In a significantly more positive episode, Jason and Tucker discuss founder personalities, 50 Shades of Grey, and the different ways crowdfunding will impact the future of business and investing.
In this episode, Jason and Tucker review the major equity crowdfunding portals in the United States: AngelList, WeFunder, MicroVentures, FundersClub, CircleUp, SeedInvest, Fundable, Crowdfunder, Rock the Post, and EarlyShares. The show starts out fairly positive, but ultimately turns into something that might be described as the Crowdfunding Playa Haters Ball. Sorry, not sorry.
If you follow news in the crowdfunding world, you’ll notice that there seem to be A LOT of equity crowdfunding sites out there. The truth is only a few of these sites matter to us in the United States. There’s not much going on in the equity crowdfunding world as we wait for the SEC to finally approve Title III of the JOBS Acts. So, sites like Crowdfund Insider are forced to dig deep for relevant content. They play up actions by equity crowdfunding sites in the U.K. and pretty much any site in the U.S. that emails them. While a study of the progression of equity crowdfunding in other countries may help us better understand how equity crowdfunding will play out in the U.S., news about new listings on U.K. platforms or new regulations from other countries shouldn’t have much interest for potential U.S. investors. In terms of relevant U.S. news, not every site is worthy of attention. Only a few have the teams and traction to succeed in the new regulatory environment. If you’re reading a story about equity crowdfunding in the U.S. and it’s not about one of these sites, you’re wasting your time.
“AngelList, a four-year-old startup based in San Francisco, is starting to open things up with a social network for the kind of people who create and invest in social networks. It’s a Kickstarter-like online forum where startup founders post their ideas and meet investors who fund risky, early-stage companies. In 2013, 500 startups raised $125 million through the site, including transactions ultimately closed offline, says Naval Ravikant, AngelList’s co-founder and chief executive officer. [Naval] Ravikant, suddenly one of the Valley’s highest-profile power brokers, says his company’s mission is ‘to make startup investing transparent, efficient, and more open.’” Source.
“‘We are not just giving startups dumb, quick, and easy money,’ said founder Nick Tommarello on stage at Y Combinator’s demo day. “With the power of the crowd, we are giving them an army of evangelists that feel a sense of ownership and are driven to help their startup succeed. WeFunder finds and features promising startups on the site to a community of almost 14,000 investors. Those people have the opportunity to put as little as $1000 into companies that catch their eye.” Source.
“Playing armchair venture capitalist has never been easier. For investors registered with MicroVentures, an eight-person crowdfunding outfit based in San Francisco, opportunities to invest in young tech startups arrive via e-mail. A link takes you to an eight-page summary of each company, laying out management bios, market size, competition and financials. You can also sign up for a webinar with the startup’s CEO. Or call up a MicroVentures broker who can speak for the company and relay questions to the founders. If you’re ready to commit, type in the amount you want to invest–usual minimum: $5,000–and click. The money sits in escrow until the deal closes. This may well be the future for helping accredited investors.” Source.
“FundersClub acts like a traditional venture capital fund in some ways, screening thousands of start-ups and funding 1.8% of applicants. But unlike that model, which requires funders to invest $50,000 to $250,000 in a deal, FundersClub allows investors to contribute as little as $2,500. And while traditional firms offer online tools to vet deals, they typically require in-person participation and paper documentation. FundersClub operates entirely online.” Source.
“Ryan Caldbeck and Rory Eakin founded CircleUp, their equity-crowdfunding portal, in 2011, before the word “crowdfunding” would be printed in news without definition, and long before the U.S. Securities and Exchange Commission would debate how to shape regulations necessary when one attaches to it equity stakes. Three years later, the company has carved out an impressively strong niche–connecting accredited investors to consumer-facing product companies–and is showing strong traction toward making those investments pay off for both parties.” Source.
“By early March, SeedInvest had completed 20 private placements, helping those companies raise $14 million. In one instance, a well-known venture capitalist referred his 300,000 Twitter followers to SeedInvest’s offering for a moped-sharing service in San Francisco called Scoot. Online investors ended up contributing $280,000 to Scoot’s $1.5 million campaign, which lasted just five weeks. ‘It not only shows you how powerful Title II is,’ [Ryan] Feit says, ‘but it shows you how powerful Title III will be once you open it up to all your customers.’” Source.
“Fundable works like a crowdfunded venture capitalist, taking in funding commitments from over 53,000 backers and disbursing them in small investments to hundreds of startups in a model very similar to Kickstarter or Indiegogo. If you see a company you like — perhaps Pixel Press, which enables anyone to build their own video games — you can choose to back that company. Interestingly, Fundable doesn’t take a percentage of the investment, but simply charges a small monthly fee. Investors can choose equity or Kickstarter-like rewards.” Source.
