Tag Archives: investment

Capital Investment– Fuel for Innovation, Engine for Growth, Fixes the Economy: More Investment Means More Prosperity…

Capital investment that companies make today in new product lines, new equipment and other assets… will determine the valuation of the companies in the future… This leads to a very fundamental objective within capital investment management, i.e., maximize value of the company through astute capital investment, which fuels innovation that propels the growth engine, which is good for the economy…

According to Standard & Poor’s (S&P); despite a modest recovery in capital investment following the financial crisis– capital investment slowed again in 2012 and is expected to contract by 2% in real terms in 2013. Initial forecasts for 2014 are for capital investment to continue to slip, falling by 5% year-on-year. A modest post-crisis recovery appears to be stalling before it has really begun. This downward trend is especially prevalent in Western Europe, which has seen its share of global capital investment fall to just 24% in 2012, and its forecasted to remain steady in 2013 before inching up to 25.4% in 2014…

According to S&P; the emerging markets also look fragile, especially Latin America where the region is expected to experience the weakest growth in business investment of all regions in 2013, in part because of its heavy reliance on the energy, materials and utility sectors… North America, however, is one region S&P expects to increase its share of global corporate capital investment from a low of 24%e in 2009, to 35.6% in 2013 and 36% in 2014… Many economists consider capital investment a vital part of the economy, which generally means that the overall mood of business has a considerable impact on the pace of capital investment and thus impacts the trend of economic growth…

The prime objective of making capital investment in any business is to obtain satisfactory return on capital invested. Hence, the return on capital employed is used as the measure of success of a business in realizing this objective. Return on capital employed establishes the relationship between profit and capital employed. It indicates the percentage of return on capital employed in businesses and shows the overall profitability and efficiency of business… in addition, it becomes a key indicator for the health of the economy: When businesses are profitable, growing, innovating, investing… that’s a vital sign for the economy…

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In the article Capital Management: A High-Wire Balancing Act by ATKearney writes: A tightrope walker daringly takes on a task that is magnified by the possibility of a great fall. A small misstep can have disastrous consequences. However, the performer has a secret: Focus on a few basic principles and follow them perfectly to reduce the chances of making a mistake. Managing multibillion-dollar capital investment is also a balancing act where it’s easy to lose sight of the basics.

People often get distracted by the intricacies of the allocation process, the internal politics, or the complexity of the business case. This last distraction is almost always dealt with by quantifying every aspect of the business case, which may give the impression of managing all the details but in reality often results in at least three symptoms of poor capital management:

  • Failure to prioritize: When capital investments are not linked to corporate strategy and financial targets, it’s almost impossible to capture the required level of returns across the portfolio.
  • Loss of accountability: When accountability are not clearly defined, followed, or enforced, and reviews are not conducted (either while in progress or post-implementation), no one owns the outcome.
  • Poor visibility: Without a corporate-wide reporting structure there is limited visibility into spending and even less control of the investment portfolio. As cost overruns mount and projects slow-down, the economics of the original investment case are      often lost.

In the article Managing Capital by ey writes: Capital is the lifeblood of every fast-growth business. As you continue your journey to market leadership, a strong grasp of what we call the capital agenda should inform all of your important business decisions: Should you restructure your business? Is now the time to sell some of its assets? How can you seize the premium acquisition opportunities? The capital agenda model helps to address these type questions and is based on four key dimensions: Preserving, Optimizing, Raising, Investing:

  • Preserving capital: Fast-growth companies needs to preserve capital. So continuously evaluate your balance sheet, strategy and markets. Look for strengths and weaknesses. Seek opportunities, but identify risks and guard against value erosion. Your ability to access liquidity, manage and release cash, control costs and engage with key stakeholders is essential to preserving capital.
  • Optimizing capital: Capital is precious. Fast-growth companies need a tight grip on the drivers of efficient capital allocation. Greater operational efficiency can release excess cash and working capital. More companies are taking an active approach to business asset management. Such rigor can uncover poor capital deployment, leading to better capital preservation and allocation.
  • Raising capital: Fast-growth companies need to keep their capital needs under constant review. Even if your balance sheet appears strong, external shocks can delay your journey to market leadership. Review your business through the lens of the investment and lending communities. Whether you are refinancing debt or planning for an IPO, you can reduce your cost of capital if you understand the ratios and covenants they favor.
  • Investing capital: Use your capital wisely. Potential backers expect fast-growth companies to make investment decisions supported by in-depth and varied scenario      analyses. Show them you have considered the alternative uses of capital. Communicate a compelling value proposition and focus due diligence on the drivers that matter most.

