Crowdinvesting as an Alternative for SME- and P2B- Lending
In many countries crowdinvesting took off with issuers offering financial securities to investors and thus granting returns in the form of interests, dividends, and/or parts of the earnings of the business. Today, a large range of portals has been set up to facilitate the matching between entrepreneurs and the investing crowd.
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When Facebook announced in March 2014 that it was acquiring virtual-reality pioneer Oculus VR for $2 billion, the news caused jaws to drop throughout the tech industry. It also left at least a few of the 9,522 people who had contributed to Oculus’s Kickstarter campaign less than two years earlier grumbling that they should be cut in on the windfall.
Sorry, crowdfunders: The $2.4 million you put up via Kickstarter entitled you to posters, T‑shirts, and prerelease versions of the Rift headset, not equity participation in a landmark deal. But Oculus’s journey from crowdfunding phenom to blockbuster acquisition did get people asking a bigger question. Sites such as Kickstarter and its archrival, Indiegogo, have had a transformative effect on how startups bootstrap themselves. Why shouldn’t the masses be allowed to invest in new companies and have a chance at realizing a profit?
Among the people monitoring the situation most avidly is Slava Rubin, the CEO of Indiegogo. When he began tossing around a concept for a company almost a decade ago with cofounders Danae Ringelmann and Eric Schell, it “was really about equity crowdfunding, before the word crowdfunding existed,” he says. After concluding that the investment angle was unrealistic, they dropped it.
It turned out that people would back campaigns out of sheer desire to help a promising project to become reality—and the lure of getting a thank-you gift for their support. But that hasn’t stopped the Indiegogo community from asking. “People are regularly saying, ‘Can I invest? Can I invest? Can I invest?’” says Rubin.
For a site like Indiegogo, the implication of the JOBS Act’s equity crowdfunding mandate could be revolutionary. “It’s really democratizing not just access to capital, but also equity for people who are not professional investors,” says Sam De Brouwer, cofounder of Scanadu, which collected $1.7 million on Indiegogo in 2013 for its smartphone-based health-monitoring gadget, then went on to raise more than $45 million from venture-capital firms. “It’s superinteresting.” That is, if companies such as Indiegogo can make it work.
With traditional funding out of reach, we had to fall back on one of the oldest, and arguably most misunderstood, funding options out there: raising money from family and friends. It was the best decision we could have made. Of course, this route isn’t for everyone. If you need a huge influx of capital up front, for instance, or if your business idea is especially high risk, then personal relations might not be the best source of funding.
U.S. securities regulators approved new crowdfunding rules in October 2015, allowing start-up companies to raise money from mom-and-pop investors over the internet. Private companies were previously allowed to solicit only accredited investors – those with a net worth of at least $1 million, excluding the value of their homes, or annual income of more than $200,000.
Crowdfunding was delayed at the SEC by leadership changes and difficulties in crafting workable rules. Since the crowdfunding rules were originally proposed in October 2013, the SEC has tightened limitations on how much investors can invest in these start-up companies.
Investors with annual income or net worth of less than $100,000 would be limited to contribute only $2,000 or 5 percent of their net worth or income, whichever is greater. Those with a higher net worth or income would be able to invest 10 percent of the lesser of their annual income or net worth in these transactions, with a cap of $100,000 over a 12-month period.
The SEC also made changes to the audit provisions of the crowdfunding rule, allowing some companies raising money through crowdfunding for the first time to provide reviewed rather than audited financial statements. The commission said that its staff would continue to study whether crowdfunding investor protections are robust enough as well as the impact of the new regulations on capital formation. The staff will issue a report within three years of the rules becoming effective.
Now, basically anyone will be able to invest, once the rules go into effect sometime next year. These offerings can be made either via existing broker-dealers, or via a new class of regulated registrants called “funding portals.” These portals — the rules for which become effective on Jan. 29, 2016 — would be required to provide adequate investor information and conduct background checks on issuers, their executives, and their officers.
They also must make issuer information available on their platforms for at least 21 days before securities can be sold, and enable conversations “among the crowd” about each offering. Platforms also could be held liable for issuer fraud against investors. Issuers will be required to provide prospective investors with a basic description of their business and the offering, and they will have the option of a question-and-answer format.
