SEC Ruling Changes Startup Funding

 

With the recent announcement that it would now allow startups (and other investments) to publicly market their offering, the SEC has opened a whole new world of opportunity in startup funding.

One of the startups we work with is a great example. It formed when a group of passionate people got together and rallied around an idea. In this case the idea was an application of a new technology with serious potential. We spent significant time setting up shop and have worked hard to gain traction in the short time we've been working together.

Soon after we formed our business, we met with our attorney who gave us a lesson on how traditional, venture capital was raised. When he explained the SEC's 81 year old ruling that prohibits startups from advertising their offering, I was gobsmacked.

"You mean we can't market our intention to seek investment," I said, flabbergasted. "So, what can we do?" He told us no mass market advertising, no email blasts, no direct mail, and no social media. "Personal, face-to-face meetings only," he said. I sat there feeling like someone was asking us to go into a prize fight with both our hands tied behind our back.

Imagine if stocks needed to be sold that way, or real estate, or any other product or service. I couldn't believe such a law was on the books, much less understand the logic.

In April of 2012, President Obama signed the Jobs Act into law. It promised assistance for startups in two important ways. First, it removes the need for people to be qualified investors in order to invest in a startup, making it possible to crowdfund an entire company. Second it obliterates the restriction that keep startups from marketing their ventures. Both provisions were given to the Securities and Exchange Commission for implementation. They were ordered to write the guidelines for how these provisions would work and were given 270 days to get it done. We're still waiting on the crowdfunding guidelines, but last week the SEC made progress on the marketing piece, announcing a plan for startups to promote their investment offering. It goes live in less than 60 days.

This ruling does more than "helps" startups, it levels the field. Today most funding happens because of who you know, and if you don't know anyone, you're out of luck. The new provision allows startups to market their opportunity to anyone with the cash to invest. Startups can compete for the attention of seasoned investors like venture funds, but also bypass the system entirely - going straight to the money guys. For a startup that could save hundreds of meetings and thousands of hours of people's time.

In 2011, Google conducted a study of the investment industry and found that the vast majority of people research products before they make a purchase. They call it the Zero Moment of Truth. Over 70% of their respondents researched for 7-10 days before making a purchase and on average, they checked 6-10 sources. How valuable would it be for startups to provide information to a potential investor at the Zero Moment of Truth?

Inbound marketing clearly helps in B2B sales. Over 65% of B2B buyers conduct research on the web prior to purchase. Content marketing provides the double whammy effect of driving direct traffic while it also takes advantage of Google's search algorithm, which places an emphasis on original content. For a business, search is typically the number one source of web traffic. Being in one of the top 3 spots on Google can move the needle significantly. When done correctly, inbound marketing can drive 5x the traffic and 3x the leads. Plus, the leads are qualified. They understand what you offer and want to learn more. Sales time.

It has the potential to change the game for startups. It's no longer who you know, but how you share the message.

The SEC announcement could also be a leg up for many coming out of the B2B world. Automation is changing the game for many business oriented companies. With many commodity products, a large team of direct salespeople are no longer as effective as eCommerce. If the sale is consultative, there is still a need for boots on the ground, but tools like the aforementioned inbound marketing, CRM, and others are changing what it means to sell and how many bodies are required to do it effectively. This has led to an influx of B2B veterans entering the startup space. B2B pros who can now market and sell investment in their startup, just like they previously sold products and services to other businesses. The SEC ruling makes it possible.

At Crowd Hydrant we help businesses leverage the power of the crowd. We provide the key ingredients of inbound marketing - content and delivery. We also provide assistance with crowdfunding and crowdsourcing initiatives. They're new tools that will soon help startups compete more effectively for funding. To learn more, CONTACT US today.

 

Image courtesy of tungphoto / FreeDigitalPhotos.net