Nathan Rose is from New Zealand but calls himself a digital nomad and lives all over Europe. He’s written a new book on equity crowdfunding, not only for the US but multiple countries across the world. He also gives out a tool at the end to use for equity crowdfunding that you’re want to be sure to listen to and start using right away. Nathan talks about how fund raising and marketing can be done simultaneously with equity crowdfunding. However, there are some downsides compared to Angel Investing and he goes into what those are.
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The Secrets of Equity Crowdfunding – Interview with Nathan Rose
Welcome to The Successful Pitch. Today’s guest is Nathan Rose, who is originally from New Zealand, currently talking to us from Budapest, and calls himself a digital nomad, which I just love so much. Nathan has a background in investment banking and he went to school in New Zealand and now is the director of Assemble Advisory, which has raised over $11 million. They are equity crowdfunding experts. He takes information and modeling and makes it easy for company founders. They know the market, they know it works and most of all, they can get you results. He is the author of a new book coming that is called Equity Crowdfunding: The Complete Guide for Startups and Growing Companies. Nathan, welcome to the show.
Hi, John. It’s a great pleasure to be here.
Nathan, I always like to ask my guests, how did you get into crowdfunding, in your particular case? When you were studying at university, crowdfunding was probably in its infancy and certainly nowhere it is today. How did you go from being investment banker to being an expert in crowdfunding?
The path of crowdfunding that I help with is actually quite similar to investment banking. When I was working in New Zealand, we would do a variety of deals, some bonds, some rights offers, but the path that I really enjoyed most was the early stage initial public offerings. That was growing companies, entrepreneurs with big dreams and big ambitions. Equity crowdfunding has a lot of similarities with that. It’s startups at an earlier stage. What I really saw when I founded Assemble Advisory was that these startups weren’t being adequately served well enough. The investment bankers wouldn’t generally bring their skills to bare because they needed to pay for the big expensive officers in downtown. Startups couldn’t afford those sorts of fees. There was this ground swell of entrepreneurs coming through with equity crowdfunding, which weren’t being served. That’s where I saw the opportunity to provide the services around that.
We’re always talking about who do you help and what problem do you solve when you give a good pitch. Can you describe what you’re doing in those terms?
I suppose a good example would be an entrepreneur from a sales background or from a technical background who wants to do equity crowdfunding but doesn’t know the market, doesn’t know the different platforms. Because there are a lot of them, especially in equity crowdfunding. The rewards crowdfunding which is important to distinguish here, the Kickstarters and IndieGoGos, which most people are familiar with. Really you would use one of those two platforms in the majority of cases. With equity crowdfunding, it’s much more country specific so therefore if you’re a UK company, you use one platform, if you’re a US company, you use another platform, if you’re a New Zealand company, you use another platform. It’s all subject to different securities regulation. The typical case of who I’d help would be an entrepreneur, a growing company that wants to do equity crowdfunding but needs some help to in terms of communicating their story, approaching the platform and ultimately getting funded.
What would be the main reason somebody would decide to get funded through equity crowdfunding versus an Angel for example, an Angel group?
I think there are advantages and disadvantages to both, we can go into that.
I think one of the big advantages of equity crowdfunding over Angel groups is the ability to do fund raising and marketing at the same time. When you think of the startup, those two things, getting marketing exposure and raising funds, are usually number one and number two on the list of things to do. Until now, they’ve always been viewed as separate activities. When you pitch into a VC or to an Angel, you’re inside a closed shop and there’s not a lot of publicity there. When you’re doing an equity crowdfunding campaign, it’s out there in the public and a lot of people can be attracted, not just through their investment dollars but through other partnerships too.
Great. All right, let’s take a deep dive into this because it’s fascinating to me. I believe it will be to our listeners. You have the choice of doing friends and family obviously, then you have maybe you actually do a little rewards crowdfunding to get some proof of concept. Now, you have to decide whether you’re going to pitch to Angels with a pitch deck and all that good stuff and do it live ideally with a warm intro. Or if you’re going to use an equity crowdfunding platform in your particular country. Is there only one per country? Tell us how do people find where to go.