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In the article Investment Is Understated by Edward Conard writes: An increase in investment by one economy relative to another will likely affect their relative rates of discovery (innovation) and implementation. Successful risky investments in innovation will grow the economy faster than less risky investments and that enlarges the existing business capacities. Also, successfully commercializing good ideas is as important as discovering them and, generally, that requires similarly risky investments…

Innovation expands the economy and benefits consumers by providing better value… As risk takers grow increasingly optimistic; asset values rise. This makes investors and consumers grow increasingly willing to take risks. As risk taking grows, the economy expands, increasing the amount of investment and the value of assets relative to the economy…

A fast-growing company with higher profit margins that is pouring more money into investment than its competitors looks much more attractive to investors, and thus garners a higher valuation. Business investment is good for innovation; innovation is good for business investment…

U.S. companies will make capital investment totaling roughly $2 trillion in 2013, according to research by McKinsey. These capital investments are critically important to future of their companies and the economy; over 50% of corporate growth is directly attributable to capital investment. The companies that manage their capital investment well, significantly outperform their rivals…

Booz Allen found that companies that employ best practices in capital investment management earn 25% higher profits than their peers. With respect to capital investment, today’s top performers are focused on the three key dimensions: Accountability, Visibility, Efficiency. Accountability has many dimensions... Yes, the numbers do have to be right. Having a clean electronic audit trail of all approval decisions and demonstrating that proper controls are in place to ensure compliance with corporate policies is critical…

According to David Straden; real measure of performance in capital investment is ROI. It sounds obvious, yet most companies fail to track and report on actual ROI… If you don’t know how you did on the most important capital investment metric, than what are the chances of driving sustained improvement over time? The simple act of announcing that actual ROI will be tracked will often lead project management to be more realistic with their estimation of potential benefits… Formalizing the capital investment process and imposing rigorous methodology over project evaluation is a step in the right direction…

A second key capital investment management dimension is visibility: The only constant in today’s world is change. In a world where everything is moving faster and faster, the best companies use speed as a competitive advantage. Given the long lead times required for larger investment, it’s arguably even more critical to be flexible and responsive managing capital investment. New opportunities continually present themselves, whether from merger and acquisition activity, new product developments or competitor difficulties…

New threats also unfortunately abound, whether it’s diminished liquidity, fluctuating exchange rates, market forces, competition, political upheaval… To move both quickly and intelligently decision makers must have real-time access to the necessary information… The best companies are proactive in establishing process to give themselves informational context and be prepared to adapt quickly to changing circumstances…

An efficient capital investment approval process is the basic building block: The best companies focus on capital investment efficiency. Doing more with less is a key imperative and being lean means putting capital investment to the highest and best use… It’s not about being smarter it’s about having a better process; one that enhances productivity and leads to greater effectiveness…

Start tracking actual ROI on capital investments, year over year.; that’s the ultimate key performance indicator (KPI) to assess progress in improving performance.. Improving efficiency is the ultimate weapon in a challenging world. Having less doesn’t have to mean achieving less. If you institutionalize accountability, increase visibility and enhance productivity, you can do more with less: More growth, higher profits, and better economy are worthy objectives…

Manage Business Strategy Like an Investment, Not Like ATM: Build Value, Create Wealth, Grow Assets, Make Investments…

Manage your business like a prudent investment and it will pay large dividends, or treat your business like an open ATM (automatic teller machine) and it can cost you– big time, like a faulty cash dispenser. Believe in your business enough to invest in it: Invest money, invest time, and invest resources… a real business must be based on a prudent investment plan with an expected return for the investment.

Business success does not just magically happen; you must have skin in the game, and you must be fully committed to making the business work– make it a real business by applying the mind-set of an investor.

According to Chia-Li Chien; managing a business must be viewed as more than a means for just improving your lifestyle; it must be viewed as an assemblage of investment assets that are used for generating wealth and serving the community… When the business is viewed from an  investor’s perspective, then you will actually expect and demand an annual investment return, as well as, growth and appreciation in the value of the business, over time. Let me elaborate, for example; managing a business can be viewed as a job (e.g., pay the mortgage…) or for improving lifestyle (e.g., vacation in Fuji…) or for the creation of wealth (e.g., establish an endowment fund…).

