Are you a wannabe investor, or an aspiring entrepreneur?
There are now more ways than ever to get those valuable connections to make you and others money. The online crowdfunding world is a network of forward thinking companies and people who want to help them succeed.
In the second installment of our Future Finance series, focused on modern investment and millennial-friendly financing, we’re looking at the particular niche of equity crowdfunding.
In 2012, the total global crowdfunding industry estimated fundraising volume was $2.7 billion. In 2015, this had grown to $34 billion. The industry is booming and growing each year, so it’s about time we picked it apart for you.
In this article, we’re going to look at two key areas:
- How you can become an investor through crowdfunding opportunities including platforms available to help you along your journey.
- How you can raise investment for your startup through crowdfunding platforms, with expert advice from FlashFunders’s Evan Markiles.
What is crowdfunding?
You probably already know, but let’s clarify it for ourselves.
Crowdfunding is the act of sourcing a large amount of money from many small contributions. Simple.
In many ways, crowdfunding isn’t a new concept. On a local level, building societies and credit unions have been crowdfunding their operations ever since the Germans invented the concept back in the 19th Century.
Think, Bailey Brothers’ Building and Loans rather than the nasty Mr. Potter who tries to shut it down.
Of course, in the modern age of the internet, is isn’t only communities located in the same place who are able to come together to fund things. The internet is awash with communities or people with similar interests. Never mind the countless people who see a good idea and recognize the money making potential of it.
This leads us to the emerging world of equity crowdfunding. Unlike previous crowdfunding sites like Kickstarter or Indiegogo where you might kick in $25 to help a film come to production with your name in the credits, equity crowdfunding means you own a part of the business.
You’re a real investor.
This provides you with a greater incentive to invest a larger amount of money. Which, in turn, increases the chances of companies raising the total amounts of money they feel they need to take that next step in their business journey.
You could be someone who is looking to kick in $1,000 here or there, or you could be an established angel investor already who is looking to broaden your net. With equity crowdfunding platforms, you can be an investor doing deals without having to have pockets a mile deep.
The crowdfunding we’re seeing now is a result of both legislative and technological changes. Obama’s The JOBS Act changed the scene by opening up investing opportunities. Prior to this, rulings by the SEC meant that only accredited investors could purchase equity in private companies. To be an accredited investor you needed a net worth in excess of $1m and an annual income of above $200k or $300k with your spouse.
The changes to this investment firewall, originally intended to protect people from repeating many of the mistakes of the Great Depression, mean that your regular Joe (or Joan) can now get in on the act.
And this is how we end up with companies like FlashFunders and the emergence of crowdfunding as a serious investment channel.
Should I start investing through crowdfunding sites?
Before I start convincing you to pour your life savings into an investment opportunity, let me remind you that I am not a financial advisor and this is not financial advice. If you want to act on the stellar information I’m giving you, I recommend you speak with a professional. That said…
If you want high risk with high reward, then you can try out equity crowdfunding as an option.
Admittedly, you’re not going to get rich investing small drops at a time in crowdfunding, and you’d be exposing yourself to much greater risk than keeping it in the bank or in a savings package. But, if you’re feeling a bit financially healthy and open to a bit of risk, you could take advantage of the technological shifts in your own way.
It’s worth mentioning that you can offset some of that risk by spreading your bets. Like a VC might have multiple investments all ongoing in the knowledge that if one fails they still have more equity elsewhere. Diversifying your portfolio reduces your exposure to risk and increases your chance of stumbling on a diamond in the rough.
Equity crowdfunding tends to be based on purchasing equity in particular small companies which you believe in and reckon could turn your small amount of money into a larger amount of money. Unlike regular investing, where you hope your money stays safe and grows gently year by year, you’re throwing your money into the deep end and hoping it learns how to swim.
I’m being alarmist, but you need to make sure you know what you’re getting into with crowdfunding so that you can make the right decisions and land that green.