That’s a very good question. There are multiple crowdfunding platforms in each country. As it turns out, they tend to have network effects happening with each platform, as in the bigger ones tend to get bigger because they attract most of the investors and they attract therefore most of the biggest companies and end up getting bigger by that process. How to find them? That’s actually a really difficult thing right now. It’s something that I’m trying to solve in terms of helping people to get more knowledge about which platforms are out there and what the different strengths and weaknesses are. In the US where most of your listeners may be from, there are a couple I can talk about. There’s WeFunder, which is by far the largest right now. They’re responsible for the first title III crowdfunding offer to raise a million dollars. There’s also Republic, which is born out of Angel List as the equity crowdfunding phase of what Angel List do.
Let’s just take a minute on that. How fascinating is that, everybody? That a lot of people think, “I’m going to put my little pitch deck up on Angel List and hope for the best.” But now Angel List has said, “Ooh, we want to get into the equity crowdfunding business as well so we’ve birthed our own called Republic,” if I heard you correctly.
Are a lot of people doing both or do you recommend people do one or the other?
In terms of?
Doing a listing on Angel list and a listing on Republic equity crowdfunding.
I see. Generally, you don’t really have to choose.
That’s what I thought.
You have to decide which platform makes the most sense because running concurrent offers gets really messy really quickly. We can maybe talk about some of the disadvantages.
Sure. Let’s talk about what’s the downside if it’s all, gosh, if I’m going to raise money and get marketing, why wouldn’t everybody be doing that and not do anything to Angels anymore? There must be a reason to not do it and just do the Angel route. What are your thoughts on that?
I think the biggest reason is if you’ve got one Angel who’s ready to write a check for you. It can be done a lot more quickly. An equity crowdfunding is not just a case of putting your campaign on the sites and waiting for the internet to shower you with money. There’s typically a two or three months process that goes on behind that to put together all the author material, the video, drum up your supporters. It’s a launch, it’s a marketing campaign. You got to do a lot of the things in the background before you get ready to go. Whereas an Angel can be a lot quicker and cleaner for the companies.
Interesting. I’ve heard the phrase from my business partner, Judy Robinett, that with crowdfunding, you have to bring your own crowd. Do you like that? Do you think that’s true?
I think that is true for some platforms but not for all. This is one of the things that I always tell the entrepreneurs that I work with. There’s a really big difference in between the various platforms because the real value add of an equity crowdfunding platform is the audience that they bring to you. Bring your crowd along, that’s great. Any crowdfunding platform can do that and facilitate the payments and the process and then all that stuff. The bigger platforms are going to give you the added benefit of having their investors who are sitting there waiting for new investment opportunities to come along.
Instead of crafting a pitch deck per se, when you’re going to pitch an Angel group or VC, depending on whether you’re seed or series A, you’re talking about having videos created on the equity crowdfunding platforms, correct? Is that in lieu over the pitch deck?
It’s more as well as I think.
As well as.
You’re still going to have to put together a pitch deck and actually that pitch deck takes more of a longer form because the idea is that you’re seeking small amounts of money from lots of different people. You have to be able to tell your story completely. Because when you’re pitching to Angels, you’re in front of those Angels and they’re getting to ask you questions. There’s still that ability in the online forum but the information has to stand on its own much more in equity crowdfunding because you can’t go around shaking hands with everybody who’s going to pledge $100 at a time. That’s why the videos are so important.
A pitch deck for an Angel group typically, it’s ten slides, ten minutes and a ten minute Q&A. How much longer is a pitch deck that you recommend on an equity crowdfunding and how long should the videos be?
I’ll say about two to three minutes is right for a video. You need to be able to capture people’s attention quickly and then convince them to go into the offer in more detail. The video is like the hook if you like. You don’t want to make it too long, you need to make it attention grabbing. I think if there’s one area that you should spend a bit of money on, which is never a thing that startups like to hear especially when they’re trying to raise funds, get a professional video done for sure. It makes the big difference.
Nathan, would you agree that it’s really important not to spend your two minutes, three minutes on a video giving just a product demo? That’s not what people want to see in a pitch for Angels. I’m assuming, that’s not what should be in a video for equity crowdfunding. Am I right or is it a product demo?
I think you’re absolutely right. You’ve had a lot of experience with this too, John. Of course founders are very very experienced normally talking about the features of their product and selling their product but they’re least good at selling their whole business model. You’ve got to excite people about the investment opportunity too.
Terrific. One of the things in chapter three, you talk about is equity crowdfunding right for your company. You’re quoting Nathan Lawrence who raised over 800,000, is it New Zealand dollars on Snowball Effect?