According to Jason Fisher and Eric Goldstein; if you’re looking to build a multi-million dollar business, then you must start treating the business like an investment– and start, right Now! And, if you don’t do it, right Now! Then it won’t ever happen… Treat your business like an investment, and it will pay you a generous return for your investment, as well as, growth in equity value and wealth… Prudent investments– financial instruments– are structured and managed for financial growth and income, and similarly, for a business to be successful– productive and effective– it must be structure and managed for growth and income, and a generous return for your investment…

But, most important,  business investments must be transparent– you must know what’s working and what’s not working, and the only way you can do that is by tracking results. And, tracking results is like looking in the mirror; where results are reflection of the investments and if afraid or unwilling to make prudent investments, then you must rethink the objectives and goals for the business…

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In the article How to Run Your Business Like an Investment by Michael Batton Kaput writes: The investors with the most staying power treat their stock portfolios with reverence. They know their investing philosophy that prizes long-term growth over short-term profits, and partners with others to get the most out of their money.

Business management could learn a lot from successful stock market players. Treating a business like an investment, rather than like a money-making tool that’s discarded after it has outlived its usefulness… managing a business like an investment can generate long-term returns and financial security for all the stakeholders. Consider these steps:

  • Step 1: Put yourself on the line. Any investment you make has material consequences for you and your net worth. With your own money on the line, you tend to take investing seriously. The same goes for a business. A substantial portion of your own assets and net worth should be tied to your business.  That gives you a stake in succeeding, as opposed to cashing in quickly and hanging your employees out to dry.
  • Step 2: Create a strategy for tough times. Too many businesses are blindsided when bad economic times or tough markets rear their heads. Financial investors, however, try to plan for the worst by hedging their risk and having plans in place to deal with difficult economic conditions. Businesses should do the same. While material success is the goal, it doesn’t always come easy. Draft strategies that the business will use to survive, and even capitalize, on tough times.
  • Step 3: Establish and maintain trust with your employees. Treating a business as an investment means treating your employees like one, too. Retaining workers and keeping them happy leads to better productivity and results. Avoid micromanagement where possible. Give employees the training and the tools to make decisions for themselves. Autonomy in the workplace generates trust between management and employees, while fostering a culture of hard work and innovation.
  • Step 4: Formulate and emphasize your business culture. When management takes the time to examine the company’s core values and priorities, then corporate culture stops being a set of buzzwords. A strong corporate culture, and adherence to it at every level of the company, is an investment in your company and the people who work for it. Just like investors know what their investing philosophy is, so should management know what their business philosophy is.
  • Step 5: Treat your business as a partnership, not a set of top-down directives. While investors may tell their stock brokers which shares to buy and sell, the smart ones solicit feedback from their brokers and take their advice under consideration. It should be the same with management and their employees. When everyone feels like they have a stake in the company and its success, this enhances the idea of a business as an investment, rather than a way to simply make money and move on to another venture.

In the article Treating your Company like an Investment by Craig Castelli writes: What is the difference between an investment and a career? The two words are rarely compared, but perhaps we should pay closer attention to their meaning. The best way to compare the two is this: you retire from a career, but you exit an investment. This distinction sums up the difference in approaches– retirement is a highly personal and emotional decision, whereas exiting an investment is a highly rational and non-emotional, business decision.

Unfortunately for many businesses, when it comes to exit strategy it’s tough to separate the emotional from the rational. Therefore, an exit is typically linked to retirement rather than the real factors that drive exit timing. I draw the distinction between investments and careers because I know far too many business owners treat their companies like careers…

The focus is short-term with primary concern being to make as much money this year as they did last year, in order to fund their lifestyle. Rarely, if ever, do business owners contemplate the bigger picture, including an exit strategy. Creating a strong exit strategy requires a shift in mindset; it requires thinking of the business as investment, rather than as a career. To this end, your business is no different from a stock or a piece of real estate, but unlike stocks or real estate, however, you have a lot of control over many aspects of the business…

Business owners that treat their business like an investment rather than careers embrace this mindset. Begin thinking about your exit… View your business as an investment, so that you can understand its actual fair market value… Take an investor’s perspective and view your business through their eyes…

