There’s been a lot of chatter this past year about the excruciatingly modest trends in VC funding for startups. One one hand, we’ve seen Bloomberg reports that “There’s rarely been a better time for American technology startups” than in mid-2017.
The Bloomberg Startup Barometer, a weekly gauge that tracks the funding flowing into private technology companies as well as profit-creating exits, indicates that, as of Nov. 6, 2017, U.S. startups were up 24.30 percent from a year earlier:
- Number of deals were up 16.17 percent.
- Deal amounts were up 79.1 percent.
- First-time financings were up 7.67 percent.
All of this confirms the stabilization of the startup economy that had been noted since spring. According to CB Insights’ Venture Capital Funding Report Q3 2017, in the first three quarters of 2017, the number of deals held at moderate pace but total investments ($52.6B in 2017) were 54.7% higher than over the same period 2016 ($34B). The most worrying trend amid the rebound, however, has been a continued decline (of 42.26 percent) in exits.” So optimism for 2017 has been cautious, based on the upward trend from the funding slump in second half of 2016.
What hasn’t been spoken as much of lately, except among certain early adopters, is the recently available, exciting potential of equity crowdfunding, the online offering of private company securities to a group of people for investment. Raising funds has gone beyond you and the next person hearing your pitch. Now you can leverage the masses.
When regulation crowdfunding (or Reg CF) went live in mid-2016 as part of the 2012 JOBS Act, it created an emerging market of great opportunity and great risk to unaccredited investors, meaning that anyone could now invest in high-risk startup equity.
IndieGogo, as you might expect, is among the big players in the Reg CF market. It entered the market in November 2016 with a portal called First Democracy VC, created in partnership with MicroVentures. But there are more than two dozen platforms in the market already. The better known platforms are well represented, as noted by Forbes.com—Kickstarter, GoFundMe, IndieGogo, Crowdrise, Crowdfunder, RocketHub—as well as many less-known platforms like appbackr, AngelList, Invested.in, StartSomeGood, FundRazr, MoolaHoop, Peerbackers, Razoo, Fundly, Quirky, WeFunder, Nextsee, North Capital, Open Night Capital, Republic, Seed Invest, Start Engine, TruCrowd, uFunding, and Venture.co.
WeFunder led the pack in 2016, having raised almost $13M by then.
Low cost of entry
Because anyone can invest, and almost any business venture can qualify, the potential is huge. The low hurdle to enter the market is illustrated by the number of first-time fund-raising businesses. In a review of the first 100 crowdfunding campaigns filed with the SEC, Kristin Mendoza of Millyard Tech Law in Boston, notes that 60 percent of these early crowdfunding companies had been in business less than one year (slide 7).
Mendoza goes on to say that about half of the crowdfunding campaigns surveyed targeted a minimum raise of $50K, and 80 percent had a minimum target of $100K or less (slide 13). Speculation has it that they aimed low in part to simplify the financial reporting to investors, or they “set the bar low enough to ensure a successful result,” or were using crowdfunding to supplement existing seed funding (slide 14).
“What is unexpected,” writes entrepreneur-investor Jake Fisher in Medium, “is the significant presence of alcohol beverage producers, particularly wine and craft beer.” He points to Hopsters, a Boston-area brewpub that allows patrons to brew their own beer, as the most successful effort to date in terms of sheer dollars raised: $1.2 million.
Catch a fire
When the market first opened, it was a slow burn. The number of early adopters on IndieGogo was small (numbering in single digits according to some reports), but every company hit its campaign target. In the coming year, with the optimism that comes with an improving VC market, crowdfunding could catch on like wildfire.
IndieGogo founder & CBO Slava Rubin has said that he expects equity crowdfunding to have a “massive impact” and be a “game-changer.” Early crowdfunded startups have been extremely varied, including software, hardware, distilleries, restaurants, movies, and video games.
Because equity crowdfunding is just one tile in a startup’s funding mosaic, expert guidance and network infrastructure remain critical, the kind of service and collaboration provided by tekMountain, one of America’s leading entrepreneurial and innovation centers.
As described in IndieGogo’s FAQ, founders considering whether crowdfunding is right for them need to consider several basics:
- You must be incorporated in the U.S. to raise funds via Reg CF, but you don’t need to be incorporated at the time you apply for a funding campaign.
- You may choose to offer company shares in exchange for investment with an equity offering, offer a revenue share to investors, or raise funds via a debt offering.
- You can form any type of corporation. (C corps are most common.)
- The platform you select is likely to be required to perform certain things like a financial review, legal review, filing of Form C with the SEC, and opening up escrow. The cost for these services is passed on to you, the entrepreneur.
- Platforms exact commissions on funds raised. IndieGogo charges a 7 percent commission and 2 percent equity fee, based on the amount of the raise. WeFunder has the lowest fee, 3 percent.
While shopping for financing for your startup, speak with the mentors at tekMountain to explore whether crowdfunding fits your needs. Our expertise can help you navigate every stage of the evolution of your success.