Via Recrea HQ & George Hodan
Here’s a reality that is worth knowing: Many of the entrepreneurs who experience the highest success in equity or donation crowdfunding are destined to have their companies fail shortly afterward. In fact, generally speaking, the larger the crowdfunding raise above what is needed, the more likely it is that the company will falter.
As basis for my observation, I have played a key role in the launch of six successful startups, two IPOs to the NASDAQ and have invested in and mentored dozens, ranging from angel, mezzanine and VC investments.
So back to my declaration: The phenomenon of raising more capital than needed or even expected can be, in a word, disastrous. It can occur in all forms of crowdfunding from donation Kickstarter style through Regulation CF and even Regulation A+. When the amount of capital raised ramps up dramatically above the capital that is needed—particularly when the exuberance starts and the numbers are climbing—the influx of capital can start to feel like a lottery win.
The challenge with many of the successful crowdfunding offerings is that the entrepreneurs in charge experience a rapid transition during their offering between two completely different states. From a pre-raise situation of low available capital, with hope that the offering will be successful but no way to be sure in advance that it will be, over to the wonderful situation of having raised more capital than expected.
This transition occurs rapidly and often the management team is unprepared for their new reality – they are now building a real business. Hope is replaced with details and decisions often complemented by operational blunders.
It’s one thing to hope for a successful fund-raise and quite another to have treble what you need in your company’s bank account. Many times the management team didn’t prepare in the traditional ways to succeed, partly because they did not truly expect to raise the capital. They were hoping to succeed but were not motivated to invest the effort to plan on success ahead of time.
Many entrepreneurs are wide-eyed optimists – as was probably needed to get their businesses off the ground. They don’t have detailed plans for managing growth, fulfilling thousands of orders, or preparing their organization to scale. So when demand goes ballistic, now what? Do they have concrete plans to deliver on their promises at the level their customers require? The lamentable answer is “rarely.”
The theoretical solution is to get thorough beforehand and at least seek the advice of mentors before you begin. Build a board of advisors. Build a seasoned management and operational team. Lock in deals with all needed suppliers before getting funded. Of course this rarely happens, because entrepreneurs aren’t willing or able to take these steps up front when they’re having enough difficulty simply preparing their pitch and have no idea yet if they will raise any serious capital. And rarely do they have spare capital to spend ahead of the fund raise anyway.
To improve the odds of survival I’ve developed a short list of guidelines to help entrepreneurs preparing a crowdfunding offering to maximize their post-offering success. These steps must be set into motion before the crowdfunding offering starts. They are easy to grasp and to implement. I call them the CrowdFunding Law of Five:
One – Make sure you have at least one person on your team who is thorough enough to make the logistics of the company work – Preferably this person will be a cynic who anticipates everything that can go wrong and builds contingency plans for what to do when the inevitable happens. This will allow your team to execute smoothly and with minimal impact as setbacks occur. Rabid demand? You may need a bigger facility. Should you buy? Build? Go offshore? What if the demand is so high the launch of the product is delayed? Or perhaps market demand dictates you delay launch for some key additional features? How will you communicate and manage the expectations of your customers and supporters during this time? This person will figure these possibilities out.
Two – Double your product budget – Whatever your best estimate is for the cost of building your product, increase it by at least 100%. That’s real life. It’s better you go in prepared to handle the cash flow impact of a higher cost model. You didn’t really expect to be this successful, right? One of the leading reasons promising companies fail is a cash flow crisis caused by rapid growth and over optimistic cost estimates. Now is the time to make sure you can survive your success.
Three – Treble the time – Take your best estimate for the time it will take to complete your product and multiply it by three . When your supplier says “three months,” plan on nine. When your development team quote you “four months till the Beta release” plan on twelve. Build your commitments around the treble expectation and you will have a far better chance of meeting or beating the promises you make to your customers.
Four – Expect quadruple the complexity to deliver your product than your estimates show – Each new feature, color, or accessory option will quadruple the complications and logistics costs when it’s time to manufacture, inventory and ship – even software gets more difficult to deliver and support when you offer multiple versions. Shipping internationally seems like a simple extension of the US business until you confront it’s real complexities.
As an example, if you offer color options for a hardware product, you have to decide how many of each color to order – then you run the risk that you sell out of one color and have an abundance of unsaleable inventory in the other colors – not a pleasant experience, and enough to burn up a lot of capital.
When you offer one version of your product, life is so much simpler. So stay focused, and avoid the temptation to create too many variations. Keep your initial product simple and focus on pleasing your customers by getting it shipped efficiently. You will have time to add bells and whistles later on once you have happy customers on board.
Conversely, avoid the tendency to create too much inventory of the first release. Find good options for just-in-time manufacturing of only the number of units you’ll need. Imagine the agony of using your magnificent funds to fill your warehouse with Version 1.0 only to discover that it won’t sell and you must ship an updated Version 2.0 release. The more obsolete inventory you have bought the bigger the risk of disaster!
Five – Most entrepreneurs are aware that they must have a long term strategy for success – But you know what catches many CEO’s out? Random company culture. Rapid funding success as we see every day in crowdfunding tends to overwhelm the CEO. Many young CEOs are anyway not aware how significant the impact of having built a great culture is. Still more are aware but don’t devote the time and effort that it takes to establish a long term culture for success.
You only get one chance to establish a winning culture in your team – once your culture is set, changing it is remarkably difficult, verging on impossible. Make sure your company is one of the few that has an incredible culture where the team excels and simply always does the best that can be done.
Lean on the CrowdFunding Law of Five. Take them to heart. Temper your visions of success by preparing your crowdfunded business to conduct itself like a strategic investment, and not a lottery win. To quote Nike – Just Do It! and make sure your company sticks around long enough to make you proud!
Rod is a Forbes Contributor. This column was first published on Forbes.
Rod Turner is expert in entrepreneurship and raising capital. As CEO of Manhattan Street Capital he helps Real Estate, Mid-Stage companies, Startups & Rollups raise capital via Regulation A+.
Read Next