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In the article How Do You Treat Business: Investment or Gamble? by Frederick Lam writes: There are two mind-sets for how you treat your business: Investor or Gambler. Think about it: Gamblers are taking chances– taking a lucky shot. They think that if you throw enough money at it, then it will grow-prosper. These are people who invest in technology stocks and pray that it will become an overnight success or they buy lottery tickets religiously…

The gambler mind-set is of hope, not of investment. In a sense, a gambler is living on prayer-hope, and banking on the idea that they will hit it big and get a 100x return… The problem is that it’s not business: Gambling is game of chance-high risk. For every one person that hits the jackpot, there are countless people who do not: In contrast, having a mind-set that treats the business like a true investment is the real key to business success…

When you invest instead of gamble you take ownership, which means that you have a different mind-set. You no longer live on chance but you have a plan, manage risk, make things happen… You don’t chase fantasies, but rather you invest in success. A gambler looks for an easy way out; whereas, an investor does their homework, researches… and finds a way to create a unique or untapped niche to leverage…

When you treat your business like an investment; you are not searching for get rich quick schemes– business success is a process, and not a one-time event. So, manage your business like an investment; change your mind-set, change your attitude, change your actions, and change the business results…

You can significantly increase your net wealth by simply changing the way you look at your business… According to Tim McDaniel; typical business owners have more than 60% of their net worth tied up in their business. That’s a huge piece of their nest egg. Yet, most business owners don’t treat their business as an investment, i.e., as something they need to watch, nurture and care for just as they do their 401(k), and other investments. Your business is every bit of an investment as stocks, bonds, mutual funds…

Treating your business like an investment is the key to increasing value and building wealth. There are five steps you can follow that will help you develop an investment mind-set, they are: Know the value of your business. Develop an investment mindset toward your business. Set a growth goal for your business investment. Protect your business from value detractors. Determine your exit strategy...

According to Gregg Hamilton-Piercy; while you are working hard to make the business profitable and to develop new strategies that will help it thrive; how often do you step back and view the business the way an outside investor might? Consider the fact that most of us have investments in stocks, bonds, mutual funds... Why then wouldn’t you consider taking a similar approach when it comes to managing what is potentially the most important piece of your illiquid personal wealth– your business?

The core idea is that, on top of running your business, it’s always a good idea to keep an eye toward ultimately moving it to market-ready status. Whether or not you are actively looking for a buyer, it’s certainly prudent to take steps that will prepare your business for situations where investors come to your door, so to speak…

According to Alex Tabatabai; it’s wise to treat the business like an investment fund; i.e., think of the business as an investment fund that’s 100% invested in the business… also, view the role of management as a capital allocators, on behalf of shareholders, and in effect a fund manager of the business…

According to Rosie Bank; the first rule of being in business is to take the business very seriously and view it as an investment… The second rule is to get in the game, stay in the game… create and execute a game plan that positions the business as a successful investment opportunity…

Growing Irrelevance of Dow Jones Industrial Average–DJIA: Antiquated, Arbitrary, Poor Measure of Overall Economy, Business…

Dow Jones Industrial Average -DJIA- is perhaps the most widely followed stock market index in the world. Yet, very few people actually know what the number represents.

Dow Jones Industrial Average -DJIA or Dow- is the world’s most famous stock market index; but according to ‘mymoneyblog’, it’s an antiquated, somewhat-arbitrary, poorly constructed, incomplete indicator that does a sub-par job of tracking actual performance of the stock market, or anything else for that matter: Every time the financial media quotes the Dow Jones Industrial Index (DJIA), down to the last decimal points, like it’s some hyper-accurate holy number, it’s very annoying. 

The DJIA was first developed by Charles H. Dow in 1896 with the selection of 12 stocks. In 1916, it grew to 20. In 1928, it increased again to 30. It’s still just 30 stocks over 80 years later. Not only that, but it’s not even clearly defined as the largest 30 companies. It’s simply 30 companies chosen by a committee to best represent the market (i.e., in their opinion) out of the ~5,800 publicly traded companies.

