Our NextSeed team is often asked by potential securities issuers what they can do during an equity crowdfunding offering to maximize the likelihood of successfully achieving their capital raising target and, ideally, do so in the shortest period of time.
There is no universal approach that works for everyone, but with this question in mind, we thought it would be instructive to review two recent transactions in order to uncover some commonalities in these successful offerings.
It is worth pointing out that this is not an article about the economics of these investments in terms of EBITDA multiples, expected return on investment, growth rates or other such metrics. This is not because investment economics are not important – in fact, they are of paramount importance. Investment economics must offer investors a market-based expected return and a way to assess the viability and risk of the issuer. In most cases, the issuing company needs to have some demonstrable track record, growth trajectory, proven ability to execute on business plan, definable value proposition and path to liquidity or exit for the investor.
Our approach at NextSeed is that, over a fairly wide range of performance metrics for any type of company we work with, there is an appropriate form of security and pricing structure at which securities will be attractive to investors and clear the market. We have a team of former bulge bracket investment bankers and private equity professionals who review and diligence the structuring and pricing of every one of our unique securities offerings.
Therefore, with the assumption that securities are appropriately priced and structured for each issuer, this article aims to explore some of the qualitative aspects which we believe may lead to a successful securities distribution.
The two transactions we will be discussing are the $500,000 issuance of SAFE securities closed in late May 2020 for veteran-owned, US-made apparel company Authentically American and the $150,000 issuance of Convertible Note securities closed in late July 2020 for ChipMonk Baking, a producer and distributor of sugar-free diabetic and keto-friendly cookies and snacks. With regard to implied valuation, size, terms and legal form of securities offered, Authentically American and ChipMonk are not really similar companies, yet both of these issuers, using the SEC Regulation Crowdfunding exemption, reached their maximum investor subscription targets less than 30 days after launching publicly on NextSeed.
Although Authentically American and ChipMonk may not at first blush seem similar, they have several common characteristics which we believe contributed to their successful outcome.
Both companies are led by management teams that are passionate about the company mission and have very personal reasons for why the companies exist.
When Dean Wegner, a military veteran, and his wife Kelly Wegner founded Authentically American, they were determined to build a company that reflected their passions – celebrating patriotism, honoring our American heroes and creating jobs domestically. They have worked tirelessly to create an apparel company whose entire supply chain is located in the US, and they have committed to giving back to the community by donating 10% of profits to charitable organizations benefiting veterans and first-responders .
ChipMonk co-founder, Jose Hernandez, received an unexpected diagnosis of Type II diabetes and found that managing his condition through dietary changes came at the cost of giving up the foods he loved. With the realization that most sugar-free products on the market were bland and contained questionable ingredients, he set out to bake something healthy and tasty. With the help of co-founder David Downing, ChipMonk Baking was founded to create low-carb, sugar- and gluten-free baked goods for people who want a healthy alternative to traditional treats.
A clear sense of mission and passion is important for any organization, but it is also especially helpful in attracting investors. As part of marketing every transaction, NextSeed initiates a targeted outreach campaign through social media and other channels to engage potential investors, and specific aspects of the business and offering are highlighted to create genuine connections between the company and individuals reviewing the materials. Companies such as Authentically American and ChipMonk, who are creating solutions with a particular group of consumers in mind, bring a sense of mission and purpose to an economic value proposition for investors and are particularly well-suited to benefit from NextSeed’s marketing efforts.
Both companies had a pre-existing network of engaged customers, previous investors and supporters who they could activate as soon as the transaction launched.
While identifying new investors is very important to every transaction, it is just as important for the issuer to bring its own supporters, investor network, or track record of community validation to the table to participate in the process. Early interest in the transaction from friends and family, customers or investors often creates a signal to new investors that the business and entrepreneur are credible and that the investment is worth taking a closer look.
In fact, NextSeed generally tells potential issuers that at least 20% of the dollars in any transaction are expected to come from the issuer’s network. Recent investments from respected angel investors or institutions can also serve the same purpose of giving the transaction a form of third-party validation which is helpful in generating transaction interest.
In this context, the Authentically American and ChipMonk marketing campaigns both benefited greatly from a high level of hands-on engagement from the business owners themselves. While NextSeed does offer full-service marketing support, active participation and involvement from the issuer when it comes to marketing and investor outreach is a recipe for a successful campaign.
In the Authentically American transaction, CEO Dean Wegner adopted a high-touch approach to investor outreach (primarily to Accredited Investors), and his efforts generated significant early traction for the deal. In fact, in the first few days of the transaction, Authentically American received investment commitments for over $200,000 of the total $500,000 raised.
