- Category: Crowdfunding Platforms
- Published on April 15, 2014
Recently, the CCA Group performed an audit on the crowdfunding ecosystem in the United States. Speaking with industry experts, performing original research, and updating
a database of all active and inactive crowdfunding portals in the country, we were able to develop a “30,000 foot” view of the ecosystem, including a closer look at the types of platforms in the space (e.g. lending, reward, equity, etc.), the verticals (e.g. business, non-profits, etc.), and comparative social metrics. In this post, will take a look at three takeaways.
Niche Plays Tend to Survive
Business programs around the world often teach that startup businesses who identify and exploit a niche have a much higher chance of surviving. In their paper New Firm Survival: Industry, Strategy, and Location, authors Sterns et. al. write “niche purveyors were found to have increased survival chances” and from our initial analysis, this rings true among crowdfunding portals in the United States. When looking at the failure ratio of crowdfunding platforms by vertical, those platforms that could only be described as crowdfunding for “everything” had a 48% chance of failure. That is, of the platforms from our previous database and with the new platforms our team was able to identify, 48% of the platforms that were set up to fund “everything” were no longer active as of the time of this study. Conversely, though there are a few funding portals that focus exclusively on environmental causes, all of the portals that we’ve been able to find in this vertical are still active. See figure 1 for a breakdown of the failure rates of US funding portals by vertical.
Funding for Businesses is a Crowded Part of the Ecosystem
Our study breaks the ecosystem down into seven verticals: everything, nonprofits and causes, creative, environmental, businesses, science, and other. Of course, these verticals are somewhat imprecise and the classification of an individual funding platform into one of these categories involves some subjectivity on the part of the researcher. Nevertheless, one striking takeaway from our study is that the space for business funding platforms is crowded. Our study found that the “business” vertical had more than double the number of platforms than the second-highest category: non-profits & causes. On the opposite in of the spectrum, the least crowded parts of the crowdfunding ecosystem in the United States are funding platforms that focus on science and environmental issues. See figure 2 for a visual representation of the crowdfunding ecosystem in United States by vertical.
The Major Players Have all the Social Proof: a Natural Oligopoly?
When our team looked at some of the comparative social metrics between platforms in United States, we were struck by the presence of outliers. Looking at the descriptive statistics (see figures 4 and 5) of the active platforms that have at least one “like” on Facebook, the kurtosis (a measure of skew) is enormous, signaling that the distribution of these data is nowhere near normal. The same can be said for the audit of these platforms’ presence on Twitter. Instead of a somewhat normal distribution, there are a few players in the top quartile that dominate the crowdfunding presence on Facebook and Twitter. This is an important consideration given the impact that social proof has. It builds trust, attracts funders, and attracts campaign managers. This may not surprise many of the readers of this piece because a couple crowdfunding portals are becoming household names and others remain relatively obscure.
In his paper Supermarkets as a Natural Oligopoly, Paul Ellickson of the University of Rochester describes the “size of the store” as a factor that drives the success of few firms in the supermarket space: “The oligopolistic chains do not carve out separate turf, choosing instead to compete head to head with their rivals, with choice of store size behaving as a strategic complement. No other theory seems capable of explaining these facts.” Interestingly, he believes that this idea is not unique to supermarkets, but applies to many retail verticals saying, “the same features seem to characterize modern retailing in many arenas.” Could it be that a crowdfunding portal shares economic similarities with large brick and mortar retail spaces? If so, that might be a strategic lighthouse for portal owners.
Written by Davis Jones for CCA
- Category: Crowdfund Investment
- Published on March 31, 2014
- Written by Jason Best
Last week Facebook announced it would acquire Oculus Virtual Reality for US$2 billion. 18 months earlier Oculus used crowdfunding platform Kickstarter to raise US$2.5 million from supporters. Unfortunately, none of those backers were equity holders. Owning equity in Oculus wasn't an option for these supporters because the JOBS Act, which was signed into law in April, 2012 and legalizes the ability for companies to use crowdfunding platforms to sell debt or equity, hadn't gone into effect yet. (It still hasn't 2 years later). Outside of Kickstarter however, there were some seed investors that were able to invest in Oculus at a $2.5M valuation. So you can understand why there are some pretty upset Oculus Kickstarter backers whose dollars didn't earn them an 800x return like the investors but feel they are partially responsible for the success.
This is not another rehash of the Occulus acquisition by Facebook. I am only focusing on one thing; misdirected anger. Occulus and Kickstarter did exactly what they offered in their kickstarter campaign. They didn't create the laws that prevented people from investing in private companies unless you are the wealthy 1%. They also didn't create the laws that made it illegal to use kickstarter-like platforms to raise equity for a business until the JOBS Act goes into effect.