According to a 2006 study, African-Americans are 79% more likely to be interested in entrepreneurship than whites. Yet African-American–owned businesses have lower annual revenues, profits, and payrolls and fail at higher rates than white-owned businesses.
In August 2015 The Securities and Exchange Commission (SEC) recently passed new rules on equity crowdfunding that have the potential to change all that.
Access to financial capital remains the key barrier facing black entrepreneurs. African-American–owned businesses with gross receipts above $500,000 are three times as likely to be denied loans as white-owned firms of similar size. And while the Small Business Administration’s lending program guaranteed about 44,300 loans in 2012, only 1,080 of the businesses that received them were run by black entrepreneurs.
Equity crowdfunding is emerging as a way to increase capital access to the black-owned businesses that need it most.
That right has been the sole preserve of “accredited investors”—comparatively wealthy individuals and institutions worth over $1 million, a select group that amounts to the top 2% of the U.S. population. But the SEC’s new rules, released under Title III of Jumpstart Our Business Startups Act (JOBS Act), will allow many more Americans to directly invest in local businesses, letting many more minority-owned companies raise capital when the rules take effect in February 2016.
This comes at a time when millennials, who some experts believe are more interested in impact investing, look poised to benefit from the largest intergenerational wealth transfer in human history. In this evolving climate, black entrepreneurs in particular have a lot to gain.
Equity crowdfunding reduces risk by spreading out investment stakes to many instead of just a few. On average, because of the difficulty securing external financing, minority business owners are slightly more likely to put a higher percentage of their own funds into startup costs than are white entrepreneurs. It’s no secret that crowdfunding can offer an appealing alternative.
What’s more, equity crowdfunding might also help black investors build wealth. Under current SEC rules, online platforms that focus mostly on African-American businesses haven’t really succeeded because most communities of color don’t have the wealth to qualify as accredited investors. By lowering the bar for individuals to invest, the SEC is making it easier for more people to gain a stake in minority-owned ventures, which could in turn narrow the racial wealth gap.
The new rules might have dramatic effects on low-income neighborhoods. According to Robert Fairlie of the National Poverty Center, increasing the number and average employee base of minority-owned businesses by just 10% would create some 1 million new jobs for minorities.
Community outreach in low-income neighborhoods will also be crucial. Entrepreneurs and investors in those communities will need to learn how to take advantage of the new tools, both from a technological and business perspective.
Finally, as the 2016 presidential candidates draw national attention to the importance of small businesses to the economy, that conversation needs to include innovative ways of supporting minority-owned companies. The expansion of equity crowdfunding to more Americans will not only help widen entrepreneurs’ investment options, it can also reduce barriers to capital that have too long kept African-American businesses and communities from thriving.
Disruptive investment crowdfunding platform AngelList has published an end of the year recap. The digital funding and job board community states that it raised $163 million during 2015. This number was generated for 441 startups funded by 3,379 investors. There are approximately 770,000 companies with a profile on AngelList today.
AngelList, launched in 2010 by Naval Ravikant and Babak Nivi, has morphed into an early stage community where entrepreneurs may seek connections with early stage investors. Simultaneously, job-seekers may be hired by promising young startups. AngelList trailblazed the path in the US, when it requested, and received, a no-action letter from the SEC in 2013, that helped to crack open the door for online funding.
The platform has since become a vibrant ecosystem for entrepreneurs and angels, boosted by its syndicate investment approach to raise capital or simply get noticed by its prominent members.
According to the AngelList update, some interesting facts include:
- $163 million raised for 441 startups from 3,379 investors
- 170 active investor syndicates today
- these syndicates include many big name VCs like Sequoia, Kleiner Perkins, Khosla Ventures and more
- 40% of funding rounds were private deals
- Private deals totalled 170 startups for $89 million
- Institutional money participated in 40% of the funding rounds
- AngelList has become one of the most prominent job boards
- Approximately 16,000 companies have matched 548,000 candidates
- These numbers doubled over year prior
- Software engineers and designers were at the top of the list of skills sought by hiring firms
For comparison sake, AngelList raised about $104 million in 2014 for 243 companies. Investors totalled 2,673.
For more than a year, the AngelList founder and CEO has been trying to persuade institutional money managers to participate on his popular crowdfunding platform, which so far has helped facilitate $205 million in investment for 650 seed-stage companies.
