Equity Crowdfunding's Arrival An Opportunity To Turn Customers Into Partners
This article first appeared in Forbes on May 20, 2016.
Earlier this week, after four years in the making, Title III of the Jumpstart Our Business Startup (JOBS) Act finally came into law. Title III, the new equity crowdfunding rule, gives entrepreneurs and small business owners the right to raise up to $1 million in capital from non-accredited investors. This means it is now legal to run a Kickstarter-like campaign in exchange for equity in your company. This innovative way of raising capital comes at a perfect time. It also coincides with my own four-year roller-coaster ride, a ride that included my losing control of my company and ended with me getting it back.
April 5th, 2012. I remember the day President Obama signed the JOBS Act clearly. I was there, invited to attend the historical signing in the Rose Garden by Startup America, an organization created around lobbying and shaping the JOBS-Act. It was one of the highlights of my six-year career as an entrepreneur and my first and only time in the White House. As someone interested in raising funding for my company, I was thrilled to be part of the effort to make it easier for entrepreneurs to raise money. But as I sat in the crowd on that beautiful spring day, just feet from the President and full of optimism, I had no clue that my business and life were about to go on that four-year roller-coaster ride.
In 2011, our company grew 100% (from $15 million to about $30 million in revenue) despite having raised only $2 million in equity capital. In February 2011, I told our sole investor that I believed we needed to raise $10 million to continue our strong growth pattern, and I suggested it might be time to bring in Venture Capital funding. Our investor didn’t agree, and because his rights allowed him to call the shots on how we raised capital, he invested another $2 million, enough to grow in 2011 but not enough to keep up our hyper-growth pattern for the next year and beyond.
At the end of first quarter of 2012, things at The Fresh Diet were OK. It was our first flat quarter ever, but I was happy we weren’t receding. It became clear that our investor wasn’t going to invest the capital we needed to keep on growing, so he agreed to allow me to talk to the many VC’s that had been reaching out to us. By the time those conversations started, our lack of growth—and lack of profitability—were glaring issues for the VC community.
That’s why I was so optimistic that day in the Rose Garden. As the President signed the bill I’d been tracking as it made its way through congress, I thought to myself, this is progress, this will help my business. But I thought it may help us then.
Everyone knows government is slow. If you’ve been to the DMV you understand the differences between private business and government. Government is not usually in a rush, but entrepreneurs are and I was no exception. After the bill was signed, I thought I could start raising funds immediately, but I was disappointed to discover that the law would take some time to go into effect. By the time Title II went into effect, in September 2013, I had already given control of my business to a new management team, a move made to appease my sole investor. My dream of using crowd funding to bring in capital and keep control of my company evaporated and I took a back seat at my own company. Eventually my company was sold and I moved on, but I kept my finger on the pulse of the crowd funding world, hoping that one day I would get a chance to use this innovative form of financing.
Companies like mine now have that chance. I re-acquired my company in February, and I am thrilled that small businesses can begin raising capital thru equity crowdfunding.
Four years ago I needed capital to continue growing, but today I, and companies like mine, need something more important: great partners. Raising capital will be great for start-ups but it will be even greater to have your customers as your partners. That’s why you should be excited about Title III: it allows businesses to bring on-board equity partners of all types, not just sophisticated investors. For as little as a few hundred bucks, your customers can now own a piece of your business. Because they can own a small piece of the pie, customers will be even more incentivized to help your company continue to improve. Having my customers involved is already working for me.
When I returned as CEO, one of the first things I did was email our customers to ask for feedback. Amazed at the variety of responses I received, I knew that the seven years of sweat equity I had put into my business was still paying off, even 3 years after I had left. While the responses were varied, many had a similar theme: “We’re thrilled you’re back.” and “Please bring back some of the things that made Fresh Diet special.” Customers—who are not owners in my business—love our product so much they took the time to email me their suggestions. They act as partners.
Today, more than four years after I sat in the Rose Garden and watched President Obama sign the JOBS Act into law, Title III allows small companies to make their customers into partners in an even more meaningful way.
Zalmi Duchman is an angel investor, entrepreneur and the Founder and CEO of The Fresh Diet. Zalmi launched his startup on January 1, 2006 with three clients. Through thoughtful development and deployment of technology, the use of social media and his own marketing skills, Zalmi Duchman and The Fresh Diet would come to define that industry by understanding how to scale the business while maintaining the personalized customer service and attention to detail that it required.