Startups Playing to Win

Ron Miller is a self-described “entrepreneur’s entrepreneur” who has visualized, founded, built, and sold five companies. Speaking in rapid-fire sentences, he gracefully guides the listener through the river of his ideas, and always with a passion for cause-based entrepreneurship. (Ron holds the trademark on the phrase “Doing well by doing good.”) He and Howard Marks founded StartEngine in 2014, originally as a startup accelerator. Since then, it has become one of the best-known sites online to raise money for startups using equity crowdfunding.

You Must Deliver a Message to Win

“My partner and I are both serial startup guys, and we raise capital in just about every form you could imagine—venture capital, private equity, angels, commercial banks, credit cards; I mean, we’ve done it all,” Miller said, “and when we saw this opportunity, we thought it was probably the greatest advancement for entrepreneurship in our generation. Because what makes America great is that we’re innovators, but the thing that holds innovators back is capital, and I think there needs to be a fair and reasonable way where people can bring their ideas to the marketplace.”

Bringing ideas to the marketplace and letting the marketplace judge them is a powerful engine behind crowdfunding generally, not just for StartEngine, and looking under the hood of that engine is Ron’s specialty.

Miller sees StartEngine as a driver, speeding the pace of innovation, moving the American economy forward, and creating jobs. America needs to attract and keep great engineers, and he sees successful companies born of equity crowdfunding as one of the best ways to do that.

We can’t forget, however, that while markets thrive on new ideas, only successfully delivered ideas raise the money they need. It’s hard to raise money, and the act of doing so becomes a success filter. When founders mount equity crowdfunding campaigns to take their ideas to the market of potential investors and potential buyers, they are validating traction swiftly, sometimes painfully, but always efficiently.

Don’t Ignore the Market

A common pattern, Miller asserts, is for founders to get their “first-in” money from an angel, or from family, and then go into a back room and work on “product, product, product,” and only much later take that product to market. The issue they face is having spent a lot of time in that backroom mentality without coming to an understanding of their potential market. They let the product out in public and then watch the product fail. Why? There might be nothing wrong with the product itself, but because it wasn’t tested first in the market, there wasn’t enough data to help it succeed. That’s a terrible waste, in Miller’s view. “It squanders our most precious resource: innovators who are willing to take the risk and do what it takes to build a company,” he said. Equity crowdfunding lets you try out your investment ideas in public and at scale. Contrast that with more traditional methods of fundraising.

“Let’s say you’re an angel, and I have an idea,” Miller explained, “and I come to you and I convince you; you say, ‘Ron, that’s great. By the way, I’ve talked to fifty people before you; you’re the fiftieth person, and you said yes.’ Great, now there are two people that are convinced that I have a good idea, right? Me and you.”

Just two people in a room. That’s a small network. Pitching online, via equity crowdfunding, means you will reach a lot more people. But why do some equity crowdfunding investment offerings succeed while others fail? It’s all in the message, Miller believes. “Develop a message that’s so clean, crisp, clear, and most important, that the founders themselves are really passionate about,” he said. He can point to StartEngine’s best-known case history, Elio Motors, maker of a three-wheeled mileage-efficient vehicle that will cost less than $7,000 when produced. The history-making Elio campaign raised $70 million via a type of equity crowdfunding called Regulation A+. Never before had so much money been raised in a public offering of this kind. Before Regulation A+ was in effect, only venture capitalists and private equity firms saw deals like this and had the opportunity to invest in them.

One reason it worked is that Elio’s product message and vision message are both clear.

Product Messages and Vision Messages

Product messages are exciting to buyers. Elio’s product message is “This is the most cost-efficient car ever produced.” Buyers want to hear about the product, so that is on message. Investors, on the other hand, want vision. “Paul Elio is reviving the American Dream, and not the American Dream of fifty or one hundred years ago, but the American Dream of now.” That’s a vision message.

Elio’s successful raise is an example of market validation via online public offering. Once company management uses a successful online public offering to prove market traction, they open themselves up to raising next-round capital from more traditional venture capital sources.

VCs have expressed resistance to online public offerings for some of those objections), but Miller believes they will come around. VCs will like the filtering capability of equity crowdfunding, using it to screen for viable investments. He predicts that VCs will come in behind micro-investors, likely buying preferred shares instead of common shares. His prediction is backed up by stats collected by regional angel groups.

The investment journey of an angel, particularly a first-time angel evaluating online public offerings, means discovering some humility. Miller’s advice is to first “look at the customer,” and then stop thinking you know everything about the product or idea. “You don’t know shit. That’s what I would say to them, magic words to them. ‘You don’t know shit.’ Stop thinking, and start asking the customer [about the potential product].” Like Steve Blank and other startup gurus, Miller is an advocate of asking potential customers what they think of a product—building a body of research before you launch. “We’re working on a product, we’re gonna create it. What do you think? Should or shouldn’t we?” These are the most valuable questions to ask at the start.

Any angel has to realize they are in a bubble, constrained by their experience and beliefs. Part of an investor’s due diligence is to do a reality check on an idea early on, seeking market validation, with or even without a minimum viable product (MVP). If a founder doesn’t have an MVP yet, it’s even more important to communicate honestly about metrics. A founder might have significant milestones that are completely different from an angel’s preferred milestones. What this means is that founders and angels must agree on what success is, and what signifies failure. If a founder asks a potential angel about relevant milestones and the answer is “I don’t know; I’m not in your business,” that’s not a good answer. Hashing it out is part of understanding the value of the potential investment, and figuring out how to work together.

Equity crowdfunding forces founders to get game. They can’t hide behind endless development and tinkering. It’s a test that some entrepreneurs resist. “If I can just get one angel to give me the half a million, then I can just go back to working my product,” goes their inner tape loop. But a privately funded startup can operate in stealth mode for a long time, delaying contact with actual customers, which can put it in a bubble far removed from the realities of its market.

This post is adapted from my new book The Angel Playbook: An Essential Guide for Entrepreneurs and Angel Investors. View it on Amazon and download a free sample.