Customer Direct Funding FAQ
The following are the most asked questions about raising money from customers.
This information will help you determine if you are a potential candidate for customer direct funding.
- What is Customer Direct Funding?
- Customer Direct Funding is a method for using your customers as a source of funding. This gives your company an enthusiastic pool of potential investors, and it gives your customers an opportunity to participate in your success.
- It is based on the investment principal that people prefer to invest in companies whose products or services they know and trust.
- This built in credibility is unrecognized and unappreciated by most companies as a source of funding.
- Customer Funding allows you to take control of your own fundraising destiny -- you are no longer dependent on the whims of banks, angels, or VCs.
- Thousands of companies like yours have used customer direct funding to successfully grow their businesses.
Click to go to our home page to download case histories.
Affinity and Cause-Based Investors
- There are 2 special categories of customers that are even more receptive to investing. These are affinity and cause based investors.
- An affinity investor is someone who is not just “satisfied” with a company’s products or services, but is “enthusiastic and passionate.”
- A cause-based investor is inspired by a company’s statement in the world, a statement that lives through their products, services, or mission. The higher good is not neglected for the bottom line.
- Both of these types of customers are highly receptive investors, with first funds often received within 60 days ....................... More...
- If this is so good, why haven’t I heard
about this before?
There are three reasons Customer Direct Funding
is not well known:
- The SEC laws previously did not allow it—and now
that they do, many attorneys are still not familiar with
these new exemptions. Changes in the laws now provide
a powerful new method for raising capital ......................More...
- The advent of Direct Public Offerings
Companies are now able to advertise, solicit, and sell investments in their company directly to their customers. This allows companies to bypass all third party intermediaries and take control of their fundraising destiny.
- The approval of the Internet by the SEC for marketing an offering to the public, and as a vehicle for virtual road shows, has leveled the playing field for thousands of companies. The Internet minimizes the cost of advertising, communication, and investor follow-ups.
- The world of fundraising is primarily split between banks,
venture capitalist, angels, investment bankers and broker/
dealers, with Lawyers and CPA’s sharing in the spoils.
Customer Direct Funding serves none of these groups ...More...
- This type of funding is more “do it yourself.”
- The SEC and States passed these exemptions to allow companies to have access to quicker, cheaper money and bypass layers upon layers of entrepreneurial pain &mdash as such, these exemptions are generally considered the step-child to be kept hidden.
- When funds are flowing from other sources (e.g. angel
investors, banks, venture capitalists, etc.), this method of financing is typically forgotten .......................................More...
Customer Direct Funding does require some commitment of time,
and I have never heard anyone say they liked fundraising.
However, the alternatives to not fundraising can be severe:
- Lack of capital is considered the primary reason companies fail, as well as keeping them pinned down in micro-business purgatory
- Capital allows you to take your company to the next level instead of being drained both personally and professionally in the constant fight for survival
- Without capital you end up being overwhelmed with the amount that has to get done because you don’t have the money to hire the people to get the work done.
- Raising capital from your customers:
- doesn’t require principal or interest payback
- allows for the option of royalty financing, which only gives up a small portion of future revenues for a predetermined period of time of your choosing
- brings in first funds in as little as 60 days
Money is a major and substantial benefit
for you and your company.
- How much can I raise? — And,
how do I do it?
The ideal size for raises with Customer Direct Funding is between $250K and $3M.
There are two types of funding methods,
Private Placements and Direct Public Offerings:
Details of Private Placement Offerings
There are 3 types of Private Placement exemptions that allow companies to raise anywhere from $1M up to an unlimited amount in a 12 month period of time.
The most common exemption is known as a 504. A 504 allows a company to raise $1M within 12 months and requires only a filing with the SEC. There are no reviews by the SEC or state.
In a 504, a company can sell stock to accredited investors and up to 35 unsophisticated investors (or unaccredited investors).
For a 504, no audited financials are required, allowing companies to move quickly with minimal legal and accounting expense.
The company can sell stock in multiple states.
Private Placements are often used to secure an initial round of funding in preparation for a Direct Public Offering
Direct Public Offerings:
- A Direct Public Offering (DPO) on the other hand has two significant advantages over a Private Placement ......More (Part 1)
- More (Part 2)
Direct Public Offering:
- A direct public offering allows companies to advertise directly to the general public
— (think customers).