You could receive perks and gifts for investing as part of a slick media campaign on behalf of the company, but these shiny trinkets should not distract your eyes away from the boring financials. You might often be investing in interesting products or things which appeal to you, but check that this isn’t the only reason you’re investing.
Let’s run through a couple of considerations you’ll want to make when deciding whether to invest into an equity crowdfunding round.
How to judge whether a crowdfunding opportunity is a good investment
As with any pursuit, start with the basics.
Do you just like their product or is there a market for it? What are their financial projections? Is there a VC or an angel leading the round?
The last point is an interesting one, and one presented by Sramana Mitra in his critique of the topic. Many investors in crowdfunding campaigns might be first time investors or people who haven’t led a round before. This doesn’t mean they’re amateurs or that they don’t know what they are looking for, but it is indicative of a potential lack of experience.
If the fundraising round is being led by an angel investor or a venture capitalist, then you can be more confident that a professional level of due diligence has been performed.
Topping up a VC funding round with crowdfunding is a useful way for startups to generate more money with a couple of added benefits. Firstly, it gives the startup a way to raise more money while still being able to focus on their business operations. Secondly, as we’ll expand on later, it creates a sea of evangelists for the business.
One example of a company which topped up its funding through crowdfunding and went on to generate huge rewards for investors was Cruise Automation which raised through Angel List as part of a syndicate led by Zach Coelius, where many small investors took part. Involved VCs in the company included Spark Capital and Sam Altman, and all parties were presumably very happy when General Motors acquired Cruise in March 2016 for a cool billion dollars.
Crowdfund investors will have made their decision to invest on the back of seeing prominent VC involvement, a neat concept, and presumably a solid business plan. Moreover, a specialized company like that in such a globally massive market is always a good contender for an exit. Which is worth bearing in mind.
We asked Evan Markiles, Head of Business Operations at FlashFunders, what key things new investors should be looking for before they take the plunge and commit their money to a project:
First, always remember that any sort of investment in an equity crowdfunding offering is an extremely risky and speculative investment, and the time horizon for seeing returns, if any, is very long. Therefore, you should only invest as much as you are comfortable losing on that investment.
This is your investment 101. Do not risk your food budget on an investment opportunity. It would be like donating your tuition money to a candidate who promises to abolish tuition, only for that candidate to lose. It’s well meaning and that risk taking quality is to be admired, but it might not pay off in the long run.
Another factor to consider when thinking about Evan’s point is the emphasis on the horizon for returns. Even if your investment goes well and starts to greatly appreciate in value, it’s not like you can just withdraw your funds. You’re tied in. Perhaps you could sell your stake, but that’s a tricky option to depend on. Unlike micro investing, which we looked at in the previous Future Finance installment, you don’t really have the flexibility to manage your money once it’s in. Liquidity is certainly not the name of the game.
You’re in this investment for the long run. Remember that as you consider your options.
Second, do your due diligence. Potential investors should not only review all materials on a company’s offering page, but really dive into the company’s SEC Form C filing, which will provide information about the company’s operating history, business plan, and any risk factors. But don’t necessarily stop there: google the company, check out their social media presence, read any press about the company. Feel free to even contact the company or its founders to inquire about the business.
This is where you remind yourself that you’re not just a user at a computer. You’re a real investor now, remember! Do the leg work and reach out to the founders. If you take up an hour of their time and then chip in a large sum of money, then that hour has been massively worth it for them. Excellent ROI.
Startups are friendly. Reach out to them as you dig deep into their operations.
If you want a helping hand in understanding how to approach your due diligence, you can use this Process Street template embedded below. Simply click I want this for my business to add the template to your Process Street account.
Should I crowdfund my start up?
Perhaps you’re not looking to be an investor.
Perhaps you have a startup or have an idea you’ve always wanted to kickstart? (pun intended)
Is crowdfunding the right option for you? It’s difficult to say.
One advantage of crowdfunding is it removes the need for what the French philosopher Pierre Bourdieu calls social capital. If you’re ingratiated into the Silicon Valley startup scene then you likely have high levels of social capital, and you can leverage that to access financial capital.
