Think of a startup, and the process behind it. You might envision rounding up a few ambitious nerds, throwing in a dash of creativity, and blessing them with the entrepreneurial spirit. We may have even tempted you to text your friends about crowdfunding your latest app idea or tech device.
Unfortunately, it can be difficult to gather the necessary finances to bring your vision to reality. Whether it’s an accelerator or incubator like Y Combinator, investing and grooming model (think Airbnb and Twitch), or a completely bootstrapped startup, each one eventually has to answer the funding question. How should I raise money and where is it coming from?
In this post, we’ll lead you through traditional startup investing, followed by all the basics of equity crowdfunding, and its impact on technology startups.
The Investing Landscape
Traditional Startup Investing
Investors, whether going through Y Combinator or other platforms, must be careful with their capital. Usually, the big money is thrown toward potential unicorns, the disruptors that return 10x the original investment. Lately, unicorns are also labeled as any startup valued over $1B. Fortune.com ranks 2016’s unicorns, with prominent names such as Uber, Airbnb, and Xiaomi topping off the list.
Unicorn or not, startups today take similar approaches to raise capital. Typically, they turn to venture capitalists, angel investors, and banks. However, this often limits the geographic variety, as connections are saturated in hubs such as Silicon Valley and New York City.
Equity Crowdfunding Regulation
As Title III of the JOBS Act is active, startups can now raise seed capital from everyday investors.
Prior to this act, platforms such as Kickstarter allowed the public to fund projects and startups. Kickstarter’s form of crowdfunding offered monetary perks and a preview of the product. A notable startup that succeeded through this method was Pebble–Fitbit just purchased their key assets, for slightly under $40m.
True to its name, rather than offering perks, equity crowdfunding provides investors with equity.
Crowdfunding: From Perks to Equity
Today, any startup can gain capital through online platforms; let’s look at how this is affecting the startup landscape and the risks that it brings.
In a move to jumpstart the equity crowdfunding landscape, crowdfunding platform Indiegogo and online venture capitalist platform MicroVentures have come together to provide this new form of investing. The platform is promoting itself with the tagline:
Invest in the ideas you believe in with a new equity crowdfunding service from industry leaders Indiegogo and MicroVentures.
This partnership presents a unique opportunity as both companies have a following; Indiegogo cites nearly 250,000 people and MicroVentures claims $100M+ from investors. While large tech companies will most likely stick to the hubs and mogul investors, equity crowdfunding brings forward a new type of interaction between investors and startups, introducing small businesses to the mix.
Sponsored on the equity Indiegogo website, potential investors are given a peek at which startups are utilizing the platform already.
Texas Zebo and Republic Restoratives represent the new aspect that comes with equity crowdfunding: geographical community. While platforms like Kickstarter and Indiegogo promote concept to market and gather a community through the potential of the product, there is no geographic emphasis.
Now that the general public can invest, geography matters, as a local community has the potential to invest in a hip new restaurant or bar. With a broader audience of potential investors, social media plays a bigger role in gaining capital. Compared to the presentation model used when convincing VCs, social media provides the exposure needed to gain funds.
The Risk
Shifting gears, the risk of equity crowdfunding lies in the potential investors. Compared to angel investors and VC’s, the general public may not have the funds necessary to bring the product or service to life. Additionally, equity crowdfunding is a high-risk investment, with no guarantee of the startup’s success.
Quoted from wired.com, having the public invest and expect returns is similar to the lottery.
“It’s like the new lottery,” says Southwestern Law School professor Michael Dorff. “There are very few Peter Thiels in the world. It’s like asking, ‘Why can’t I be Warren Buffett?’ There are a lot of smart people trying to be Warren Buffet or Peter Thiel. Your odds are slim even with the experience, expertise, and education.”
Equity crowdfunding is still a young platform, and time will sculpt its reputation. This new model is for those searching to experiment, who enjoy the thrill of a high-risk high-reward investment.
That’s All, Folks
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