We Know Equity Crowdfunding – But What is "Pre-crowd"?

Oscar A Jofre Jr. |

Equity crowdfunding as an industry has grown from an annual $1.5 billion raised in 2011, to a predicted annual total of nearly $11 billion in 2015. What's more studies by the World Bank Group predicts the industry's expansion into an industry annually raising up to $96 billion, overall set rise to almost three-times the size of today's venture capital industry. What's more 291 such equity crowdfunding platforms exist at this time, with more service providers in legal and marketing work, to cite a few, inbound for the new platform. With all the buzz about equity crowdfunding, how many investors know what the term "pre-crowd" means? The answer to this should indicate whether you're ready, as an investor or issuer, to seriously consider the option.

Define: Pre Crowd

What is Pre-crowd

So what does pre-crowd refer to and why does it matter? Pre-crowd is short for pre-crowdfunding. It is the first stage of the three principal stages a company goes through when raising capital via equity crowdfunding. They sport very intuitive names, as the "Pre"- stage, the "During"- stage, and the "Post"- stage. Each of these stages involved in equity crowdfunding come with a requisite set of required legwork. Meeting these requirements is essential for a capital raising round, via crowdfunding, to successfully occur without major self-defeating future liabilities.

The "Pre-crowd" stage is that stage during which all of the preparations for a successful crowdfunding round take place. During this sub-stage startups enlist a number of advisors, service providers, and the requisite technologies to accelerate your way through the crowdfunding stage smoothly.

At the pre-crowd stage, there is a wide variety of service providers and supporting businesses that are hoping to utilize equity crowdfunding as a means to raise capital for their business. These services distinguish themselves in terms of the timing during which they become useful. The Pre-crowd stage would, for example, feature lawyers and due-diligence companies required to ensure that a company's efforts satisfy all SEC-related compliance and filing needs. It would also include public relations advisors and crisis management specialists who would help with the messaging and marketing end of the offering as it might be perceived.

The During- stage, involves the actual platform on which individual companies chose to list and publicize their offer. It might also involve IT services used to manage any technical issue encountered during the process of leveraging social media for payments purposes. In the same vogue, mobile payment service providers and banking platforms must monitor the logistics of monetary commitment as the crowdfunding round proceeds. Typically, operations management specialists are required to reconcile the symphony of processes at play. These efforts are similar to the way an investment bank's trading floor, compliance, risk management, and investor relations teams might go about coordinating an initial public offering.

In the same vogue, the Post- stage would likely involve public relations managers to make sure there is no unexpected development of the company's story in the immediate aftermath of a crowdfunding round. Such an unpredictability might endanger said company's changes of progressing towards further capital-raising rounds; especially as they begin to involve the public markets and other institutional investors.

Here is a breakdown of the typical types of service providers involved from previous transactions. They come in two main types, business elements and public relations elements. For business elements involved in preparing a pre-crowd stage, companies will require a full business plan before all else. Without a way to communicate your company's vision, there is very little chance that equity-based investors, or even the founding team, will understand the company's value proposition. Part of this appeal via your business case involves your team or the startup in question presenting audited or reviewed financial statements.

Next comes your estimated projections company projections; this gives potential investors a sense of your grasp of the realities of your likely path to an IPO.

After this step, background checks on officers, directors, and some major shareholders, are required to ensure that the issuing team and its management can deliver on the business project on behalf of incoming investors. If background checks yield potential pitfalls in management, corporate searches are in order. These guarantee that in the short-to-medium term the team receiving shareholder capital will be well sourced and equipped to deliver on the startup's growth strategy.

After the fundamentals are taken care of in terms of business processes and team-building, public relations is the next critical area for pre-crowd firms to cover as a base. The firm's social media footprint should be revised and tailored for the company's next steps in terms of publicity. It is also crucial for the issuing firm to have a public relations strategy overall, as strategic planning is one of the major preventive methods when it comes to reputational risk. Since crowdfunding amounts to banking on a young company's reputation and hype, this has material consequences and must be a priority. Finally, anyone who has seen Kickstarter, for example, in action while raising funds online, sees that the production quality of their videos if always professional and clearly articulated, and free of double talk. These are key precautions to take during a company's pre-crowd stage.

Many simply assume that they can just go to a crowdfunding site and raise money online given the brilliance of their particular business case. What they fail to realize is that equity crowdfunding portals turn down a large majority of applicants. They do so because of how frequently unprepared company attempt raise funds from a discriminating public. Equity portals are required to abide by securities regulations, and they list these clearly on their portals. It is, therefore, more of a privilege for a company to list successfully on one of these portals. It is vital that startups looking to raise funds use the appropriate service providers.

At a minimum, you should be looking at 90 days preparation prior to going live on an equity crowdfunding portal. Watch for my next piece on the topic of how to prepare for crowdfunding.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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