In October 2015 AngelList announced that Chinese private equity firm CSC Group has committed $400 million to a new $450 million fund that will both back existing syndicates and help activate new ones. The fund, called Upshot, is believed to be the largest-ever investment vehicle dedicated to seed-stage investing.
“Yes, it’s large but this is something we expect will last for four years,” Ravikant explains. “And what it really does is allow us to participate in follow-on rounds for these companies, which is something the syndicates usually can’t do because they’re too small.”
The deal is expected to be the “largest single pool of funds devoted to early-stage startups — ever,” the WSJ reported. Beyond that, it could also be the “largest-ever single investment by a Chinese private-equity firm in a U.S. fund.”
Here’s what it really boils down to: “With all this institutional capital from CSC, AngelList will be able to do deals faster, because CSC will be able to participate in any investment syndicate, writing relatively large checks and making the site’s angel-investor leads less reliant on the individuals in their syndicate.”
But not everyone knows about AngelList’s free recruiting tool, and that’s in part because the company doesn’t market it, at all. So to help raise awareness for startups in Boston, two AngelList employees are co-hosting a private event with Accomplice, an investor in AngelList.
The Cambridge venture firm has also frequently used AngelList to put together investment deals, particularly through their BOSS Syndicate arm. Out of 16 BOSS-backed startups that were anonymously surveyed, 75 percent use AngelList for recruiting and 15 percent of their total hires come from AngelList, according to Sarah Downey, Accomplice’s director of community.
Naval Ravikant, CEO and co-founder of AngelList, told that one of AngelList’s major advantages over other recruiting tools is that it’s completely free. But what makes it even more valuable is the transparency it demands of companies.
For instance, all job postings must include a salary range and the range of any equity being offered. Companies are also encouraged to fill out other information, including their investors.
AngelList’s recruiting platform currently has more than 16,000 startups, VC firms and larger companies actively looking for top talent.
Among those larger companies and firms are Yelp, Sequoia Capital and Tinder. And there is no shortage of talent for those companies to look at: the website has hundreds of thousands of job candidates, with the platform having reached up to 250,000 active users last year, Ravikant said.
Crowdinvesting in real estate
For those who are looking to invest in real estate, finding good opportunities can be difficult. In commercial real estate, unless you know a property owner or developer, it’s nearly impossible to get your foot in the door. A company called Selequity has launched a platform that will make crowdfunding real estate investments much easier.
RealtyMogul, a startup that connects investors with real estate projects, announced that it has raised $35M in Series B funding. The company launched its online marketplace more than 2 years ago with a focus on equity deals funded by individual, accredited investors. (So it was offering a kind of real estate crowdfunding, but one where most people couldn’t invest.)
Singapore-based crowdfunding platform CoAssets has listed on the National Stock Exchange of Australia (NSX), Australia’s second largest stock exchange, and will trade on the NSX under the symbol “CAX”. The NSX is a secondary board in Australia and the second largest listing market in the country after the Australian Stock Exchange (ASX). 130 firms are listed on the NSX; approximately 80 per cent of new listings are foreign companies.
The NSX listing of CoAssets will support growth and increase investment potential. Launched in July 2013 as Southeast Asia’s first property crowdfunding platform by Seh Huan Kiat and Getty Goh, CoAssets crowdfunds residential and commercial properties in Asia, Australia, the UK and the US. It claims to have membership in excess of 11,000 individuals to date across Southeast Asia.
CoAssets primary function is to serve as a multi-sided platform linking developers, agents and property owners seeking alternative funding sources with investors keen on co-developing projects and co-purchasing property units.
Crowdinvesting across the world
The UK is a “world leader” in equity crowdfunding, with further democratisation set to open up everything from hedge funds to IPOs in the next few years. Crowdfunding is just one of a number of ways in which European SMEs, typically far more reliant on bank financing than their American counterparts, are trying to compensate for the continuing decline in bank lending.
Others include issuing publicly tradable debt or equity; placing securities privately with institutional investors; and accepting loans from non-bank financial institutions (“shadow banks”). Banks and others are also securitising loans to SMEs (ie, pooling them, dividing the pool into tranches with different degrees of risk, and selling the resulting securities to investors).
