Posted on 10/16/14 by Darren Stauffer
Most people are at least somewhat familiar with crowdfunding, and most likely have heard of sites like Kickstarter and Indigogo, where companies or individuals seek to raise money for a project, service, cause, investment or experience via the web. In recent months, Equity Crowdfunding has grown tremendously and for the first time, the general public has a chance to invest in companies now in exchange for equity or stock in the company. This type of funding shines a bigger light on this already growing space and gives non-traditional investors a chance to perhaps get a piece of the next Facebook or Uber.
I wanted to understand a little more about equity crowdfunding and its implications for the future, so I spent some time talking with Rafe Furst, one of the co-founders of crowdfunding website Crowdfunder.com.
DS: Who is the ideal candidate to raise capital via Equity Crowdfunding?
RF: A startup raising seed capital or a small cashflow-positive business looking to expand.
DS: Do you think Equity Crowdfunding will replace donation based funding (websites like Kickstarter and Indigogo)?
RF: No, both are becoming important to early-stage finance. Consumer-oriented companies should validate the market for their product first via the donation platforms, and then once they are ready to scale, come to an equity crowdfunding site like Crowdfunder. Neil Young's Pono is a perfect example, where they pre-sold 15,000 units of their product on Kickstarter and then raised investment on Crowdfunder based on the market validation they got at Kickstarter.
DS: When would you recommend a company/start-up go the route of Equity Crowdfunding versus traditional Venture Capital?
RF: It's not either/or, they are complementary. At Crowdfunder, we are enabling everyday citizens to participate alongside institutional VCs at the same terms. We work with many VCs who love this because they are always looking for follow-on investors to complete the rounds they lead. And of course it's great for the startup because they are not at the mercy of just a few top VCs to fund their whole round. Startups can negotiate better terms from VCs knowing that they aren't the only game in town.
That said, the traditional VCs have moved downstream and are no longer funding pure startups. So if you are looking for less than $5M and you don't have significant revenues, equity crowdfunding has become your best option.
DS: Are there specific industries or industry sectors you see being funded more than others on Crowdfunder?
RF: We are a broad, industry-agnostic platform. That said, we do see quite a few tech startups, consumer product and entertainment companies, as well as for-profit social enterprises.
DS: The highest funded deal on Crowdfunder is Neil Young’s PonoMusic player with a whopping 6.3M raised to date…what do you attribute this to?
RF: It was a combination of Neil Young's popularity, the support of all the key players in the music industry, people's passion for music, and Pono's previous market success on Kickstarter.
DS: On average, how many companies do you see being added to the Crowdfunder platform on a weekly basis?
RF: We've been experience 15% month-over-month growth, which currently equates to around 300 new companies a week.
DS: I see that CrowdFunder is on CrowdFunder; talk about exemplifying the phrase practice what you preach... What are your goals for the campaign and what do you plan on doing with the capital?
RF: Our Series A is closed and we will be announcing details about it soon, check our twitter feed.
DS: The Jumpstart Our Business Startups Act or JOBS was signed in to legislation over 2.5 years ago, yet the ‘new rules’ regulating equity crowdfunding remain to be seen. Some states have even taken it upon themselves to create their own legislation, while we wait to hear back on the Federal level. What do you think the delay is and when can we expect a resolution?
RF: The rules for Title II of the JOBS Act have been in place for the last year. This is the lifting of the prohibition against generally soliciting private fundraises, and it has enabled platforms like Crowdfunder to host Public raises, like Pono. This is, in fact, equity crowdfunding, though it is limited to Accredited Investors.
Title III is known as the "Crowdfunding Act" and it allows for non-accredited individuals to invest. Everyone is eager for the final rules to be put in place, but as you note this has been delayed for 2.5 years, and there are some who believe that once the rules come out they will not be workable. The issue is that the SEC needs to protect investors, and in so doing may make it cost-prohibitive for companies to raise money under Title III.
The SEC and Congress, with the input of key stakeholders in the industry, are working on a resolution. Everyone ultimately wants the same thing, which is for early-stage companies to be able to raise investment from anyone who wants to invest, as long as investors are informed and protected from bad actors. There are a number of different solutions being considered, including new legislation which mandates the SEC more specifically.
While I have great confidence that it will be worked out to where everyone is satisfied, I would not expect non-accredited investors to be able to participate before Q3 of 2015.
DS: Traditionally entrepreneurs were excluded from discussing raising capital with strangers. This led entrepreneur and investor relationships to be limited to personal networks, often within the geographic location of where the company resides. With the rise of Equity Crowdfunding, these barriers have been broken down. How do you see this affecting the investment landscape on a national and global level?
RF: I see huge positive disruption, democratization of access to capital for entrepreneurs and access to high-yield investment opportunities for everyday citizens.
There is over $200 Trillion held in long-term investment assets worldwide. These are real estate, public securities and other assets that yield between 1% - 9% annual return historically.
By contrast, early-stage venture investing yields 20% - 60% annually. Less than $80 Billion a year is being invested currently into this asset class, mainly because of the issue you raised: without publicly available, open, transparent, free markets (i.e. equity crowdfunding), only the wealthy and well-connected could access these investments.
How many early stage investment opportunities are there? In the U.S. alone, there are 7 million new businesses launched each year. Worldwide the estimate is 50 million new businesses a year. By contrast, the public markets have less than 20,000 businesses to invest in total (and the new IPOs per year is measured in dozens).
It doesn't take a rocket scientist to look at the numbers above and see that a financial revolution is upon us.
DS: For those who are contemplating making an investment on an Equity Crowdfunding platform, what advice would you give them, either on doing their diligence or other advice?
RF: First, read Peter Lynch's classic, One Up on Wall Street, which shows how an amateur investor can do better than the professionals through a disciplined value-investing approach.
Next, anyone making an investment in an early stage company needs to understand that there is a ton of risk involved, and any single startup investment is more likely to go out of business than not. Thus, diversify as much as possible and expect your money to be locked up for 5 - 10 years. Don't invest what you can't afford to lose, and don't invest if you will lose sleep if your investment goes to zero.
Do your own diligence, don't just rely on other people. This means actually talking to the founders on the phone, and other investors in the company. If at all possible, visit the company's office and get to meet the team in person. Consider the fact that you are going into business with these people, and you will want to trust them with your money, and you should feel that they trust you and respect what value you can bring to the table besides your cash.
This may seem like a lot of work, and it is. But the rewards can be tremendous. If you invest in the right startup early-on (e.g. Facebook), you can make 1000 times your original investment or more. And even if you don't capture one of these "unicorns", simply by having a diversified portfolio and a long-term approach you can do extremely well.Topic: BIG Update