a company's website and see tons of information about its customers, case studies, video-great content that adds color to the numbers- that helps me to make the case for where the company is going and whether it's going to continue to grow and my investment is going to appreciate," he said.

Craig Sher, who raised close to $140,000 in bridge financing from investors on SeedInvest for his business StearClear-a designated-driver service that offers rides to people leaving hospitals on medication or who are otherwise impaired-found that putting together a simple PowerPoint presentation with 12 slides in SeedInvest's "data room" helped address many common questions from investors who bought convertible notes in the offering. When he held two recent calls with them, he said, "they were mostly asking about exit strategy."

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