Small businesses often have a tough time getting the money they need to get started. Banks have cut back on small business loans, and alternate lenders often charge high interest rates. But because of a Texas law passed in 2014, small businesses can tap into a new source of capital: investment crowdfunding.
An Enlightened Speakers Series event in Houston examined investment crowdfunding, and how it can offer a way for small businesses to get their nest egg. Guests heard from Youngro Lee, the CEO and co-founder of investment crowdfunding portal NextSeed; Simon Nguyen, the owner of Houston salon Hair Revolution, which received funding through NextSeed; Bobby Billman, a marketing expert who advises NextSeed; and Bill Forrest, who works with small businesses and startups as a sales and service officer for BB&T.
“Democratizing the ability to fund capital is really a powerful idea that’s growing faster than we thought it would,” Lee said. He pointed to the Texas law that opened the way for crowdfunding. Before, under the security law that had been in effect for 85 years, companies could only raise money from accredited investors – people with a net worth of at least a million dollars.
“Now the law allows any business to raise money from anybody, regardless of their income level,” Lee said. But the federal law still has to be finalized, and some states, Texas included, have passed their own investment crowdfunding laws. NextSeed specializes in raising capital for local or small businesses as a supplement to their traditional funding sources.
“Crowdfunding is a new tool that’s available to us as owners and investors,” Lee said. “The success or failure depends on how we use these tools.”
Simon Nguyen counts himself as a crowdfunding success. “The process itself was very simple,” he said. “It wasn’t any more complicated or difficult than what I was used to do with a traditional bank loan. We closed the campaign in a matter of eight or nine days.”
In Nguyen’s case, Hair Revolution raised $25,000 from 17 investors. Lee explained that each investment is a loan, and the investor will realize a payback through revenue sharing. Nguyen will pay 1.05 percent – or $105 for every $100 invested. He will share four percent of his monthly revenues until the $105 is paid off. Because the payback is based on revenues, in some months, the investor will get a little bit more, but in slow months, the return will be a little less.
“It’s a debt deal, not an equity deal,” Lee said.
Nguyen concurred. “If it was equity, I would not have done it,” he said.
The $100 figure used in the example is the minimum amount a crowdfunding investor can put into a venture. Individual investors are limited to $5,000 per deal, but an accredited investor may invest an unlimited amount. And yes, the returns are small. But people are willing to accept a smaller return because the investment is being made in a local business.
“If it’s a business I support, like my favorite pizza joint, it’s not like you’re going to sue them for that extra one percent return,” Lee said.
Billman said the benefit of crowdfunding is not just getting the funds. “You’re building advocacy for your business,” he said. “Even if somebody only puts in $100, they are more inclined to visit you, more inclined to recommend you and they are more inclined to drag people along with them when they do visit you.”
Billman described himself as an advocate for small business, because they define the culture of a city. “In Austin, it’s about food trucks and live music,” he said. “The reason Austin has a vibe isn’t because of the Subway franchise, it’s because of the local businesses that are generating and putting a new feel to the culture of the city.”
Billman said he invested in Hair Revolution to help his wife raise money for their local school system. Nguyen put on a special event at the salon, gained some new customers, and Billman’s wife got money for the schools. “It’s a self-feeding growth idea,” he said.
“I don’t look at this purely as an investment,” Billman added. “On half of the ticker symbols in my e-Trade account, I have no depth of knowledge of the company and am purely looking at the return. If you look at NextSeed, I care because these are businesses in my community – they are friends and colleagues running these businesses.”
Investor crowdfunding is not to be looked at as competition for banks, the speakers agreed. “I see it as supplemental,” Billman said. “It’s a partnership and not an adversarial situation, at all.”
BB&T’s Forrest said NextSeed is a great alternative for a small business that doesn’t qualify right away for a bank loan. “NextSeed is doing their job when they help that small business get going, then get stable,” he said. “NextSeed passes that business back to BB&T when that stability is there.” Stability in growth is one of the most important things a bank looks at when evaluating a small business. “Rapid sales and one time upshots are great to help do a lot of things like recognition, but the stability and growth and achievable goals are where the returns and success come from,” Forrest said.
Lee said crowdfunders like NextSeed need support from the banks. “If your traditional analysis doesn’t show the typical business model for a loan,” he said, “but you’ve had a successful crowdfunding offering and you’ve seen results over six months, if we get a bank to say that is worth X percent on a risk profile, then we will be able to hand off businesses to the banks for those who need bigger loans.”
Lee said a lot of businesses require intensive capital up front, but for various reasons might not be able to raise a bank loan. “We’re working to partner with banks and other partners to co-lend and put the capital together,” Lee said.
He added that investors will deal with banks, too. “You open an investment account with the bank and use that investment account for your deals. That way, we have verification that you are qualified to have an investment account for the state regulators.”
The Texas Security Board makes the rules for investor crowdfunding. “When we did the campaign, I was told that I couldn’t really tell people directly about investing in my business,” Nguyen said. “What I was allowed to talk about was to say that I was working with NextSeed to raise funds for my business and direct them to the website.”
Lee said that’s because all the information for a campaign must be available online, so that everyone is dealing with the same information. The campaign cannot be conducted offline.
Texas, he said, is a logical place for crowdfunding to flourish. “Texas has that maverick perspective and has passed the law while other states are still worrying,” he said. “We’re independent and do things our own way. That’s relevant to crowdfunding – somebody has and idea and we can reach out to the crowd for funding, and we’re good.”
There are now eight crowdfunding platforms doing business in Texas, many with specific targets, such as real estate, startups and oil and gas.
“People will see the track record over time, and realize there is a new methodology for raising money,” Billman said.
Lee summed it up: “If we can work together in Texas, and I do believe Texas can become the crowdfunding leader, we can become the leader in the world.”