He said, to raise that kind of money, I don’t think people think about equity crowdfunding as raising that seed round of money. When you raise it with an Angel group, that can take a while too because you have to get in front of the right group and then there’s due diligence, which is anywhere from, I don’t know, 45 to 90 days depending on how fast you go back and forth and come up with the terms. How long is a typical equity crowdfunding to raise that kind of $800,000 mark, let’s say?
It’s fairly interesting. There are I think three phases involved. There’s the phase where the offer is actually open. That would be 30 days or 45 days typically. For a lot of people, that’s all they see and they don’t see the preparation that went into that to get that campaign to go live. Before that 30 to 45 days, there’s a preparation phase where you’re putting together the video and getting all the content together. I would say that would be about two to three months that you need to budget for that or up to six months. It can easily blow out depending on how much resource that the founder can put into it and answer emails and so on. An interesting anecdote that I’ll share with you is a company called Monzo in the United Kingdom. They actually closed their crowdfunding round for a million pounds in 96 seconds, 96 seconds it was done. They’d raised their one million pounds.
All right. Let’s hear how that happened.
The funny thing is, that makes a nice headline. 96 seconds, a million pounds. Really, it was a year in the making that whole campaign. When you think of who was investing, it was their customers. Having that user engagement at the core of everything they did was what enabled them to ultimately raise in that 96 seconds.
That’s really the bring your own crowd in action right there. Your own crowd is your customers and anytime your customers become your investments in any kind of platform, you have a win and other investors want to join in because they figure if your customers want to invest, you really have figured out something that people want.
The parallels with Angel Investing are quite strong in that regard. No one in Angel Investing wants to be the first one in, but once the first one does go in or they can sense that there’s some kind of momentum in the offer, then everyone jumps in really quickly. When I said before that for the bigger platforms you can rely on their audience to some extent, that’s true but you got to generate your own momentum first. If you’re working with a big established platform with a big audience, if I could just throw a number out there it would be something like 50-50 in terms of the crowd you need to bring yourself and then the rest of the crowd will follow along with you. If you can bring that initial momentum to bare.
Let’s go back to this 800,000 round. I’m sure that wasn’t just a bunch of people pledging 100 bucks. Because typically when you raise 800,000 with Angels, it’s 250 here, 300 there, that kind of stuff. Is that how it works or is it much smaller amounts that add up to 800,000?
It can be both is the short answer. There’s a company called Haughton Honey again in the UK who raised very large numbers of small amounts of money. But there are other ones out there who put their minimum investment amount right up at 20,000. That means that you’re not going to get the crowd to come along and you’re going to just effectively do an Angel round or VC round but do it through the efficiencies afforded by the crowdfunding platform.
Would you say that when you’re raising that kind of money, 800,000, that it is typically one or two people starting off on 100,000 and then other people following with similar type sized offers?
I would say there’s a very well established thing in the equity crowdfunding world which is the concept of a lead investor. Crowdfunding absolutely has a higher rated success when you can bring an Angel investor along into the round. Effectively, they anchor the round, they might put in 25% of the round themselves and before the offer has opened, they’ve done things like negotiate the valuation, negotiate the offer terms. Make their name and the experience they have in the industry public. In that way, the people who want to just chip in $100 or $1000 can say, “Hey, there’s this really smart Angel investor here who knows what he’s talking about, who’s put their own money behind it and come up with a valuation that they’re happy with.” For mom and dad investors who find it difficult to value early stage companies, and even the professionals do find it hard, they can then follow on and invest with the Angels, which I think it’s a really good way to do it.
If I understood you properly, one way to go is to do the normal route of have a pitch deck, use your network or hire someone to get you in front of the right Angel investors. They come in and they say, “You know what, instead of having my Angel group fund this whole round, let’s go with an equity platform and I’ll give you this amount of money. I’ll be the lead investor for equity platform as opposed to the lead investor for other Angels.” From there, you start getting other people in.
Now, doesn’t that make the cap table very complicated because you’ve got all this people putting $100, $1000 there and you’ve got to give equity each of those people? Does it cost you to have to give away more equity when you do it this way?
I think there’s two questions there. It doesn’t mean you have to give away more equity. I think the answer’s no. I think actually in general, the valuations being achieved through equity crowdfunding are somewhat higher than pure Angel or VC rounds.
That’s good to know.
