What’s the most effective way to raise capital for your startup?
How do most companies actually raise capital for their startup in our area?
What changes in SEC law have made it easier to reach a lot more investors?
What’s the best way for YOUR startup to raise capital?
In this video and podcast, Alan Grosheider, Director of Metro Startup Launcher, recaps his recent speech at Venture Connectors to discuss all of the above and more.
Transcript Below (Machine transcribed, so please forgive the typos.)
Hey everybody, it’s Alan Grosheider with Metro Startup Launcher in this video and we’ll also put it out as a podcast on how to get capital for your startup. I’m recapping a speech that I gave recently to venture connectors and in the speech I talked about what seems to be working and not working for raising capital for your startup in our area and some of the law changes that allow you to be more public about raising capital for your startup and what I would recommend that you do. So first let me ask you if you think it’s a good idea to raise capital from lots of small investors to get your company started. Well, let me give you a couple examples of companies that have done that and had been very successful with it. The first I witnessed myself when I was going to college, I would come home in the summertimes and workout at a gym in Southern Indiana and at that gym there was a guy who would walk around asking people to invest in his company and he was asking for five or $10,000 and talked to a guy, another guy one time who was pointing in mountain talking about it and said, this guy’s crazy.
He walks around the gym every time he’s here and he’s trying to get people to invest in his company and he thinks he’s going to build this big national company and it’s going to compete with pizza hut and little caesars and dominoes. So I think you can probably guess who I’m talking about: Papa John. Everybody’s heard the story about him selling his Camaro so he could buy an oven and put the oven in his dad’s bar and get his company started. But what they haven’t heard is he also raised capital from fairly small investors in a number of fairly small investors in the area to get the company started. And of course now he is the first Forbes 400 billionaire in the Louisville area. So the point is small investors can definitely lead to big success. I’ll give you another example. My company, it was called ESA1 in 1994.
I was 25 years old and I found for investors to put $6,000 each into my company and I started this company that was going to be a nationwide environmental inspection company. We then ended up, I ended up putting an $85,000 on credit cards and I definitely would not recommend that to anybody. But from there we raised $350,000 from 52 to individual investors. And then finally $3,000,000 from a venture capital firm. From there we built the company to include operations in all 50 states with employees in 30 different cities around the country. So again, small investors can definitely lead to big success. So how do you do it? If you want to raise capital for your startup, the classic way I’ll call it this, is the way that most companies still raise capital around here and probably the most common way that’s raised around the United States. You start with an idea and then you form your corporation and you create a business plan.
Then you get your friends and family to invest in. Hopefully you’ve got some friends and family who are willing to put some money in that. If you’re lucky, you find a lead investor and the lead investor knows how to set up all of these things. They set up your help. You set up your Cap Table and your valuation and shareholder agreement. All of the different pieces that you need in order to successfully raise more capital and then the lead investor helps you go out and get more investors. But this can. There’s a lot of places this can go wrong, especially at the friends and family level. That’s I think where most companies end up failing is that they have a great idea and they get things set up and they start moving, but they don’t have friends and family who can invest when they don’t find a lead investor and once that happens, they just kind of fall apart.
So here’s what I would recommend as a better way to raise capital for your startup. You start with the same idea, set up your corporation and create your business plan, but now you create a safe agreement. A safe agreement is a document that you use to hand to a shareholder and they sign it when they write a check to invest in your company, and I’ll talk a little bit more about that in a minute, but then step three, you actually file yourself. You file with the SEC to make it legal for you to raise capital for your startup. And then step four is you just network. You network like crazy. Just like Papa John did, just like I did back in in when I started the company in 1994. You network and you find lots of small investors that get you enough money to get started, so I mentioned a safe agreement and also a business plan.
Those are the two main tools that you need when you’re going out and raising capital because w, if you have a safe agreement and you have something to hand your investor to sign, it makes it, makes raising capital so much easier and you look at your business plan at this point. You want it to be a plan that you’re going to use to try to build the company, but it’s primarily a tool that you’re going to use to get people to sign your safe agreement and to write a check to help you raise capital for your company. If it’s a company that needs capital to get started and it’s amazingly more easy to raise capital when you can hand somebody a document that they can sign and know what they’re versus going around and networking in in. Maybe you have your business plan already and you meet people at venture connectors or wherever and and somebody says, yeah, I might be interested in investing in your company.
Now what? And neither one of you knows what to do next. You don’t have a document. Decide if you have a safe agreement in a business plan. Those are the tools that can get investments in your bank account. So what is a safe agreement? A safe agreement is the first thing I think we need to really change in our community to embrace, to accelerate capital raising in our community. It’s. It was invented by y combinator in Silicon Valley. It’s the most successful accelerator in Silicon Valley and that’s primarily what’s used in silicon valley in the early stage of capital raising. Here’s the way it works. Let’s say that you get a whole bunch of people to invest five or $10,000 in your company and you raise $200,000 and it’s enough to get your company up and running. Then an investor comes along and really likes what you’re doing and they invest a million dollars.