“Today, Crowdfunder has seen 40,000 entrepreneurs and investors on its platform, which includes 7,000 companies who have signed up, some of which have converted to paying accounts. A smaller portion of these accounts are active at present, as the companies generally pay the premium during their active fundraising process. Instead of taking a percentage of the funds raised, Crowdfunder instead charges companies a flat fee based on how much they’re raising, and other factors, like whether or not they want a featured position on the site.” Source.
“Founded in 2011 and launched publicly earlier this year, EarlyFund hosts both equity- and rewards-based campaigns on EarlyShares.com. BoatSetter’s offering is a hybrid model that includes rewards, such as commission-free boat rentals. Upcoming EarlyShares campaigns will feature equity investment offerings related to web entrepreneurship, real estate and music industry projects. Lopes said EarlyShares has a user base of 50,000 and about 1,000 accredited investors.” Source.
10. Rock The Post
“The crowdfunding platform also focuses aggressively on customer service, with its staff personally assisting each project creator (once approved) in the curation and crafting of their campaign. The team offers one-on-one consulting sessions, weekly, personalized email tips, and a variety of educational info, such as tips, guidelines, webinars, and tutorials to increase the potential for success. The platform charges a 5 percent fee for successfully funded projects, which is lower than if one were to use CrowdHut’s services (and the majority of crowdfunding portals). Rock The Post offers an integrated payments option, so that users can make transactions on the site itself, rather than being directed to a third-party website. Again, the startup’s main value proposition is the degree to which it’s willing to help its project creators reach their funding goals, trying to remove that impersonal air that can infect larger platforms.” Source.
11. Return on Change
“In fact, the former investment banker started his own social enterprise, New York-based Return on Change, an online funding platform for-profit high-impact startups–that includes cleantech and social enterprises, among others–in 2011, well before it was even clear that a law would ever be enacted at all. Certainly, Return on Change is not the only new site out there aiming to become a JOBS Act portal. But, according to Paul Geller, Thankster’s founder, the company may have an advantage, because it started well before most of its potential competition. ‘They’ve built up a lot of knowledge of this space,” he says. “They really went ahead and took a chance.’” Source.
These 11 sites are set up to be the main the players as the U.S. equity crowdfunding scene expands. In future posts, we’ll explore their relative features and benefits more in depth and take a look at some niche sites that could also make a difference.
Follow me on Twitter for more crowdfunding news.
In the first episode of the Poor Man’s Angel Podcast, Jason Camps and Tucker Max discuss Tucker’s history backing Kickstarter and Indiegogo projects and the problems with Kickstarter and rewards crowdfunding in general.
Best Analysis: The Crowd Cafe
Jonathan Sandlund covers the equity crowdfunding industry in a way no one else has matched. Jonathan is a former investment banker with plenty of private market experience that really shines through in the site’s articles and videos. Jonathan believes equity crowdfunding can solve many of the current inefficiencies that plague the private investment landscape, but he’s far from a cheerleader. If you want smart analysis detailing the issues, challenges, and future potential of the equity crowdfunding landscape, you must bookmark this site.
Best News Site: Crowdfund Insider
I’ve struggled to find a great news site that covers equity crowdfunding well, and most sites I look at come up far short in their coverage. Of all the options available, Crowdfund Insider is the best. They cover all types of crowdfunding, but their coverage of equity crowdfunding is consistent and excellent. The site offers news on platforms and campaigns along with original editorials from a number of crowdfunding experts. If you want to keep up with what’s going on in the crowdfunding world, Crowdfund Insider should be a daily destination.
Recommended Reading: Equity Crowdfunding Needs Educated Investors is a good recent example of one of their editorials.
Best Investor Education: Crowdability
Run by a team with past Wall Street experience, Crowdability offers a mix of news and articles about issues potential startup investors need to consider. Although the site can get a little cheerleader-y at times, the articles are often quick reads and thought provoking. Their weekly newsletter also provides interesting articles about both equity crowdfunding and more general startup investing topics. Whether you’re an active accredited investor right now or thinking about taking advantage of Title III, this is the site you need to read to make sure you’re evaluating and taking advantage of the investment opportunities available to you in the right ways.