The DJIA is price-weighted, but it– does not weigh its 30 component companies based on their market capitalization (i.e., total market values) like other indexes (e.g., S&P 500, NASDAQ, etc.), but rather, it’s based on the ‘share price’ of the component companies. This flawed calculation creates an extreme variant weighing for similar companies, e.g. compare the weighing of DJIA components– IBM vs. GE, where IBM ($107 billion revenues, in 2011) has a huge 12% weighing, on the index, while GE has barely a 1% weighing, despite having near $150 billion in sales.

The ‘Industrial’ portion of DJIA is largely historical, as most of the modern 30 components have little or nothing to do with traditional heavy industry. The value of the DJIA is not– actual average of the prices of its components, but rather it’s– sum of the component stock prices– divided by a ‘divisor’, which changes whenever one of the component stocks has a stock split or stock dividend; this is done to generate a consistent value for the index.

Although Charles Dow compiled the index to gauge performance of the industrial sector within the U.S. economy; today, the DJIA is influenced by not only corporation and economic reports, but also by domestic and foreign political events, such as; war, terrorism, natural disasters… any event that could potentially lead to economic harm…

In the article Never Say Dow by Kenneth L. Fisher writes: Dow Jones Industrial Average (DJIA) is completely useless, misleading index of market performance, and ineffectual for analyzing history or making forecasts. There are two reasons: First, an index of 30 stocks is necessarily a narrow and arbitrary gauge of market activity. Second, it has a structural deficiency– it’s price-weighted. That is, you add up the prices of the 30 stocks, than divide by an adjusting factor to get the index value.

When Charles Dow first calculated his index, he divided by the number of stocks he was tracking to get an average stock price. Over the years he and his successors had to adjust the divisor to preserve continuity in the index as component stock’s price split and some stocks were replaced. What’s wrong with a price-weighted index? In the weighting of the components it ignores the variations in the market values of the different component companies.

Instead, it gives most weight to companies whose share prices happen to be high. For example, a company with a share price of $100 would have twice the weight of a company with a share price of $50. With price weighting there is the absurd result that the performance of the DJIA hinges on what stocks split and when; for example, if IBM splits 2-for-1, its weighting in the DJIA is cut in half.

This is absurd, because stock splits are purely cosmetic; they have no bearing on any investor’s net worth or dividends. DJIA is completely ineffectual for analyzing market history. Mathematically, yearly outcomes are purely random depending on which stocks split and when… similarly for making forecasts…

In the article Shake Up Dow! by Andrew Bary writes: The Dow Jones Industrial Average (DJIA) is overdue for makeover. The world’s most famous stock index hasn’t adjusted component companies since 2009, during which time Apple has emerged as one of the world’s most valuable company… and Google; both companies are conspicuously absence from DJIA.

These companies represent major shifts in the global business landscape, yet admitting Apple or Google — or any other high-priced stock — would be difficult, given how DJIA is calculated. Since DJIA weights its component companies based on absolute stock share price: Apple’s price of around $600, would overwhelm the index with a 26% weighting, which is double the influence of current DJIA component…

Given its daily swings, Apple alone could move the DJIA regularly by 100 points… One solution would be to adjust DJIA calculations; capping weighting of stock at fixed percentage… However, changing the DJIA’s format won’t be easy, which may be why an Apple-friendly alteration hasn’t happened, yet. The reality, however, is that the DJIA amounts to a $20- or $25-stock average now, because the lowest-priced stocks matter little. Some agree with John Prestbo; not worth tampering with DJIA just to include; Apple, Google…

According to Jeff Rubin, DJIA is still a relevant and important indicator that tracks the market closely… It’s what individual investor focus on. However, Rubin questions whether lowest priced stocks need to be in the index at all, because they have so little impact. He points out that the correlation of DJIA with the S&P 500 is more than 90%. This means these two indexes tend to move together, although not in lockstep. Even with the quirks and archaic calculation method, the DJIA remains the most widely followed market index…

In the article Why Do We Still Care About the Dow? by Adam Davidson writes:  The DJIA remains not only a rough measure of stock market performance, but also the most frequently checked and cited, proxy of U.S. economic health. In the postwar boom of the 1950s, the economy was growing so fast, and the benefits were so widely shared, that following 30 large U.S. companies was a solid measure of most everyone’s personal economy.