So all of those people that signed safe agreements, the way it reads, they’re safe agreements will convert over to shares and it’s gonna convert under the same terms as the larger investor. So think about it as an investor. It’s really fair for you because you get to have a much more sophisticated investor negotiate for you. They negotiate and I’ll show you the different things. They negotiate the Cap Table and negotiate the valuation and they negotiate the operating agreement. All of the complicated stuff that needs to happen to operate your company that’s now negotiated by a much more sophisticated investor and you don’t have to worry about negotiating early on. If you’re an investor and as the person who started the company, you don’t have to worry about figuring out all those things at the very beginning, which is really hard to do. So I also mentioned an sec filing.
This is a really important piece of the puzzle that most people have no idea they actually need to do. When companies raise capital without filing with the SEC. Even if you’re taking investments from your brother and your uncle, you’re doing it illegally. The SEC is supposed to be notified, so I would suspect that Papa John Probably back in those days didn’t do that. I don’t know if he did or not, but I know from my first for investors with Esa one I didn’t do that. I had no idea what was supposed to do that. Now eventually when I raised a larger amount of capital, we did do the filings correctly, but it’s a very important thing because the sec can actually shut you down. They can make it so you can’t raise capital for your company anymore and it’s going to kill your company if you start.
If you start raising capital without the sec filing and the thing is it’s a very easy process. It’s very easy to do. I would recommend working with an attorney, but it should be very simple and fast. It’s a online form that’s filled out on the SEC Edgar website that takes minutes and I don’t think there’s even a charge for filling out your sec filing, but you need to make sure that you submit the right sec filing. There are a lot of different types of sec filings and what you’re basically doing is telling the sec that you don’t want to be a public company like Mcdonald’s or somebody that’s publicly traded because there was a whole lot of complication that goes with that. So you’re filing an exemption from having to be a public company. The three different types of exemptions that would most likely be used around here or a regulation d five, zero, six B, a regulation d five zero, six C and a regulation cf.
a regulation d five zero six b exemption is the most common way that startup companies raise capital. It’s called a private placement because you cannot do any advertising. You can raise capital from an unlimited number of accredited investors and accredited investor is defined as someone who makes over $200,000 a year or $300,000 including their spouse or they have a million dollar net worth excluding the value of their home. So you can raise capital from an unlimited number of accredited investors and up to 35 nonaccredited investors per year. But you can’t do any advertising whatsoever. And you have to be able to prove if the SEC comes in and asks you to, you have to be able to prove an existing relationship with those investors. This is why angel groups were formed because they can show then an existing relationship with all of those investors and that’s what.
That’s what most of the lead investors I talked about earlier are used to using to do a private placement and get their friends to quietly invest in the company. A Regulation d five zero six c exemption is a newer type of exemption that came about as a result of the jobs act. It became legal in 2012 and this is the exemption I think we really need to take a hard look at for our area to accelerate capital raising. I’ll explain a little bit more later, but here’s the way it works. You can raise an unlimited amount of capital from accredited investors. You cannot accept investments from any nonaccredited investors and you can advertise as much as you want. Unlimited advertising. You could run a full page ad in the Wall Street Journal. You can run facebook ads and twitter ads, whatever you want to try to get people to invest in your company and you don’t have to be able to show any existing relationship, so if you look at that, even for investors who do have a big network of accredited investors to invest in your company, this is something really to take a look of it because it really opens up the number of potential investors who could invest in your startup.
And the third exemption I’ll mention is the regulation cf or regulation crowdfunding a exemption, it’s the one you’ve probably heard the most about recently. It allows full online equity crowd funding where it’s kind of like kickstarter, but when people invest, they’re actually investing in your company instead of donating. It became legal in 2016 also as a result of the jobs act. Here’s the way it works. You can raise up to $1,070,000 per year and you can take any type of investors accredited or not accredited and they can invest online. It has to be through a licensed portal and there are 41 different portals that are raising capital for startups and they make it very convenient. They set everything up for you. They collect the money for you and it has to go through the portal. They have have to collect the money for you, but people can invest as little as $100 and you can advertise as much as you want.
There are a little bit more limitations on the advertising versus the Regulation d five a c, and you don’t have to show any existing relationship. I think this type of capital raise has some potential later if your company has a really large audience, because here’s what we’ve seen happen. There’s been a couple of companies locally that have attempted to raise capital using this method and I think they found that it costs a lot of money in advertising to bring in enough investors to really do a good capital race. When people are investing really small amounts, you end up having to spend a whole year. You have to be really good at marketing and prepared to spend quite a bit of money in order to market your capital raise, so here’s the plan that we recommend are going to start really promoting through metro startup launcher, which I think can help our community really accelerate our capital raise for startups and this is based on what idea to raise capital for my own company, Bluetooth 22.
We knew early on that Bluetooth 22 would require a lot of startup capital to build our system. It’s a system online system that is uber rising, the business of real estate inspections, so we built a platform that lets people connect with the right real estate inspectors, let’s banks and real estate companies better manage their real estate inspectors for the real estate transaction. So it’s a pretty complex system and we knew it would require a lot of money upfront to build and often in our community. When you talk to an angel investor, their first comment is, what’s your traction in the marketplace? Well, if you have even built your product yet and you don’t have your first customer on board, it’s kind of hard to have any traction, so we knew we were going to need to raise capital in little bit of a different way.