In ChipMonk’s case, just a couple of months prior to the launch of the NextSeed transaction, ChipMonk had closed on a $200,000 private round of Convertible Debt securities with substantially the same terms as the $150,000 that were offered in the NextSeed crowdfunding transaction. In addition to referencing the investor interest from the previous private round, ChipMonk had an active list of customers and other interested parties with whom they did business that they were able to solicit when the NextSeed transaction launched. Although the average individual investment from this customer network was relatively small, these existing customers and other supporters collectively gave the transaction important early momentum in the market. In addition to creating the early momentum, both issuers’ successful outreach and existing investor relationships helped them achieve a lower overall cost of capital. NextSeed offers a discounted fee on all investments that are sourced by the issuer.
Both companies demonstrated resilience to the COVID crisis and were able to define the company’s investment thesis favorably in spite of current events.
All investors today are trying to adjust to the “new normal” in a post-COVID environment. This does not mean that investors are not participating in transactions but rather there has been, and will continue to be, enhanced scrutiny on the ability of issuer management teams to adapt and remain relevant in the current environment. The ability for issuers to proactively and realistically address what the impact of the COVID crisis is on operational cash flow and demonstrate an ability to evolve the business model is currently a differentiator used by investors parsing the winners and losers in the capital-raising arena. The crowdfunding market is no exception. We believe that both Authentically American and ChipMonk were exceptionally adept at mitigating investor concerns around COVID, but in different ways.
ChipMonk was able to demonstrate that while it largely lost its brick and mortar distribution network, it more than made up for the loss by growing its website and Amazon sales, resulting in a 60% increase between March and May 2020. In addition, it adapted to the new environment by altering product mix away from packaged cookies in favor of pre-blended baking mix packs, responding to the new trend of customers under stay-at-home orders baking their own cookies.
Authentically American’s distribution had already had a significant web-based distribution strategy, so there was no need to redirect in response to COVID in the way that ChipMonk did. However, Authentically American’s focus on goods made in America resonated with many potential investors and other stakeholders concerned about the larger economic dislocation experienced by working-class, manufacturing wage earners as a result of the crisis.
Both companies’ management teams went the extra mile to engage potential customers, investors, and stakeholders.
Both Authentically American and ChipMonk are media-savvy. They recognize the importance of cultivating and nurturing relationships with mass-media channels and have done so in the ordinary course of their business as well as in support of their NextSeed transaction.
As previously discussed, both companies’ management teams were proactive in investor outreach during the campaign, and were also willing to host investor webinars in support of their transactions. Authentically American’s Dean Wegner took the opportunity to share his personal story and how it led him down the path to creating a 100% Made in USA apparel company. Taking the time to put his face and story in front of potential investors helped forge a genuine connection with investors that had not yet had the opportunity to meet Dean in person.
These webcasts are indicative of a broader willingness to engage with supporters and stakeholders through mass media and other channels. Authentically American has appeared on Fox & Friends and in Forbes Magazine and Yahoo! Finance, while ChipMonk was featured in the Houston Chronicle and numerous local stations and media outlets. Both companies’ management representatives regularly appear in videos or other internet-based content to connect with interested audiences. Efforts like this that go above and beyond are typically indicative of a successful campaign and, perhaps more importantly, a successful business. They are a direct reflection of the values and work ethic of the businesses’ leadership.
There are many ingredients which contribute to launching and closing a successful crowdfunding transaction. The business has to have a compelling value proposition for investors, and the price of the offering must be based on terms acceptable to the market. But in our experience, these are basic requirements required for a successful crowdfunding campaign.
As demonstrated by the Authentically American and ChipMonk experiences, a passionate and proactive approach to marketing and addressing market concerns up-front can make a meaningful difference to the deal’s outcome. This is a message we have always conveyed to the issuers we work with and, given the current environment, it has never been more true.
About the Author
Jovan Vojvodic is the Managing Director of the Investment Banking Team on NextSeed. He focuses on originating, evaluation and structuring financing transactions for NextSeed's clients through Regulation D and Crowdfunding securities offerings. Vojvodic, an experienced local Houston-based investor, has 20+ years of New York investment banking experience in power, energy, and renewables at Morgan Stanley and Merrill Lynch. He has advised on IPOs, M&A, follow-on offerings and private equity transactions totaling over $100B. Graduated with BS in Finance from Lehigh University; University of Chicago MBA with honors.