As I’ve written before, I’m a big fan of Crowdfunding. It became “legal” almost a year ago but we’re still waiting for the SEC to write the rules for it. Here’s a link to a long winded New York Times piece about the opportunities and frustrations.
DISCLOSURE: Once the rules are written, my firm plans to facilitate investing in Crowdfunding.
Quickly, Congress passed the JOBS Act this year with a provision allowing companies to solicit investments from “unsophisticated” investors. Previously, solicitations could only be made to high net worth investors. The provisions were to become effective on January 1, 2013 pending rules to be written by the SEC.
The SEC has not written the rules yet and probably won’t by January 1. (I don’t know if that is a permanent link.) This delays everyone and everything related to crowdfunding. DISCLOSURE – I plan both selling crowdfunded investments and providing consulting to businesses wanting crowdfunding. I believe it will help boost the economy.
PROS: Small businesses requiring up to $1,000,000 in capital will have a new source for funds. Owners can cash out of companies without having to sell their entire interest. Ordinary investors can find new revenue streams and investment opportunities.
CONS: There will probably be a lot of con-men involved in crowdfunding. Most business ventures fail and ordinary investors may not be able to handle the failure and loss of investment. Congress will probably overturn the law once some crying Grandma appears on 60 Minutes with a sob story about losing her life savings.
Obviously, I’m in support of the law. I signed a petition here in support of it. I live in a depressed area that could use a capital infusion. I’m sure there are plenty of local businesses that would get a boost from crowdfunding. There are also plenty of local investors looking for a better rate of return than CDs and Money Market accounts. There will be plenty of hucksters (see .com bust and real estate bust). More importantly, there are plenty of good businesses and good business ideas that will benefit from this law.
Are you considering starting a business or buying an existing business? As a small business accountant, whose livelihood depends on small business clients, my advice is DON’T.
There are different challenges to starting a business versus buying an existing one so I’ll focus on starting a business. You need to ask yourself and answer the following questions:
- Does the world really need another massage therapist, tattoo parlor, auto mechanic, whatever you want to be?
- What separates my business from all of the other businesses out there?
- Do I know what business I’m really in?
- Am I comfortable working twice as many hours for half the pay of the average tenured schoolteacher?
Here are my answers for you:
- NO! The world probably does not need another business like yours. Look around. How many existing businesses already offer your product or service? They already have all of the advantages especially the most important advantage of customers. This leads to Question 2.
- Unless you can come up with a differentiation, YOU WILL FAIL! Even with a new big idea – a true entrepreneur – you need something big that separates you from your competition. Not only do you need the differentiation, you need your customers to recognize and value it. That brings me to Question 3.
- You are in the marketing business. Regardless of what service or product you actually deliver, all businesses are in the marketing business. If you don’t know marketing or are afraid of marketing, YOU WILL FAIL! Marketing is acquiring customers and getting them to stay repeat customers. Read some Dan Kennedy BEFORE starting a business. No Customers = No Business.
- Facts matter. The average schoolteacher works far less and makes far more than the average business owner. There is no down time. No one gets summers off. You are responsible for paying all your bills and trying to have something left over for yourself, your retirement and your healthcare. If you want a safe, comfortable career, become a school teacher or other government employee.
If I sound bitter, you are delusional. This is the hard truth of business – most people fail. The lucky few get too much credit and publicity. If I haven’t talked you out of it, good luck.