So here’s generally what we did and what I would recommend you to first file a five zero, six b exemption with the sec. That was the first one that I talked about that does not allow you to advertise, but it allows you to have up to 35 nonaccredited investors. So file the five or six B and create your safe agreement. Now, the reason why I would recommend this because then you can go after your friends and family first and if you have some nonaccredited investors that want to get on board, they can invest so you can tap out your friends and family first. And what we did is create a monthly email update just using mailchimp. We send out an update every month that explains what we’re doing and gets people excited about the company and it really worked well. We were able to bring in a lot of investors that way and the interesting thing is the monthly update is so important because people only invest when the time is really right for them.
Maybe they just got a tax return back or something or just came into some money or or have just been thinking about making an interesting investment. Whatever it people invest when they are ready, so doing that monthly update just continues to remind them of what you’re doing. Now. Once we ended up tapping out friends and family, once we felt like we had as many people, friends and family as we could on the email list, we switched to a five, zero, six c, six C is the exemption that allows unlimited advertising. Now once we did that, we could run facebook ads and Linkedin ads and post things on twitter and and drive people to sign up for our mailchimp email list. So we were primarily just telling people about the company, writing articles about what we were doing and driving people onto that monthly email list and it’s absolutely amazing how well that worked because we started to get investors.
We actually had investors invest up to $60,000 without even ever talking to me on the phone, so I was. It’s really been amazing how well it worked and it’s that monthly email with advertisements that drive more people to be on the email list and then we just repeat. We just keep doing that over and over again. Overall, following this process really gave us a lot of benefits. One, it gave us time to build our system. We could take our time without pressure to make sure that we were building everything right and testing everything out before we put the first customer on the system too. It allowed us to really spread the risk out to a number of indifferent different investors so that we didn’t have any large investors that were really pushing us to move too quickly. Three, it gave us time to get customers.
Same thing. We didn’t have the pressure from a large investor, so we were able to take our time and bring some customers on and really Beta test the system with real live customers and for. This was amazing. We ended up landing through our monthly emails because we just kept casting the net a little wider all the time. With those emails. We landed a $5,000,000 investor from Michigan who’s coming on board who really liked what Bluetooth 22 is doing and was just excited about about getting involved and that same investor, there’s a real bonus for Louisville out of all of this. That same investor is building three funds that are going to total $450,000,000 and they are interested in making those funds available through metro startup launcher. So what do we do next? First, we teach others how to follow this same process to accelerate their capital raise to we create a Louisville safe agreement and we’re working with bill stretch and Fort Phillips and other local attorneys and also want to work with any angel investors who are experienced to come up with a safe agreement that we feel the whole city can use as a starting point and have a boiler plate that would be available for free on metro startup launcher that startups can use to raise capital three.
Continue to build the investor database. We have a, a nice database. We’ve started through a content marketing we’ve done for metro startup launcher and then also through the capital raise we did for Bluetooth 22 and we just keep building that and every startup then that raises capital through metro startup launcher, helps us raise our number of potential angel investors in our database of emails at four. We organized screeners and mentors who can help companies get to the point where they’re ready to raise capital. Alex de is already organizing a group that will be helping screen companies and they’re also building a $20,000,000 fund, uh, and will be available to the whole startup community to help screen companies and get them ready to raise capital. Also, our whole startup community, we’ve got such a great startup community. We’ve got the enterprise core and vogue awards in a launch it and you have l all the different organizations in town that are helping start as prepare to raise capital or to help them prepare to grow.
What would it work with the whole community to screen startups and get them set up to raise capital? I’m metro or blogger, so if you’re watching the video, this is kind of what the ecosystem would look like. Everything got the right is metro startup launch her. Our whole goal is just to build a huge database of angel investors and get people investing in more startups and we’re just doing that through content marketing blogs and videos and podcasts and then accelerating it with ads and postings on facebook and linkedin and twitter and whatever social media and it gets the word out. We’re also going to be tying into the $450 million dollar funds and Alex’s $20 million funds and the whole startup community and pointing those investors at companies that are ready to raise capital and getting more companies funded and started. So how can you help our startup community will make sure you go to metro startup launch.com and join our email list if you haven’t already, and tell other people to do the same thing.
Our goal is just to create a larger and larger audience and let more people know about what we’re doing and get more people on our email list who could be potential investors or potential startups and share content. When we put content out, we’re normally posting it on linkedin and facebook and twitter, and if you could share that content to your social media, it really helps us hit a wider audience. And finally, if you could donate to metro startup launch here. We’re a five zero, one C, three nonprofit, so it’s all tax deductible and it’s very easy. Just go to the website and there’s a link in the upper right hand corner and it walks you through the process of donating is very easy and every dime that we raised and donations goes toward boosting content so that we just hit a larger and larger audience on facebook and Linkedin and other social media. The more investors we can get involved in our startup community, that more startups we’ll get started and the more success we’ll produce. Thanks for watching this video and podcast and please pass on the word about metro startup launcher. Thank you.