Recommended Reading: How to Get 10x Return
Best Insight: Paul Niederer
Paul Niederer served as CEO of The Australian Small Scale Offerings Board (ASSOB), the world’s oldest equity crowdfunding platform and oversaw $75 million of transactions for 90 different companies. While most jurisdictions have platforms running with only accredited investor raises Paul managed both accredited and unaccredited raises with both investor types often in the same raise. Many in the U.S. are wondering what will happen as accredited crowdfunding continues to grow and unaccredited equity crowdfunding opens up to everyone. Based on his experience, Paul Niederer is probably the most qualified person to give insight into how things might play out.
Recommended Reading: Crowdfunding in 2020
Best Platform Blog: FundersClub
Most platforms have blogs but their posts are often infrequent, about only the platform itself, or both. Few of them provide valuable news or educational information that potential investors could use. But FundersClub stands out among the crowd. They still only post a few times a month, but almost everything they publish is worth reading. Of note is their monthly “digital magazine” which collects a number of great news and educational posts that both investors and entrepreneurs should read. It’s a great way to catch up on what’s going on if you don’t have time to follow the news.
Recommended Reading: Evaluating Technology Solutions from Startups
Best Twitter Account: Mine*
You should follow me on Twitter for crowdfunding news and straight talk.
— Jason M. Camps (@jasonmcamps) May 7, 2014
*Possibly biased selection
Yesterday, I wrote an article for Betabeat about how hardware startups abuse Kickstarter. The short version: established hardware startups that already have a product, committed investors, and outside marketing and PR help are using Kickstarter to essentially raise multi-million dollar Series A rounds without giving up any equity. These aren’t the companies Kickstarter was designed to serve; they’re much more suited for equity crowdfunding.
Some people took my criticism to mean I thought equity crowdfunding would destroy rewards and everyone would abandon Kickstarter. That’s not the case at all. Each type of crowdfunding will find it’s place in the early stage company funding continuum and they will work well in concert. A company in the news today bear this out:
Kuli Kuli is a “superfood snack” company who raised $53,000 on Indiegogo in June of 2013. This money helped them get off the ground and established a beachhead in Whole Foods and other natural food stores in Northern California. They’re now using this momentum to raise a $350,000 convertible note on AgFunder.
As far as I can tell, Kuli Kuli never raised any outside funding before turning to Indiegogo. This is how companies likely will and should raise early stage funds in the future: Personal / Friends & Family investment –> Rewards Crowdfunding as proof of market and necessary seed funding for initial growth –> Equity crowdfunding for serious growth and expansion.
Betabeat was kind enough to publish an article I wrote today - ‘Special Thanks’: How Companies Use Kickstarter As The New Series A
Now, Kickstarter’s stated mission is to “help bring creative projects to life”. The story Kickstarter sells to the masses is “these guys really need your help and this project couldn’t possibly exist without you”. This then creates a feeling among project backers that the creators should be loyal to them. In reality, the only relationship created is very similar to most commercial transactions because Kickstarter is at its core a glorified pre-order system.
According to Liam Casey of PCH International, the hardware startup world “look[s] at Kickstarter and it’s just foreplay. There’s a lot more to come after that.” The large gap between backer expectations (fueled by Kickstarters’ messaging) and reality resulted in the blow up over Oculus’ acquisition and could lead to the same reaction to Pono (and other similar projects) somewhere down the road because of the way those hardware startups use Kickstarter.
Earlier, a friend sent me another interesting example of the disconnect between how backers and project creators view Kickstarter. This jackass sums up my point pretty well:
Please understand that we are not a retail enterprise…
This is not about receiving product and making sure that the rewards look exactly like the drawings we posted during Kickstarter Campaign. Crowdfunding is when a group of backers combine forces to assist an project creator achieve a stated goal. The stated goal of this Campaign was to “create a company that makes rebuildable earphones”. In return for your help financing the IRONbuds Campaign, we agreed to ship all backers the rewards they requested.
I ask you to please be patient while we fulfill the obligations we agreed to. It simply isn’t helping things when you continue to stir things up in a public forum like this. I would estimate that some 98% of our backers have been satisfied with our progress even though it has taken longer than we expected. We are quite grateful to them.
I ask you to please join the 98% that patiently await for us to pull this off.
On Tuesday, crowdsourced fundraising site AngelList unveiled a new fund that has raised about $25 million from limited partners who traditionally invest in venture-capital funds. The fund, called Maiden Lane, will bet about $200,000 each on the site’s top investors and on select startups picked by them.
We’ll probably see a lot more of this as crowdfunding becomes bigger and more traditional financial services firms try to get involved. They’ll come in with the same “innovative” pitch they always use- as the experts, we know better than you. Let us make the decisions and you’ll end up better in the end. This could work really well for people who don’t have the time or inclination to understand what angel investing is all about and just want to get in on the action. One problem though…
Yet while some venture firms have adopted more palatable fee models and shared more information, the industry’s dynamics have largely remained unchanged. Venture firms typically charge a 2% management fee and take 20% to 30% of the profit, or what’s known as a carry. This structure incentivizes venture capitalists to raise larger funds and allows them to make money even when they fail to return capital, some limited partners say.