The reason for that is when you go through an equity crowdfunding platform, often there’s more standardized documentation and you as the entrepreneur can set your own terms and then the crowd either follows along or doesn’t. The successful rounds are sometimes getting better terms. The other part of your question was about the messy cap table. There are ways to mitigate that. One of the ways is through a nominee structure, as in all of the smaller investors will end up becoming a holder in a nominee company, which I’m going to explain quickly. It means that that nominee company will vote and make decisions together. If you’re a company founder and you need some kind of shareholder resolution or you ultimately going to sell the company, then there’s just one nominee company that needs to vote and the provisional nominee manager will take care of all the investor communication for you.
Interesting. Now, is that based on a majority rules or is it the one guy who’s supposedly the professional decides for everybody?
Generally, it’s majority roles.
Got it. Let me ask you also about the cost because you write about this. There’s a price tag attached to using an equity crowdfunding agency. Is that like a broker taking a percent of the money they help you raise with Angels and VCs?
The crowdfunding platform will take a cut but generally that percentage is based on success. The fees that founders are really concerned about are the upfront costs, like getting your video done, legal work, anything like that which will be charged regardless of your success or not. It really depends on how much hand holding you need. If you can find the platform yourself, you’ve got a huge email list, which means you can just get the investors to come along or maybe you had someone in your team who’s good at the social media and the video and you can self produce all of that. The cost can be very low. If you need more hand holding by professionals, then yeah, the costs can mount up to, I’d say that maybe in the US, something like $15,000 or $20,000 might be typical, maybe less than other countries where there’s a less a restrictive regulatory regime.
I wanted to ask you one of your earlier comments about don’t expect to just put your stuff up on the equity platform and expect the magic of the internet to do all it’s work and people are just going to find you with your cool pitch deck and engaging video. What else do people need to do besides bringing their own crowd to that platform to market this?
I think you need to make the investment itself step up because you’re going to do a lot of outreach in an equity crowdfunding campaign and people need to see something good there when you direct them to the page. Otherwise they’re going to click away, never to return. I think being good at telling your story, this is exactly the same stuff as you’ve talked about on your podcast many times. Having a clear story about what the problem is, how your company solves it, why people should get excited about your uniqueness and your positioning, how it’s going to make money, all that good stuff.
Bringing your crowd to the offer, there’s so many ways to do that. I think one mistake that people make is they rely on social media too much. They think that it’s got the word crowdfunding in its name so you can run it exactly like a Kickstarter or an IndieGoGo campaign where if the product is itself just cool enough it can go viral through tweets and shares and likes and all that stuff. I think in equity crowdfunding, it’s more important to go to pitch events that the crowdfunding platform will organize.
Got it. Let’s take a moment and just pause there. That’s a really good piece of information. A lot of people will say, “I know there’s Angel groups that have meetings,” but there are actually equity crowdfunding meetings that you can go to and encourage people to go check out your platform without having to literally pitch them. I’m guessing you’re probably going to have to pitch them a little bit to intrigue them enough to want to go check out your platform. Is that right?
The way that one of those events would typically work, there’d be maybe you and five other company say that are giving a short introduction and you hope that you can excite people and that audience enough that they go into your page. By the way, at those events, they do get the chance to shake your hand.
How do people find out about those events, Nathan? Is it just googling it or are there something to belong to?
Those events are organized by the platform themselves. Again, the US is a few years behind some of the rest of the world, which is unbelievable really given the home in Silicon Valley and the whole startups scene. The UK and the rest of Europe is actually quite a bit more advanced in terms of this sort of thing. There’s some places that you can find these crowdfunding pitch events. If you’re in London for example, you could sign up to the Seeder’s Blog, Crowd Cube, Syndicate Room, those are three of the big platforms in that market, or else just ask your local startup incubator or accelerator.
That leads me to the question about your insights on the title III law passing here versus what’s going on to the rest of the world. What are your thoughts on that?
It’s fantastic firstly that the US is now part of the equity crowdfunding revolution. A title III crowdfunding allows a startup to raise a million US dollar in any twelve month period. There are a few extra restrictions compared to more liberal regimes like New Zealand and the UK, but at least it’s a start and we are seeing some money being raised. One of the things that’s in place in the US for example is that ordinary investors who don’t make the sophisticated high net worth threshold, as in people who basically aren’t really rich. They can only put in $2000 maximum into each crowdfunding offer, or five percent of their annual net income. That’s in place. I guess that means that if you were in a comparable market, you could have more people putting in amounts greater than 2000. In the US at least, retail investors can only put in that 2000 in each offer.