It is time to stop directing their anger at Oculus or Kickstarter. Instead, supporters should shift their dismay to the group that prevented them from making an investment in that company (that had the chance to reap a financial gain in the process) in the first place: The Securities and Exchange Commission (SEC). If the SEC had moved faster to write and approve the rules for equity crowdfunding for unaccredited investors (a.k.a. the vast majority of people living in the U.S.), then Occulus could have made the decision to raise money via either equity or debt crowdfunding (likely equity since it had no revenues or prospects for very near-term revenues to support a debt repayment). IF they had made this decision to raise money via equity crowdfunding and IF individuals made these investments, they would have reaped the same rewards as other stockholders with the same class of stock.
My point in not to say that everyone is going to get rich on investing in startups. My point is that if the SEC had moved more quickly in their rule making progress (remember, it is now 2 years since the President signed the bill), tens of thousands of businesses and startups across the US could have had new options to consider in raising capital for themselves. This would have created more jobs and innovation for our economy and potentially other companies that might have created a financial gain for their investors. Not the "truth is stranger than fiction" type of returns Oculus delivered, but returns (via equity or debt investments) none the less. Let's congratulate innovation and hard work and let's direct the frustration with the inability to make investments in startups and private companies, at those that can can help alleviate it.
If the SEC will move forward and issue final rules that provide companies with the opportunity to raise capital, other companies will have a shot at building their vision and regular investors will have the chance to be a part of it if they choose to be.
PLEASE NOTE: It is entirely unlikely and insanely rare for a company to sell for $2B in less that 2 years (or ever, for that matter). Historically, most startups fail and historically, most people who make investments in early stage companies or small businesses loose money. Making investments in startups and small businesses is very high risk and if one chooses to make these high risk investments, they should be limited to a very small percentage of their total portfolio.
- Category: Creating a Global Framework
- Published on December 17, 2013
- Written by Sherwood Neiss
The future of Impact Investing and Crowdfunding was on display in Nairobi, Kenya last week. At the World Bank/infoDev’s annual funding meeting their budget was divvyed up among the creation of Climate Innovation Centers (CIC) in Kenya, Ethiopia, South Africa, Vietnam and the Caribbean and new funding mechanisms to allow the Bank to effectively seed innovative via crowdfunding.
CIC’s are incubators training impactful, locally sustainable technology companies. Examples include a biofuel gas stove company that can reduce carbon emissions and black smoke disease and a household filtration system company that recaptures and recycles water allowing women to perform their duties while saving them hours from painstakingly carting water jugs on their shoulders.
The new funding mechanism, called crowdfunding, will use the Internet, technology and the social network to connect would-be entrepreneurs with diaspora money. It will allow investors anywhere to identify a wellspring of opportunity in emerging markets, fund their entrance into incubators, and seed them with capital. The CICs will provide training in management, operational and financial systems, procedures and controls. They will also teach entrepreneurs how to broaden their fundraising efforts via crowdfunding to solicit future growth capital from investors who share similar communities and homestrings. These investors won’t be traditional institutional investors but Africans, Asians and Carabineers who live abroad and wish to remit funds into these investment opportunities from their sofas in Detroit, Michigan or London.
Crowdfunding isn’t just a fad, it is turning out to be a powerful tool to democratize access to capital globally. Research conducted by the University of California, Berkeley shows that funding by the crowd operates in a rational manner (eg: no hype), removes the stickiness of the process (eg: brings documents online, allows multiple parties to diligence and vet at the same time, and facilitates the immediate transfer of information and cash). The industry which only started to gain traction in 2009 is already a multibillion dollar industry that consists of entrepreneurs, fundraising websites, ecosystem players that provide vale added services and of course at the center investors.
For the CICs and other considering this path the next steps are creating education, training and a funnel of opportunities. This requires the connection of stakeholders in the private sector who focus on teaching entrepreneurship and merging those principals with crowdfunding and accounting. The stakeholders include organizations focused on building entrepreneurial capacity, crowdfunding education companies and tools that facilitate the accounting of businesses and their structures and processes. Sherwood Neiss of Crowdfund Capital Advisors says, “This fits perfectly with our firms capabilities. Our principals are all successful entrepreneurs, who have raised millions of dollars in the private capital markets, hosted successful crowdfunding campaigns and wrote the framework for the crowdfunding law.”
Crowdfunding solves pressing problems for both NGOs and developing world entrepreneurs. It answers the question, where do I find capital? It makes the impossible possible. It provides a continuum of funding and community engagement from product to process. And allows investors to enjoy the greatest opportunity for economic value, which is created at the inception and historically limited to the very few.
But crowdfunding doesn’t come without risks. And these risks (lack of oversight, regulation, & policy) can be greater in the developing world. There are ways to mitigate this risk. It begins with standardizing the process, coming up with a standard disclosures, connecting these ideas to co-working spaces, incubators and accelerators that are sponsored by trusted brokers like the World Bank and regulating all this online, via websites that are registered and tied into reporting systems where investors can see how their money is being spent.