- Unlike a Private Placement, which limits you to a total of 35 unaccredited investors you can sell to, with a DPO there is no limit on the number of unaccredited investors you can have in your deal.
There are two primary types of DPO’s:
One is called a SCOR offering (Small Corporate Offering Registration) allowing companies to raise up to $1 million within a 12 month period of time in a particular state.
The other primary type of DPO is called a Regulation A Offering (also known as a Reg A Offering), which allows companies to raise up to $5 million within a 12 month period of time and in multiple states.
Please go on to part 2
after closing this box
- The SEC recently approved the Internet as both a communication and marketing vehicle for companies raising money.
- Communication: This allows companies raising money the ability to give virtual road shows for potential investors around the country.
- (In the past, these road shows were generally live events and restricted to accredited invertors only—and sold only through investment bankers)
- Advertising to find Investors: Once the states and SEC agreed to allow companies to advertise their offerings to investors, it was just a matter of time for the SEC to accept the Internet as an advertising medium. Now companies can use the web as a powerful and low cost way to reach out to their customers or affinity groups, both locally and nationally.
- Companies can use Internet marketing methods for pennies on the dollar compared to traditional forms of advertising (e.g., direct mail), dramatically reducing advertising costs.
The valuation of companies that receive public funding is generally far higher with less dilution than that of private funding.
Public funding also comes with no strings attached, including no investor interference by one or two large investors in important company decisions.
If you want to take your company public, completing a DPO first puts your company on a fast track approach, and when ready, you can complete going public at a fraction of the cost.
Using a DPO with the explicit intent of taking the company public (although this can not be promised) boosts its attractiveness to investors, making it easier to sell the offering.
- The investor receives stock in a company that when public can be listed on an exchange, giving investors the ability to sell part or all of their stock as needed — providing liquidity and a flexible exit strategy.
- Upon going public, the company founders/CEO also have the option to be able to cash out of a portion, or all, of their stock when needed.
- What is the success rate?
There are four factors needed for success:
- You have a sufficient number of customers
and a way to reach them ............................ More...
There are many factors that go into determining the number of customers you will need to successfully raise money:
The size of the capital required is important and most successful Customer Direct Funding efforts fall between $250K to $3M.
In addition, the types of customers you have and the nature of your relationship with them plays a key role. The more of the following features you have, the fewer customers you’ll need:
- How connected are your customers to you?
- Are your customers local and do you see them in person?
- How often are you in contact with them?
- How recently was your last contact?
- How affluent are they?
- What’s the level of intangible pull your product or service has with your customers? (Affinity)
- Does your company or service have a cause or mission component? (Cause-based)
Depending on the extent you meet the criteria above, the number of customers you’ll need will range in the hundreds on the low side, to the thousands on average, or tens of thousands for highly impersonal connections.
- Your company’s current financial condition
is neutral to positive ......................................More...
Hot story – riding positive trend
Sexy products & services or new products in development, and aggressive expansion through expanding proven marketing efforts.
Profitable or highly profitable,
and trending up
Looking to accelerate what’s working and scale up in a big way with additional capital.
Clear, simple to understand, like the founder/CEO.
Break even to moderately profitable
Good possibility funds will grow the company. May not hit projections but can still be a good investment.
Solid company, solid story,
but not much sex appeal
Does not inspire passion for, or agains.
Sense that cash will stabilize and improve the company
- help it turn the corner.
No strong trends, either positive or negative
||Potential for good to great success.
||Concern the company won’t perform
as expected,or will go out of business.
Story bland and boring - pitch has not captured the DNA of the opportunity
Want money for things other than growth; pay off debtor, buy out a partner. etc.
and trending downward for years – no vitality showing
No strong plan for growth. Feeling is that this company is going nowhere.
Heavy losses over years
and getting worse
Desperate for money.
Desperate cash flow condition
Survival at stake.
- The founder / CEO has a vision for the company’s
future that is credible and inspiring:
- Confidence in a company’s future is an important ingredient in a customer’s transition from passive purchaser of the company’s products to active investor.
- The packaging, marketing and selling of your offering
is exciting to your customers:
- Your company has the know how and does much of the packaging marketing and selling of the offering and you use a company like ours to take you over the line. Or you have a company like ours take a more active role.
The first three factors fall on a spectrum from a big yes to a big no, with shades in-between.
Assuming you fall somewhere on the yes spectrum of each, and have the sales and marketing support your odds of success are virtually guaranteed.