Colorado Springs-based Outwest Systems Inc. isn’t going to reach its crowdfunding goal of $100,000.
“We’ve been learning some stuff about how to make crowdfunding work,” said Paul Weissler, the company’s president. “It seems what you kind of have to do is bring a crowd to your crowdfunding. You can’t just show up and say ‘Hi everyone. Pardon us,’ and ask for money. You’ve got to lay your groundwork.”
In recent years, crowdfunding has become more popular as a way for businesses to try to raise capital.
Weissler and his vice president, Jim Cline, thought using the Kickstarter site could help them fund the company’s second product — the SharpShot EZ-Trainer, which is a laser dry-fire and airsoft marksmanship training target box that can be controlled with an app on a smartphone or tablet.
“It’s a refinement of our original system that we started the company with in 2009,” Weissler said. “This one is a lot simpler and easier to set up.”
Unfortunately, after raising only $4,200, it didn’t take the duo long to realize the key to a successful crowdfunding campaign was having a core group of followers.
“… If you do not have, essentially, the people waiting for you to start, you are going to fail,” Cline said. “You have to have the number of people you need to have to be successful waiting for the funding campaign to kick off.”
The business partners say a marketing plan should be developed and started about six months before launching the crowdfunding campaign.
“That’s the reason most campaigns fail: They don’t understand the campaign doesn’t start when the Kickstarter launches, it’s at least six months before that,” Cline said.
Jerry Rome, the state’s securities commissioner, said his office has also found it’s essential to build a group of potential investors for a successful crowdfunding effort.
“If you make an offering or have an idea that you want to be successful, you have to have more than just a concept — you need the crowd,” he said. “If you own a brewery and you want to expand your business and need to raise money, you sort of have a ready-made crowd for it because you have customers who come in on a regular basis, and crowdfunding may be a good way to attract customers into investing in your company.”
The Colorado Crowdfunding Act was adopted in 2015 to help enable smaller businesses to utilize the funding mechanism to raise money.
“There is this gap between getting funds from friends and family and then getting funding from professionals,” Rome said. “Crowdfunding was invented as a way to fill that gap.”
The idea of gathering a large group of investors to raise capital comes from websites such as Kickstarter.
“People have been able to raise and support what they do by using those websites,” Rome said. “But the key to websites like Kickstarter is that it’s a donation and you really don’t have any expectation of enjoying any profits in the further development of the company.”
The state allows companies to do what is called “equity crowdfunding.” Unlike Kickstarter, where pledgers typically only receive the product or a token of appreciation for their contribution, investors are getting shares in the company they support.
“What the crowdfunding act does is it provides an exemption from the securities registration provision of our act,” Rome said. “It enables you to claim an exemption and reduces the cost you normally have to incur in doing a securities offering.”
Companies can only raise up to $2 million using equity crowdfunding.
Investors also have limits unless they are already accredited, such as is required with Regulation D offerings, said Jillian Sarmo, a spokeswoman for Colorado Division of Securities.
“In order to protect people, the limit that any individual can invest — unless they are an accredited investor — is $5,000,” Sarmo said.
Those interested in equity crowdfunding can find intermediaries on the state’s Department of Regulatory Agencies website.
“You have an intermediary that may have 10 or 12 of these offerings on its website,” Rome said. “Now, if you have investors interested in crowdfunding, they can go on the intermediary’s website and see if there is anything there that looks attractive to them.”
So far, Rome says the state has been disappointed in the interest shown in equity crowdfunding.
“We’ve only had two offerings that we’ve approved,” he said. “That’s since August 2015 — almost three years now.”
A year ago, Rome’s office started examining why more companies weren’t utilizing the funding option.
“We had a forum with a panel of experts and out of that forum, we decided to revise our rules regarding crowdfunding to streamline the process and make it less expensive to raise money through it,” he said. “We’re trying to figure out ways that we can encourage it while at the same time protecting investors.”
Those new rules, which Rome said cut out a lot of the red tape, go into effect July 31.
“One of the problems is there is a number of options out there now for small companies to raise money and we’ve talked to some folks in the industry and some of those alternatives are more attractive to small companies right now,” he said. “We are trying to make crowdfunding more attractive to the small businesses and hope they can better use crowdfunding in their endeavors.”
While the crowdfunding campaign for OutWest Systems’ new marksmanship system wasn’t successful, the product is still scheduled to be available for purchase on the company’s website next week, Cline said, adding they still would consider trying the funding tool again in the future.
“Next time, the campaign would be for a more affordable product that appeals to a bigger audience than just gun enthusiasts like with the marksmanship system.
“We would have a 10- to 15-second video out there as a teaser and people would be like, ‘What is this?’” he said. “We would start getting those [marketing] pieces out well ahead of the crowdfunding campaign and build our crowd. We think we’ve learned a lot about how all this works.”
Meanwhile, Rome encourages any Colorado businesses interested in equity crowdfunding to contact his office at 303-894-7855 for more information.
“I think that we are in a situation where we would like to see it succeed and are trying to take steps to make it a successful part of capital raising for small companies in Colorado,” he said.