Crowdfunding is often associated with Kickstarter, the website where people can donate to projects. But as a result of the JOBS Act, crowdfunding is no longer restricted to donations—interested investors can buy small equity stakes in companies. In the months since equity crowdfunding’s legalization, hundreds of crowdfunding platforms have appeared. In addition to the big players like AngelList, there are smaller niche platforms like FilmFunder, a platform for motion picture investments.
Going forward, it will be interesting to see which crowdfunding platforms survive. NerdWallet turned to crowdfunding experts to find out which platforms will survive and what types of companies will pursue crowdfunding.
- University of Tennessee College of Law Professor Joan Macleod Heminway, author of Proceed at Your Peril: Crowdfunding and the Securities Act of 1933, believes there will ultimately be a small number of equity crowdfunding portals.
“The crowdfunding of equity securities, while possible under the provisions of the Jumpstart Our Business Startups (JOBS) Act, requires significant financial and human capital. The requirement that a specific intermediary—a registered broker or funding portal—conduct the offering adds costs to the overall system that may not outweigh the benefits. In addition, the JOBS Act imposes significant disclosure, record keeping, and other compliance requirements for both issuers and funding portals and includes a new, untested liability provision for misstatements and omissions that expressly applies to both issuers and individual representatives in their management. As a result, unless there are further legal changes, I have trouble seeing many informed folks jumping on the equity crowdfunding bandwagon. Some brokers may engage in equity crowdfunding as a loss leader to attract clients to whom they can sell other services, for example. Assuming that some issuers, investors, and brokers/funding portals can establish a business model that works and is sustainable, I would expect a relatively small number of brokers and funding portals to engage in equity crowdfunding.
“Entrepreneurs and business managers who are considering financing their firms through equity crowdfunding will want to think hard about the overall financing trajectory of their business over time. Most VC investors and public offering underwriters do not want to invest in firms with numerous equity holders. So equity crowdfunding may not be viable for firms desiring to seek VC or public investors. In the alternative, the feasibility of mandatory exit options for crowdfunding investors (e.g., mandatory redemption at the option of the firm) will need to be explored.
“It seems safe to say that, absent rampant fraud in the overall crowdfunding market, donation and reward crowdfunding will continue and, perhaps, grow. Even folks who are expecting no monetary return from their funding of a business get an altruistic benefit out of donating or lending to small businesses that they believe in—music groups, designers, fine artists, craftspeople, social enterprise ventures, consumer products innovators, etc. Brokers/funding portals that capitalize on these kinds of businesses are likely to be successful, even in the absence of a robust equity crowdfunding market.
“I suspect that the way in which the many potential businesses will choose their broker/funding portal will be different for different types of firms and potential investment audiences (as it is for underwriters in the public offering markets and placement agents in the private placement markets). Reputation, investment community connections, availability, and cost will all play roles (as they do in other markets for intermediaries). I assume that, due to the registration process, much of the information about these firms will come from information gathered by the Securities and Exchange Commission and the Financial Industry Regulatory Authority.”
- University of Minnesota Carlson School of Management Professor Gordon Burtch believes the equity crowdfunding landscape will continue to be highly segmented.
“Although many of the hundreds of platforms that are now in operation will ultimately fizzle and die out, given time, you can expect to see a large degree of market segmentation to persist into the future. What we have seen thus far in the reward- and donation-based crowdfunding scene are a few large players, which allow people to raise funds for pretty much anything (think Kickstarter, IndieGoGo), and a fairly high volume of smaller players, which provide niche offerings, targeted toward specific geographies, industries, or segments of the population.
“The reason these industry-specific platforms exist is that, although the big players offer the benefit of higher web traffic volumes, in order to capitalize on that traffic, the organizer has to compete with the masses of other campaigns that are fundraising in parallel. Fundraisers have to figure out a way to stand out, to differentiate themselves and attract attention. To make matters worse, on the other side of the table, potential contributors have to sift through the active campaigns to locate something they are interested in funding. Consider, in contrast, a niche platform. There, there is the benefit that any visitors a campaign does receive are already more likely to be interested in what the campaign organizer has to say, they are more likely to have a similar passion for what the organizer is trying to do, and they are more likely to have a better understanding of the subject matter.
