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How Crowdfunding Was Our Path To Success

Equity crowdfunding FTW

In a traditional startup, the entrepreneur empties her savings account, gets funds from friends and family, tenaciously grinds away at her idea, gaining enough traction to attract an accelerator, angel investor or early stage venture capital fund.

At every step she is told to be aware of “signaling”, she is told to build relationships, ask for advice, not money. She is told to scour Crunchbase and AngelList for investors who invest at her stage, in her industry, but haven’t invested in a direct competitor.

If she whispers in the right ear, gets the right warm intro, impresses the right venture investor, gets the right people on her side, she might be lucky enough to get funding for her idea.

To win she has to be lucky, know the right people, communicate the right way and be willing to take rejection after rejection in stride.

I’m here to tell you that there is another way. Crowdfunding.

At Mycroft, we decided early on that we were not going to go down this path. As serial entrepreneurs, we were already financially independent and weren’t going to take on debt or roll future earnings into a highly speculative idea. To move forward with the project, we wanted evidence that people would actually be willing to purchase the final product.

So we went to Kickstarter where, for a small investment in a video, we could share our vision and see if there was a market for it. Our success at Kickstarter was validation that we were on the right track. We used the $127,520 we raised to hire some developers and start building our product.

Of course, building a hardware product and a complete vocal computing stack to back it up was going to cost more than that. Fortunately, we were invited to join Techstars which came with $120,000 in funding and gave us time to continue building traction and perfecting our message.

As we graduated from the Techstars program we decided to continue raising money, but the Techstars method of cuddling with investors and singing “Kumbaya” around the campfire was not a fit for me as a CEO. Those of you who know me know that I’m intense, focused on the business, and don’t have much time for relationship building. So where to find investors of the right size who want to invest in our space? Once again – crowdfunding.

I view equity crowdfunding as Tinder for fundraising. If you look at the traditional method it is a bit like dating at a bar. You, the entrepreneur, are the male out for a night on the town. The investors are female, at the bar and enjoying themselves. You are supposed to intuit from signals, magical glances, and body language that one of the females is interested in you. If you ask all of the women in the bar out you are a jerk. If you don’t read the signals right, you waste time with someone who is engaged. If you are at the wrong bar? Good luck.

Tinder solved this problem for dating. If you are interested in a female you swipe right. If she is interested in you, she does too and you start an exchange. Many of these exchanges are non-productive, but at least you are corresponding with someone who is interested, not someone who is married and just at the bar for a drink with a friend.

The same is true of equity crowdfunding. The company puts itself out there and joins a reputable crowdfunding site. In our case we used Crowdfunder.com. Investors who are looking for deals look at the profiles and decide which ones they are interested in. If both parties are interested they connect and a deal gets done.

Russ Hanneman

This approach is a huge time saving for both the investor and the entrepreneur. Investors can use software to zoom in on the industries and stages they are interested in. Entrepreneurs don’t waste time chasing investors who are not interested. Ideally, both parties benefit.

In our case, this has certainly been the case. Though we are a Techstars company, NONE of our investors have come through the Techstars network. Nearly all of our investment has been driven by crowdfunding or, more recently, through 500 Startups.

The process is easy. We build a profile that accurately portrays our company. Then we get some small commitments from existing investors or other angels we’ve met. We often meet investors at pitch competitions or meetups.

Once we have a few commitments we open a deal on Crowdfunder. In our case, we pay for an e-mail distribution and placement on the home page. This is how Crowdfunder has historically been paid for their services and we’ve found it to be a good investment.

Within a few hours of sending out the e-mail, we generally get some interest from investors. We follow up immediately to set up a phone call. We find that we get around ½ of interested investors to take a phone call. This call is used to screen, introduce and pitch the investor. If the call goes well there is usually a few additional questions, then we generally strike a deal.

We use HelloSign to sign the paperwork. We’ve found it easy to use and it allows us to keep a template on file so we can use the same document for all of our investors. We get the investor to sign, we sign, and funds generally arrive via wire transfer within a few days.

Without crowdfunding, our fundraising process would have taken a lot longer and may have been unsuccessful. By connecting us with investors who are interested in our company, we were able to save time, close deals and focus on building a company. I’d strongly recommend the process to any founder who has some traction and can communicate their story effectively.