But not all great ideas are born in Silicon Valley. Great ideas happen everywhere, all over the world. Crowdfunding your venture allows you to bypass those connections and networks to try to gain funding wherever you’re based and whatever your social capital.
(Maybe you can approach Andreessen Horowitz later, anyway!)
Moreover, different concepts are more or less likely to capture people’s imagination. A business centered around a concept which solves an obviously identifiable problem and is relatively unique will likely attract interest as part of a crowdfunding campaign. However, it’s probably a little more difficult for a company who offer insurance services and believe their business model means they can undercut their competition.
One of those is engaging, the other not so much. The latter might be a great business opportunity and still suited to crowdfunding, but it could be a little harder to sell to an insurance-layperson.
Elon Musk somehow capturing both Fredo and Vito Corleone. “You come to me on the day of my rocket’s landing…”
Evan gives us his breakdown on what helps a startup to have a successful equity crowdfunding round. According to Evan, companies suited to equity crowdfunding generally share a couple of key characteristics:
1. A very large user/customer base, as these people already use and love your product, and will be excited to become part of the company as an investor. You also already have their contact information, so reaching out to them via a newsletter would be a really cost-effective way of acquiring investors.
2. A successful Kickstarter or Indiegogo campaign in the past, as it will show that there is a market for your product, you will have a big list of potential investors to go back to, and you have experience reaching out to the crowd and using the internet and social media to raise funds.
3. A good supply of capital to pay for a marketing budget. It’s no secret that almost all successful and “viral” Kickstarter campaigns actually have a ton of marketing dollars behind them. It costs money to make a great video pitch, and to buy Facebook ads.
The general theme emerging is that you shouldn’t simply rely on investors within the platform you choose. They may help and get involved, but your chances of success are boosted if you can drive potential investors en masse to the opportunity you’re presenting to them.
Step 1. Build a big user base, whether through the growth of your product or an earlier crowdsourced seed investment funding round. Step 2. Leverage that user base to cream off the investors who will help you move forward.
But remember the advice we gave above to potential investors: make sure your company is in a good position to be invested into, you have your financials properly displayed, and you’re willing to engage with those who have shown an interest in you!
5 equity crowdfunding sites you can use to raise or invest
FlashFunders is the company of Evan Markiles and offers a full service equity crowdfunding package. We asked Evan what his priorities are for the company:
At FF, our first focus was always being compliant and having a robust regulatory framework. While we are a FINRA Funding Portal (FlashFunders Funding Portal, LLC), we also conduct 506c and Reg A+ offerings through our clearing broker dealer license (FinTech Clearing, LLC). Thus, issuers and investors can be confident that we’re doing things the right way from a compliance perspective. This framework also allows an issuer to travel with us as they grow. They may start with us doing an equity crowdfunding round, and then a few months later conduct a 506c Series A round, and a year later a Reg A+ offering, all on the same platform.
Sounds good! FlashFunders provide a clear line of development for companies looking to raise funds within their platform. This assistance in the natural progression from seed to Series A is good for startups and good for investors. It shows there is space for forward movement without having to distract focus away from the business operations.
We also focus on providing a soup to nuts, end to end solution. We provide all the tools to manage your incoming investors, track your marketing analytics, and conduct the entire round in a compliance manner, as we’re conducting our backend compliance procedures on all investors.
One of the benefits to investors is this interactive aspect where you can monitor the performance of the companies you have a stake in directly from within the platform.
FlashFunders is a true equity crowdfunding site as there are no obligations in regards to being an Accredited Investor; anyone over the age of 18 in the continental US can jump aboard.
AngelList is one of the big players in the world of equity crowdfunding. They were pretty much first on the scene and continue to offer their services.
AngelList is known for being one of the largest social networks for startups and has a huge number of companies and investors within its platform as a result. As an investor, AngelList offers three membership levels. The first is the most flexible and requires minimum investments of $1,000. The next step up gives you the opportunity to treat your AngelList investments like an index fund, but requires big bucks: $100,000. The final premium version gives you the benefits of both membership forms with a dedicated AngelList representative.