Governments are keen to promote all this, to limit the economic harm done by sickly banks. Angellist has been launched in the UK. UK syndicates will allow individuals to invest in rapidly developing startups like Hailo, Transferwise and Zoopla. However, the launch of the project in the European market is postponed due to regulatory constraints.
Darren Westlake, co-founder and CEO of leading investment crowdfunding platform Crowdcube, said the future of crowdfunding in the UK and around the world was “more democratisation”. “Crowdfunding platforms are well positioned” to “put the P back into IPO,” he explained, pointing to the success of Crowdcube’s existing equity system as an example of public interest. Is crowdfunding “the new normal”? Darren Westlake thinks so. Crowdcube has raised over £80 million in investment for new businesses. Westlake is on a mission to raise the profile of crowdfunding as an industry, and he’s seeking to bridge the gap between old school investors and the new school of fintech innovators.
Taylor Swift’s most recent disruptive move was a donation made to a little girl named Naomi, who is kicking the crap out of cancer. It was for $50k, to help with some medical costs that insurance wasn’t picking up, through the site GoFundMe.
Only problem was that GoFundMe never thought anyone would donate over $15k at once, so it took a bit of rejiggering to allow Swift to make her donation: “Taylor Swift’s donation was so generous that it required us to increase the donation limit on the platform,” said Rob Solomon, GoFundMe CEO. GoFundMe’s previous donation limit was set at $15,000, but has now been increased to $50,000.
There are never any limits on how much a campaign can raise. Some additional information since crowdfunding site GoFundMe confirmed its funding round in June 2015: the company is now valued at around a range of $600 million to $650 million. Media also heard that Iconiq Capital, the firm that manages the personal wealth of executives like Mark Zuckerberg, has participated in this round of funding. At the time, it was confirmed that Accel partners and Technology Crossover Ventures led the round, with Greylock and Meritech Capital Partners participating.
GoFundMe’s latest funding round valued the company at around $500 million. It appears GoFundMe’s founders have decided it’s time to cash out. The company’s cofounders Brad Damphousse and Andy Ballester told the Wall Street Journal that the pair have decided to sell a controlling stake to the investor group that is leading its latest financing round. GoFundMe said it has raised $1.2 billion from its campaigns to date. GoFundMe earlier this year said it was approaching $100 million in funds raised from campaigns every month.
As crowdfunding sites like Tilt and GoFundMe raise large rounds to take their businesses to the next level, a startup that sits in the same area of web-based fundraising is trying a new approach.
CircleUp, a crowdfunding platform for consumer brands to raise money from accredited investors, has closed a $22M fund of its own to back a range of brands on the platform. The Consumer Growth Fund, as it is called, will match investments made on its platform by others – not take the lead on funding itself, in order to avoid conflict with other investors. The size of the fund nearly matches the amount CircleUp has raised for its own business. To date the company has picked up over $23M from investors that include Canaan Partners, Google Ventures, Union Square Ventures and Maveron, among others.
Millhouse Capital, owned by Roman Abramovich, has invested in an Israeli startup iAngels. The crowdinvesting platform iAngels developed a model for investment of small amounts in startups, based on experienced investors. The company has raised $2.25M in this round, with the new investment making a total of $2.6 million raised by the company to date. iAngels raised the money on its own platform.
One more interesting startup of 2015 is Tendr. It Is like Tinder for finding your next equity crowdfunding investment. New York-based startup investment platform Onevest announced the launch of its Series A round of financing, to mark the implementation of Title IV of the JOBS Act by the US Securities and Exchange Commission to facilitate smaller companies’ access to capital. The Series A offering is already live on Onevest’s network and transactional platform. Onevest connects early stage startups with accredited investors. Last year, the company facilitated the close of over 15 transactions averaging between $750,000 and $4,500,000. This year Onevest expects to double the amount of companies that successfully raise capital on the platform, the company said in a press statement.
FlashFunders, an equity crowdfunding platform, is announcing a new program that automates the process for entrepreneurs, making it entirely free to raise or invest in a seed round. Most crowdfunding platforms like AngelList and FundersClub are used for a small portion of the round, facilitated online, and usually allow for much smaller checks to go into an SPV.
With FlashFunders, the company offers that same functionality alongside the ability to send the FlashFunders listing to a VC firm like A16Z or Union Square Ventures to participate or even lead the round with a larger (>$25K) check, meaning the entire round is facilitated online.