Typically within an Angel group, if they already have one type of person they’re investing in, they won’t take on a competitor. Is there anything within certain platforms in equity crowdfunding that they say, “Oh, we’re already funding something that is in healthcare for, whatever, Doctors on Demand. We can’t have another one going on concurrently.” How does that work?
This is a bit like the IPO window back from the investment banking days, which was that each company would try to find a slot where they’ve got the attention all to themselves. I actually think the opposite is true in equity crowdfunding because if you’re on the platform at the same time as a bunch of other offers are, then it’s actually positive because you’re going to get the benefit of everybody else’s outreach efforts and everyone else’s audience that’ll maybe go to the platform for your competitor or for other companies, which aren’t even related to you but are just crowdfunding at the same time. Because they’re on the site, they can see your offer too.
Is there some barrier so your competition isn’t seeing all of your secrets? Because a lot of founders are so paranoid. Obviously investors don’t sign non-disclosure agreements, but do they say, “We already have this. You can’t come on here.” I’m not 100% understanding the yes or no to that.
I think the answer is no, that you will be subject to other companies coming on at the same time.
You have to put enough out there without giving away your “secret sauce”. You can say how, you can say what you’re doing, but you don’t necessarily have to go into that much detail on how you’re doing it unless you want are competition to see it. Would that be fair?
Right. We talked about advantages and disadvantages of equity crowdfunding. I think this is another of the disadvantages. If you are not comfortable with your business’ whole revenue projections and business model and what you think of the market and what you’re doing and strategy being out there in the public domain, then equity crowdfunding isn’t for you.
Got it. Much like people go from a seed round from Angels to series A with VCs, are you seeing a lot of people go and get their seed round up to a million dollars from equity crowdfunding and then VCs are more than happy to fund that just like they would an Angel round?
I think there is still something of a negative stigma around it from some Angels and VCs, as in if the cap table is messy, like a nominee structure hasn’t been used, then they might be a little more hesitant. But I will say that their perception is changing. Some Angel and VC companies, this is just true of the economy in general, some people just don’t like new ways of doing things. In Europe at least, we’re seeing that they’re becoming more comfortable with us. If they want to get access to the best companies and some of the best companies are using equity crowdfunding. Ultimately John, a VC will invest in a company no matter how messy all the structuring is if the company is a great company.
Has a huge potential and traction and a good team and all the other good stuff. I love storytelling, Nathan. I’ve saved your story about how you wrote the majority of your book in a small town in Georgia. Tell us that story.
That is Georgia, the country. Not Georgia the state.
Okay. Tell us where Georgia the country is for those of us who may not know.
Georgia is located north of Turkey and south of Russia, around the Caucus mountains, just between the Black Sea and the Caspian Sea, which is not the typical place to hang out. The reason for going there was to get away from it all for a couple of months while I wrote the majority of the book. It was successful. Two months in a little hideaway where no one knows you, it’s a good way to get a lot of work done.
I bet. Really focused. Nathan, how can people follow you on social media? Do you have a website you want to direct people to?
Sure. The website is AssembleAdvisory.com and within that is the page on the book, which is out now, AssembleAdvisory.com/book. That’s Equity Crowdfunding: The Complete Guide for Startups and Growing Companies. If you’ve heard this podcast episode and you want to know more, then now that’s available on Amazon.
Great. What is your Twitter handle?
My Twitter handle is @Assemble_ADV.
Okay, let’s repeat that for everybody. @AssembleADV.
Yup, short for advisory.
All right, great. We’ll put all this in the show notes. Nathan, thank you so much. Is there any one last bit of advice or thought you want to leave our listeners about equity crowdfunding or just being an entrepreneur in general?
I’ll share one tool if that’s okay, John.
The tool is Thunderclap. Thunderclap allows you to prearrange social media shares. If you’ve got a crowdfunding campaign coming up and you want people to share the word on Facebook and Twitter, you can get them in the weeks and months leading up to your company actually launching to pre-commence on Thunderclap. That way when your campaign goes live on the arranged date, everyone tweets and Facebook shares at exactly the same time.
Brilliant. That’s a great, great thing to do. That’s bringing your crowd to the crowdfunding. There it is. Love it. Thank you for that great tool. Thank you for writing this book. Thank you for sharing your expertise with us. It’s been a pleasure.
Thanks, John. Thanks for the podcast and everything that you do too. It’s been great.
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