Whether you choose to crowdfund through AngelList or not, you should probably become a member for the social network value and access to other forms of investment, like accelerator programs.
Okay, so, this is sailing a little close to the wind (geddit?) in terms of being equity crowdfunding or not.
Gust is one of the largest networks of angel investors and was founded by the now legendary David S. Rose. The O.G. Angel.
Generally, to get involved as an investor it’s best to become a member of one of the angel investment groups within the platform and invest alongside them. This allows you to draw upon the collective wisdom of the group when deciding whether or not to invest. But for investors, Gust is a little more big league than regular crowdfunding suggests.
For startups, you can simply make your profile and work from there. Gust acquired rival Fundacity in 2016, so one would expect their startup portal to improve in light of this purchase, as well as their presence within Europe and Latin America.
Circle Up has a different focus to some other crowdfunding sites. It isn’t a social network, nor is it investor led. Circle Up provide more of a curated experience for investors.
The platform focuses on onboarding consumer brands and working out what their investment needs are. From there, the startups are matched with potentially well suited investors and introductions are made.
This provides a degree of vetting while also adding value into the startup’s pitch. The team at Circle Up will assist in reviewing materials and providing coaching to make sure each startup is representing itself well and professionally. This kind of approach is good for inexperienced startups who are often uncertain about what they need to provide or how best to convey the message.
As an added bonus, Circle Up sell themselves on a range of added bonus services for companies post-raise, with partner offers from Amazon and others.
Picking up Fundable as our next platform brings us back into the proper world of crowdfunding. A world of small donations and social media campaigns.
Fundable is part of the ever expanding Startups.co network which includes Zirtual for virtual assistants, and Launchrock for landing pages.
Fundable operates much like Kickstarter or Indiegogo, where you can start a campaign and raise funds from the network. The minimum commitment from investors is $1,000 and no money changes hands through the platform itself. As with some other platforms, Accredited Investors are the only ones with full access to browse company materials in depth.
There are new sites opening up in the field of equity crowdfunding all the time. The market for these sites is large and growing. As we’ve seen already, Fundacity was acquired by Gust and Fundable by Startups.co.
There’s definitely activity.
Given that the equity crowdfunding explosion occurred in 2012 with Obama’s JOBS Act, the industry is still somewhat in its infancy. Evan suggests that we could continue to see the market change over the next few years as new elements of legislation are making their way through congress. The Fix Crowdfunding Act bill aims to increase the amount of money a company can receive from true crowdfunding in one year from $1m to $5m.
These kinds of legislative changes could further increase the scope of this industry. In our next Future Finance article, we’re going to look at cryptocurrencies and the role they’re playing in funding and investment. Given their advances, it may serve the government well to remove the barriers on regular out-in-the-open investing. The stories of a financial Wild West with Gibraltarian saloons and Singaporean cattle ranches should start the banks and the regulators hoping this town is big enough for the two of them.
Mining Bitcoin ain’t easy, but it’s honest work
To crowdfund or not to crowdfund… wait, what was the question?
I know, we’ve meandered a little through different elements and areas of crowdfunding.
Even covering at least one platform which is barely within the crowdfunding category! But that’s part of the problem. The distinction between what qualifies as crowdfunding and what is small time angel activity has become blurred. It’s both the problem and the core concept. We’re all angels now.
The key takeaways from this article are:
If you can afford to invest $1,000, there are plenty of sites which allow you to pump that money into the company of your choice.
If you are a startup with a large user base, it is worth looking at leveraging that base to drive your funding round; there are plenty of sites to help you.
But it all comes with risk. There are no guarantees you’ll raise the money you want to raise, and there are no guarantees you’ll see returns on your investments. Whether you’re brave enough is up to you.
Have you invested through equity crowdfunding sites? Or, maybe you’ve crowdfunded for your startup? Let us know in the comments below what your experiences have been and we might reach out to you to find out more!