Back then, the U.S. was largely self-sufficient country, so Asian or European economic troubles didn’t matter much. There was less national inequality, and everyone’s income tended to move in the same direction. By late 1990s, however, the DJIA stopped being an indicator of how the U.S. economy was doing; instead, it became a driving force. During the frothing of tech bubble, the hottest companies weren’t making money by selling profitable products and services, in the real world– they were selling fantasies to stock investors.

The DJIA, drawn out to two decimal places, may seem like the perfect scientific number, but it’s far from it. A small committee selects 30 big companies and then adds up the price of their stocks. Then, analysts divide by the Dow divisor, a mis-leadingly precise-seeming number formulated to account for things like; dividends and splits. These are the least of the Dow’s problems: More troubling is that it ignores the overall size of companies, and only pays attention to share prices.

Yet the DJIA’s biggest flaw, perhaps, is that it doesn’t help us to make sense of an increasingly interconnected global economy– one in which companies, such as; GE, IBM, Intel… all make more than half their profits in other countries. But still, some argue that the stock market reflects the overall wisdom of the world’s investors. That may be true when looked at over months or years, but it’s never very clear what wisdom is telling us at any given moment: Panic in Europe might have investors terrified about the next few months, sending stock prices down, but that downward move could be obscuring the fact that those same investors feel chipper about the economy 2 or 10 years down the road.

Alternately, investors might feel very bad about the long-term future of U.S. economy, but are excited because, for example; that afternoon the Fed announced a low-interest-rate policy. None of these criticisms is news to finance professionals, most of who use far more precise measures– like the S&P 500 or the Wilshire 5,000, which cover more companies more precisely– when making investing decisions. In fact, that might not even surprise Charles Dow, who created the DJIA. It’s interesting, Charles Dow, himself, infrequently observed his own index, says John Prestbo.

Also, Prestbo caution the average investors against drawing broad conclusions about the overall health of the economy from any narrowly focused stock average. This is particularly true, now; for the first time in a while, the economy is truly worth worrying about. It’s even more true when a twitchy financial system is being monitored by a twitchy index that’s perfectly suited to 24-hour news cycle.

The DJIA is simply an obsolete mathematical calculation-created and relatively unchanged since 1898-tracking only 30 companies selected by Dow Jones’ management. According to Yaron Ron Reuven, Dow Jones management claims that modifying DJIA calculation methodology poses the risk of destroying one of its distinctive qualities.

Further, they claim that despite the limited number of stocks in the DJIA, it has had more than a 90% correlation to the widely diversified S&P 500. According to ‘Weakonomist’, DJIA remains important for two reasons. The first is because it’s old and most people are traditional idiots and love old things, despite its relevance. The other reason is because the 30 stocks represent U.S. brands. If these companies fail, we’re all screwed we think– not so fast ‘pessimistic Patty’.

The backbone of this country is ‘small’ business; these are—‘mom and pop’ shops, local gas station, local company that employs 1,000 people or less. That’s what actually runs the U.S. and, as such, the U.S. economic health cannot be measured by one metric. If you want to measure the status of big companies, use the S&P 500, which includes the DJIA and all of their competitors.

If you want to measure the health of the stock market, follow the Wilshire 5000, which includes (you guessed it) 5000 stocks. Throw in your quarterly GDP date, price of oil, and the greenback vs. euro numbers and you can actually get a much better idea of the economy…

How’d the ‘market’ (DJIA) do today? You hear it on street corners, you see it in office restroom stalls; folks trading well-known information, fiction, fact, hype, hyperbole; they share their wisdom on the ways of the ‘market’…

Crowdfunding or Crowdfrauding: The Real Winners– Entrepenueurs, Startups, Small Business…, or Accountants, Lawyers, Consultants…

Crowdfunding is an emerging way of funding; startups, new ideas, projects… by borrowing funding from a crowd (many people), e.g., family, friends, fans, connections….

Crowdfunding is the collective practice of people using the Internet to network and pool their money for a variety of purposes, including funding an early-stage company. Another aspect of crowdfunding is tied into the ‘Jumpstart Our Business Startups’ (JOBS) Act which allows for a wider pool of smaller investors with fewer regulatory restrictions.

The Act was signed into law on April 5, 2012, and the Securities and Exchange Commission (SEC) has approximately 270 days from the enactment date to set forth specific rules and methods to ensure that funding actually take place. The JOBS Act adds a new equity crowdfunding exemption to the registration requirements of the Federal securities law. In other words, follow the rules and regulations that the SEC and other regulatory agencies hand down, then you will be able to use the Internet to raise money for your company.