And beyond that, FlashFunders automates everything that a securities law firm like Cooley LLP would normally handle through integrations with Lexis Nexus, DocuSign, IRS, and the SEC Edgar Portal. Going through a securities law firm for an early-stage investment can cost a company between $10K and $30K, according to FlashFunders founders Vincent Bradley and Brian Park, and some will spend up to $80K on the process.
In what may be one of its first investments in a Series A round, the investment firm KKR has pulled from its $98.6 billion in assets under management to lead a $15 million investment in fundraising platform Artivest. The deal is part of a broader push from the private-equity firm to invest more actively in startup technology companies.
Alphaworks, the equity crowd-funding platform for startups and their communities, re-branded to Quire.com. CEO Erin Glenn said that the company was eager to get a .com domain and that ‘quire’ (a centuries old word that which means ‘folio’ or collection of single pages) was a perfect fit for what the platform represents. “The imagery of the word is that of individuals coming together to build a community,” said Glenn. “It’s more than the sum of its parts.”
SecondMarket, the secondary transaction manager whose involvement in Facebook’s pre-public offering fire sale of shares arguably hurt the social network’s eventual initial offering, launched a new product to put more control over secondary sales in the hands of startups. With private companies staying off the public boards longer and valuations for later stage rounds climbing, an increasing number of firms are launching to invest in secondary sales (sales of shares owned by company employees or investors that were distributed as part of earlier rounds or as compensation).
Crowdinvesting in Asia
Rewards-based vs equity crowdfunding – what works better? Major Internet crowdfunding platforms like Kickstarter hand out a range of rewards to entice backers but is offering equity more valuable. In the past 12 months, some Singaporeans start-ups made moves that bear watching in the new year. They raised a big pot of money, formulated plans to expand overseas and hired corporate big guns for management. In the process, they are transforming industries from e-commerce and industrial automation to student scholarship and talent spotting.
This capital-raising platform connects accredited investors with funds to spend and companies that need capital. CapBridge launched a pilot in the middle of this year with 10 companies and has remained under the radar ever since. However, chief executive Steven Fang has been busy promoting Capbridge in Israel, Australia and other countries. Capbridge is in what is called equity crowdfunding, where investors are given equity in exchange for funds. Equity crowdfunding for the public is not approved here. The Monetary Authority of Singapore (MAS) had received feedback from the public and the industry on securities crowdfunding but has not responded yet. Capbridge and similar companies like Crowdo and FundedByMe will be ready to offer their services once the MAS approves this investment approach.
Singapore-based crowdfunding platforms CoAssets, FundedByMe and New Union have established a tripartite alliance to grow crowdfunding in Southeast Asia. Combined, the three companies have facilitated raising of S$200 million ($148.17 million dollars) through international campaigns, to date. They plan to accelerate this growth in the coming months, despite the relative youth of the industry in the region. “This alliance represents the emerging wave of financial services that will meet crucial business needs. We are extremely excited to bring a new avenue to connect drivers of business, and allow them access to funds that weren’t previously available to them,” said Eddie Lee, managing director of New Union Singapore.
Technology startup incubator and accelerator IdeaSpace Foundation has observed a new investment trend in the Philippines — that of small and medium-size enterprises (SMEs) becoming startup investors.
Equity-based crowdfunding platform Asian Crowdfunder has launched its operations in Malaysia in June 2015, and is in the process of starting operations in Singapore, Indonesia and Thailand. The pan-Asian platform, which claims to be accessible to vetted accredited investors only, is founded by an international team of experienced and successful entrepreneurs and asset managers backed by decades of experience.
China’s largest e-commerce companies are eager to leverage their millions of users and hoards of data for new projects. For example, Alibaba’s other businesses include healthcare management, financial services, and cloud data. Now JD.com, its smaller but still formidable rival, is branching out into crowdfunding for startups. JD.com, which filled 689 million orders last year, has launched JD Equity Crowdfunding platform to help startups secure capital.
The project is an offshoot of Coufenzi, the crowdfunding site JD.com opened last July. Coufenzi allows users to contribute funds toward individual projects and products. So far, projects on Coufenzi have raised a total of RMB280 million (about $45 million).
Photos: Getty, company profiles
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