When President Obama signed the JumpStart Our Business Startup (JOBS) Act in April 2012, entrepreneurs across the country took note. With implementation of the act currently slated for early 2013, small businesses will stand to receive as much as $1 million by "crowdfunding," (or sometimes referred to as social lending) or selling small amounts of equity to multiple investors, without first undergoing the standard (and potentially expensive and time-consuming) SEC registration process.
The food entrepreneur's perennial lament about leaky cash flow is therefore ancient history, right? Maybe.
The JOBS Act is slated for early 2013 for good reason: The SEC has yet to make the adjustments necessary to insure the law works for everyone involved, including the food entrepreneur. The very concept of crowdfunding is still in its infancy. In fact, the National Crowdfunding Association (NLCFA), which is now working with the SEC to fine-tune the JOBS Act, was founded just one month before the passage of the act itself. Before crowdfunding was signed into law, it wasn't a viable source of funding for most American small businesses. Instead, its utility was limited mostly to creative and non-profit enterprises, whose human capital were returned little more than the satisfaction of performing good work.
Crowdfunding vs. Venture Capital
Small food businesses and other food entrepreneurs need more from investors than "warm fuzzies," and that's why it's critical that they exercise caution. The difference between a venture capitalist and a crowdfunding investor could not be starker. While the former typically wants to give cash to make cash, the latter tends to give cash to make a difference. The NCFLA's website, which offers a crash course in "Crowdfund 101" for potential investors, asserts, "The best reason to make a crowdfunding investment is because you love the idea the entrepreneur is presenting, or you're a fan of the product, or you believe in the entrepreneur herself, and you want to give her a shot at making it." Reputation management, always a salient concern for food entrepreneurs, is key.
Further, the $1 million that a small business or entrepreneur (the "issuer") stands to gain does not come without conditions or terms. Businesses that are publicly traded don't qualify for crowdfunding under the JOBS Act, nor do businesses seeking more than $1 million. Any entrepreneur who has not yet registered with the SEC and is seeking less than $1 million can become an issuer under the crowdfunding provision. If the issuer is seeking more than $500,000, audited financial statements must be submitted to the SEC. Issuers seeking amounts between $100,000 and $500,000 must produce CPA-reviewed financial statements, while those seeking less than $100,000 must produce a statement from the chief executive insuring that the company's financial documents are sound.
Crowdfunding as an Alternate Lender
Crowdfunding sites such as SoMoLend, which already offers small-business loans that are packaged and sold as notes, is prepared to accommodate the crowdfunding provision of the JOBS Act immediately upon implementation. They currently offer small-business loans that are packaged and sold as notes and is prepared to accommodate the crowdfunding provision of the JOBS Act immediately upon implementation. A quick tour of SoMoLend.com is its own crash course in crowdfunding. Perhaps most telling is the site's homepage, which looks like a high school yearbook spread: 45 thumbnail portraits of the 2012 Graduating Class of Crowdfunders. The idea is clear - crowdfunding, or more correctly in their case is peer to peer lending, takes investing from the public to the personal arena. SoMoLend also channels investors to local issuers, meaning that your first customer could own a literal slice of your pie.
For entrepreneurs, that fact alone can be hazardous. Startups and entrepreneurs make mistakes, and small food businesses are no different. Successful food entrepreneurs dust off their shoulders (and their aprons) and move forward, but that can be tricky when thousands of investors are watching online, and maybe even in person.
Why Crowdfunding for entrepreneurial food businesses?
Several Crowdfunding 3rd parties are focused on consumer products (CPG) and provide equity financing vs. debt and one is CircleUp. Food appears to be ripe for Crowdfunding, according to Ryan Caldebeck, founder of CircleUp and his reasons are:
- Few capital sources exist for sub-$10 million consumer products businesses.
- The "crowd" understands consumer products best… because we shop!
- Consumer based products companies hit cash flow faster than most other businesses.
Crowdfunding definitely has the potential to help savvy entrepreneurs turn a profit, thanks to financial and human capital. The bottom line? Crowdfunding could be a great way for a food entrepreneur to get cooking, as long as he or she doesn't burn down the kitchen in the process.
This guest post was provided by Jessica Edmondson who contributes onBusiness Administration for small businesses and entrepreneurs for the University Alliance, a division of Bisk Education, Inc.