. . .
Maiden Lane will operate as a kind-of fund of funds with relatively cheap economics. It will charge zero management fees and a 30% carry. But only one-third of the carry will go to the fund’s general partners–which include AngelList operating chief Kevin Laws and Dustin Dolginow, a venture partner at Atlas Venture. The rest goes toward paying the angels’ own carry which are roughly 20% on average.
Fees on fees on fees! Innovation do cost.
When Facebook bought Oculus for $2 billion, many people took to social media to start complaining. There was a good deal of misunderstanding from people (most of whom were not actually backers of the Kickstarter campaign) who could not understand why the people who gave their hard-earned money to Oculus were not sharing in the wealth of the Facebook windfall. These misguided people could not understand why a $15 donation to Oculus only got the donor a poster and a thank you, and not shares of Oculus stock and a lottery-like payoff from the Facebook buyout.
Of course, this is nonsensical and nobody who contributed to the Oculus rewards-based crowdfunding campaign expected to own a piece of the company. But, if Title III had been available to Oculus to use “equity crowdfunding” two years ago, it is interesting to think about what could have happened. Let’s pretend for a moment that the SEC rules were in effect at that time, and Oculus had the option when they did their Kickstarter campaign of selling stock through an equity crowdfunding portal instead.
This is a shockingly insightful article from shameless self-promoter Kendall Almerico. The amount of misunderstanding or pure misinformation spread around after the Oculus acquisition was stunning.
There are a lot of good reasons to invest in startups, but people mostly do it because (1) they can and (2) they’re bored. The government has taken away your ability to play poker online and continues to frustrate efforts to expand sportsbetting. Luckily, startup investing may be even better than those two options. As Michael Lewis said in the The Big Short, “The line between gambling and investing is artificial and thin …. maybe the best definition of ‘investing’ is ‘gambling with the odds in your favor.’”
Here are a few rationalizations you can tell other people so they don’t figure out you’re just a gambling junkie looking for action:
As diversified as your normal portfolio probably is right now, your returns there are all highly correlated and subject to shocks in the general economy. When the next big crisis hits the system, your entire portfolio is going to take a plunge. This risk is doubled by the fact that your job security is probably put at risk by the same shocks that will cause your portfolio to tumble. Startups generally aren’t affected as much by these systemic shocks and can provide some potential upside that is less correlated with the performance of the overall economy. Investing a small percentage of your overall portfolio (somewhere between 5 and 15% depending on your age and risk tolerance) could be a good way to at least retain some potential upside during financial crises.
Startups Are Your Only Chance to Invest and Generate Real Returns
The public markets don’t raise capital for businesses anymore. They act as an exit for all the early stage investors. By the time you’re buying equity in a public company, all the value is gone and your money is merely going to the previous owner of the stock. It’s not being put to work by the company to create anything of value. If your capital isn’t being put to use by the company, you’re merely speculating. We’ve been over this before.
A Level(er) Playing Field
We don’t pick stocks anymore. Everyone knows that game is rigged. If you attempt to invest in individual public companies, you’re going head to head with professionals (and computer programs) on a field of play where they have countless advantages over you. The great thing about startup investing is that you’re not competing for the same companies as the pros. Successful Angels and VCs have amassed lots of capital that they need to put to work. They do this by investing in larger deals and later stages than they used to. The seed stage of investing is being vacated by the pros. This leaves a gap that’s going to be filled by equity crowdfunding.
Besides the lack of direct competition with professional investors, the truth about startup investing is that no one really knows what they’re doing. Beyond a few tenets of due diligence that represent exercises in common sense and care, the knowledge of experienced Angels and VCs is based on ex-post rationalizations that influence their approach to investments. Their experiences may or may not apply in a future where equity crowdfunding fundamentally changes the way people invest.
From a more philosophical standpoint, startup investing is the future.
Jonathan Sandlund covers this better than I can:
In 5 years, when a rising generation of investors can frictionlessly invest in an asset class that means something to them—that they trust—will they? Will they invest in the companies whose products they love; the startups they read about and follow; the indie films that inspire them, and the musicians that move them; the local restaurants they drive by each day; and, when given the choice, will they choose to invest in the communities and causes that define them, and in the places they call home?
I believe they will.
You should really read the whole piece: The Disruptive Rise of Meaningful Investing. Also, invest in startups because it’ll be fun.