“Geography-specific platforms exist because there are a number of hurdles to international crowdfunding, particularly when you start to talk about equity-based models. Differences around things like language, currency, legal frameworks, etc. make a single unified platform quite challenging to implement. Although IndieGoGo has arguably made this work in the reward or donation-based space, equity investment is likely to prove more difficult. It is also important to bear in mind that a lot of crowdfunding campaigns have goals and value propositions that are highly tied to a particular geographic area, addressing the unmet needs of the local populace (e.g., urban development projects, local businesses, services delivered via face-to-face interactions).
“The businesses that are most likely to benefit from equity-crowdfunding are those that find it challenging to locate capital through other means. For instance, entrepreneurs located in rural areas, first-time entrepreneurs that have yet to establish the ‘right’ connections, or businesses pushing a value proposition that is somewhat ambiguous or unclear. Businesses that are aimed at providing products or services to individual consumers also have a leg-up here, because they can benefit from directly engaging with those customers early on. However, you will also want to keep in mind that angels and VCs are often able to provide other support, since they often have business experience and can help guide you. If you are a first time business owner, or you are new to the industry in question, this guidance could prove critical.
“Crowdfunding comes with its own particular costs and benefits. As far as the benefits go, a major selling point of crowdfunding is that it allows you to engage with customers early on, to stimulate word of mouth and buzz. This latter aspect can help to drive sales, while the former can help to streamline product development by getting customers involved early on, reducing the cost of rework if / when you find a major hole in your idea. You can establish a rapport with customers at very little cost, to refine plans or designs, to expand upon them, to assess concept feasibility and to gain some indication of potential market value.
“On the other hand, crowdfunding, if poorly executed, has the potential to ruin a good business idea. Word of mouth and customer feedback can easily become detrimental to new ventures should they spiral out of control. This is particularly likely to happen if the expectations of crowdfunders are not met, if projects are pitched too early, before they are fully formed and well thought out. If timelines are not met, if the quality of the deliverable is lacking, if supporters are not kept abreast of the project’s progress or if the proposer fails to heed or respond to the crowd’s suggestions, the sentiment can begin to go negative. These issues will become doubly important once the US markets open their doors to unsophisticated investors, who may not have realistic expectations about what it means to invest in an entrepreneur.
“You will also want to keep in mind intellectual property issues (exactly how much of your idea you are ready to reveal at this time). Further, it is important to bear in mind that obtaining early-stage financing through equity-crowdfunding could have implications for your ability to obtain funding from angels or venture capitalists down the line. A number of articles in the popular press have discussed this issue in recent months. The main point here is that a VC would probably not touch a start-up with a ten foot pole if it already has 100s of investors at the table.
“In terms of choosing a platform, generally speaking, it depends on the business and the entrepreneur’s personal situation. If you are a first time entrepreneur and you have no customer following, it will be key to build up attention early on. As I noted earlier, this would suggest that a bigger, more general platform might be the way to go. On the other hand, if attention and awareness are not hurdles, then a niche platform, targeted toward your particular industry or geography would make more sense.
“As things presently stand, in the US, there are a couple of solid options. The biggest equity platform operating at the moment, to my knowledge, is AngelList.com – it has quite a large user base and has helped fund quite a large number of startups to date. This is important, because I suspect that many of the newest equity-based platforms that are beginning to pop up in the US in response to the JOBS Act have yet to reach critical mass. Other options you could look at are WeFunder.com, which is somewhat smaller, but growing, and EquityNet, which has been around for a number of years now. Note: in all cases, unaccredited investors will not be able to participate, until the JOBS Act is fully implemented (probably sometime next year). If you live elsewhere in the world, then you are likely to have more options, as there are a number of well-established equity-based platforms. For example, CrowdCube in the UK is doing quite well, as is Symbid in the Netherlands.”
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