Crowdfunding allows; startups, ideas, projects… which do not fit the conventional venture investment pattern to attract funding through the participation of a crowd– you need a crowd (many people) to participate, e.g., family, friends, fans... According to the ‘Daily Crowdsource’; crowdfunding has gone from $32 million market to $123 million market in the past two years. In 2011, crowdfunded businesses and projects raised $102 million on rewards-based platforms, including $85.4 million raised by projects that reached their total funding goal… this signifies 266% increase in the total amount donated and 263% increase in the amount donated to projects that received their full funding.

This explosion is attributed to the increase in the number of projects that are being posted online. More than 31,000 projects sought crowdfunded donations in 2011, up from just under 12,000 in 2010. The ‘Daily Crowdsource’ report says; not only are more projects being launched, but the number of projects achieving their full funding goal is also increasing, indicating the market is becoming more efficient at allocating resources…

In the article “Crowdfunding: What it Means for Investors” by Bill Clark writes: The crowdfunding feature of the JOBS Act will not only impact startups, it will also affect investors. That’s because the law allows almost anyone to invest in a startup, however, there is one catch: In the amended Senate bill, the SEC has 270 days to interpret and issue the rules for the public. That means potential investors may have to wait until 2013 before it’s legal to make an investment.  In about 90 days the ‘Access to Capital for Jobs Creators Act’ should go into effect, allowing companies to tell the public that they are raising capital.

In the past, this type of solicitation was illegal and could exempt the company from raising money privately. Now, startups will be able to solicit their deal, which could mean that more investors will hear about it.  The caveat is that only accredited investors can participate in those deals where the company is soliciting. In other words, this will only apply to investors who fall into the following categories.

  • Your net worth is more than $1 million, excluding your home.
  • You have $200,000 in new income for the last two years and reasonable expectation to make $200,000 in the current year.
  • You have $300,000 in household income for the last two years and reasonable expectation to make $300,000 in the current year.

If you don’t fall into these brackets, then you have several options: 1. Review campaigns on crowdfunding platforms, such as; Kickstarter, Indiegogo, Rockethub… Here, while you can’t make an actual investment in company, you will get something for your contribution. For example, if you invest in a video game you might get a copy of the game. 2. You can sign-up on a startup listing platform, e.g., Angellist, where you can check out startups for potential investment. Or, if you choose to wait until 2013, then as a new investor you will need to fill out a suitability questionnaire which will ensure that you understand the risks associated with investing…

A recent ‘Crowdfunding Industry’ report reveals incredible potential for equity-based crowdfunding, saying: ‘After collecting data from more than 170 crowdfunding platforms (CFPs) and other sources, the results revealed that CFPs raised almost $1.5 billion and successfully funded more than one million campaigns in 2011.

As of April 2012, there were 452 crowdfunding platforms active worldwide; and there will be more than 530 projects by the end of 2012′. The report also found that the crowdfunding market is growing at the rate 63% CAGR (compounded annual growth rate) for total amount funds raised. The report identifies four categories of crowdfunding platforms:

  • Equity-based (for financial return): Platforms grew 114% CAGR, primarily in Europe, and raised largest sums of funds per campaign; over 80% raised $25,000+.
  • Donation-based (motivated by philanthropic or sponsorship incentive): Platforms raised the most funds at $676M, but the slowest-growing at 43% CAGR.
  • Lending-based (P2P, P2B, and social): Platforms represent the second largest category raising $552M, and grew at 78% CAGR faster than donation-based.
  • Reward-based (for non-monetary rewards): Platforms  show very high growth at 524% CAGR, but from a low base of about $1.6M  in 2009.

Surprisingly, it’s the reward-based model that currently accounts for the most amount of money in the crowdfunding industry (79%) at the moment (probably due in large part to Kickstarter’s model for success). Lending-based is currently the category with the smallest share, but that may change with the new crowdfunding bill. One determining factor in the growth of equity-based crowdfunding will be the ability for CFP’s to successfully satisfy SEC rules and become registered, then equity-based crowdfunding offerings are expected to rise exponentially.

Another highlight of report concerned the rate at which fundraising takes place. The popular theory is; the first 25% of funds take longer to rise than the last 25%. However, according to ‘crowdsourcing.org’, it takes approximately 2.84 weeks to raise the first 25%, then 3.18 weeks to raise the last 25%, on average. The lending-based take less time than equity-based or donation-based campaigns. These figures could be important when considering crowdfunding strategies.

In the article Before You Crowdfund, Read This by Mark J. Mihanovic writes: The JOBS Act legislation is sweeping in nature, and it contains various provisions crafted to ease capital raising for privately held companies. The provision that has generated perhaps the most buzz is a new securities exemption that allows companies to raise up to $1,000,000 per year from large numbers of investors through funding portals.

This allows companies  using crowdfund equity financing to greatly expand potential sources of capital. However, crowdfunding comes with some potential pitfalls. So if you are an entrepreneur forming a startup, you will want to map out your near-term and long-term financing strategies before you decide whether to go the more traditional route of friends-family, VC financing, crowdfunding. Here are a few points to keep in mind:

  • The crowdfunding provisions of the JOBS Act legislation include various requirements and complexities that your early-stage company must adhere to, including (a) specified disclosure obligations, (b) rules regarding which funding portals and brokers you can use in crowdfunding financings and (c) per-investor caps on investment amounts, which could prove difficult to navigate. The SEC will announce its regulations within the next several months, and that could have a significant impact on the utility of the crowdfunding option.
  • It could cost you significant time and expense to do the administrative work associated with record-keeping and potential contractual arrangements with large numbers of stockholders. Further, a greater number of stockholders could translate into a greater number of disgruntled stockholders, further translating to more potential stockholder lawsuits. This in turn could lead to, among  other bad things, higher directors liability insurance costs.
  • It might be difficult to obtain venture capital once you have taken a round of crowdfunding, so it’s likely crowdfunding will become an alternative route, rather than a stepping-stone to venture capital financing. In short, if you are considering near-term crowdfunding, be aware that the transaction might foreclose venture capital investment down the road.

In the articleCrowdfunding Mistakes that Can Kill a Campaign by Scott Steinberg writes: The biggest misconception people have about crowdfunding sites is that once they post their project up, things will fall into their laps with little effort. That is not true folks. ‘All growth depends upon activity. There is no development physically or intellectually without effort, and effort means work’.

Here are some fun facts that will help you reach success; 75% of crowdfunding projects use well crafted video to help gain more support, 65% posting users shoot video themselves, and 80% users share post on their Facebook, Twitter, personal blog and other media outlets that will help raise awareness.

Projects with clever and enticing giveaways have 70% higher success rate, and if blogs or large publications pick’s up your post, the project will experience significant boost. There are many ways to success; it just depends on what steps you take, hard work, and a lot of  marketing…

Business startup activity is at its lowest point on record– a point worth paying attention to since, historically, startups have created an average 3 million jobs annually, while existing firms lose 1 million jobs each year. As a ‘Kauffman Foundation’ report puts it: Startups aren’t everything when it comes to job growth. They’re the only thing.

According to the ‘Silicon Valley Watcher’, the latest report on trends in U.S. venture investments shows a massive decline of 40% in seed investments in U.S. startups in the final quarter of 2011, and a much larger drop of 48% for the entire year.  According to Dane Stangler; the U.S. badly needs to encourage a ‘producer’ economy– in which more people create companies and entrepreneurial opportunities– instead of the current ‘consumption economy’.

Proponents of the crowdfunding say that it will increase startup activity, whereas, critics argue that it will create– or exacerbate– a kind of speculative attitude. Also, the concern that lowering the barriers for entrepreneurs… to raise money will also make it easier for fraud artists… to take advantage of individual investors.

For many companies (in particular, those unable to get venture capital whether due to size, business sector, or geography), crowdfunding will make a great deal of sense… although, it’s highly unlikely that crowdfunding will change the game plan for companies that would otherwise be able to secure venture capital financing.

Crowdfunding might just be the answer that will allow for a consistent flow of funds for startups… but, until SEC releases regulations it’s anyone’s guess on the potential impact. In the meantime, a prudent approach for startups, entrepreneurs… and investors, alike, is to sit back and wait until we get a bit more clarity.

The crowdfunding alternative is new, evolving and subject to the securities laws and related liability. As such, you will probably need advisors– accountants, lawyers… to help navigate the regulations, disclosures and ongoing compliance.