In doing so the perennial question of trust and accountability are answered. This is about creating a value chain of opportunities and allowing investors to put their money where their mouth is. Businesses that are successful may not only have access to capital, but strong local resources to guide them and a distribution network of customer and investors for their product.
Not only are these technologies sustainable but the process by which they are funded is efficient. Consider electricity. There has been a movement in the developing world to decentralize and promote off-the-grid technology that create mini grids. Rather than using mega public funding to finance nationwide electrical infrastructure that take decades and billions, we may now use crowdfunding to create mini funding events and have an impact almost instantly and at a subfraction of the cost. And by narrowing the funding target business models are promoted that are appropriate for a particular village or region rather than tackling national issues.
As countries move from donation or perks based crowdfunding to debt and equity crowdfunding policy will need to be addressed. The financing policy environment will be extremely important. Policy controls whether companies can succeed. Where they can do business and how much they can charge for things like electricity. Policy needs to be enabled that allows these crowdfunding ecosystem to flourish. This was the subject of the World Bank’s report Crowdfunding’s Potential for the Developing World.
With $60B in remittances already flowing into Africa a year but often times being immediately spent for goods or safety concerns over hording cash. Crowdfunding may allow diaspora communities to engage directly with locally sustainable businesses that are having an impact and creating jobs and economic prosperity. Crowdfunding will address the gender inequality issue as more female investors back more female entrepreneurs and promotes economic inclusivity particularly for parts of the work that historically have been called “the bottom of the pyramid.” The time is here, the World Bank is taking the next steps. What is your country doing?
- Category: Creating a Global Framework
- Published on October 23, 2013
- Written by Sherwood Neiss
October 23, 2013 - Washington, DC. Today, the SEC took the important next step in legalizing debt and equity based crowdfunding in the USA. In an hour-long hearing all 5 commissioners, including two conservative ones, voted in favor of updating the securities laws to the way we live our lives today via the Web and social media. “This is a huge step forward in our fight to increase access to capital for startups and small businesses,” says Jason Best, principal of Crowdfund Capital Advisors and co-creator of the Crowdfunding framework that was signed into law by President Obama. “The work isn’t done. We need to review the rules and provide substantive feedback on them so they can be finalized. We look forward to continue working closely with the industry, the Securities and Exchange Commision and FINRA to finish the process.”
Crowdfunding is an Internet phenomenon that uses the social network and crowdfunding websites to facilitate the funding of startups and small businesses. It takes traditional “friends and family financing” and expands it to make it faster and more efficient to attempt to raise money for a business. With the passage of the JOBS Act in 2012, the United States paved the way to use money raised via the internet and social networks as an investment rather than a donation or pre-order for a product. The industry has grown dramatically in volume in just a short period. A University of California Berkeley Study claims the market size will reach almost $4B when debt and equity crowdfunding begins.
Entrepreneurs will be able to seek up to $1M/year on regulated crowdfunding websites either known as funding portals or broker/dealers. Investors are limited as to how much they can invest based on the following income or net worth thresholds.
Income or Net Worth
Maximum You can Invest across all crowdfund opportunities/year
5% of your income or net worth. Whichever is greater
10% of your income or net worth up to $100,000
Investors need to understand that investing in startups and small businesses is a high-risk investment. While entrepreneurs must submit to a fraud and background checks the reality of business failure and fraud still exists. “We believe a risk greater than fraud is failure, despite the best efforts of the entrepreneur,” say Best.
“Entrepreneurs should take the time to educate themselves,” says Sherwood Neiss, principal at Crowdfund Capital Advisors and also co-creator of the crowdfunding framework signed into law by President Obama. “Raising money is not easy, nor should it be. We want entrepreneurs to be successful but we also want them to understand the seriousness and responsibility of taking investor money and reporting to them. This is why we created Success with Crowdfunding to help entrepreneurs and investors better understand this new type of investment and how best to use it.”
Neiss and Best aren’t done. They just released a report in conjunction with the World Bank entitled Crowdfunding’s Potential for the Developing World. In the report they provide a roadmap for governments interested in implementing crowdfunding ecosystems to analyze whether they have the variables necessary for the environment to flourish. They estimate that the global opportunity for crowdfunding will exceed $90B within 20 years. They just returned from being part of a U.S. State Department Delegation to Kuala Lumpur, Malaysia where they presented at the Global Entrepreneurship Summit and from the first Academic Symposium on Crowdfunding, held at UC Berkeley where leading academics presented research papers on key findings related to crowdfunding.
Why is September 24th a Huge Day for Entrepreneurs? Title II of the JOBS Act and Crowdfunding for Accredited Investors Begins
- Category: Crowdfund Investment
- Published on September 20, 2013
- Written by Sherwood Neiss
More Investment Money Means Potentially More JOBS!
On September 24th, there will be a sea change in how entrepreneurs can seek money from early stage investors - one of the largest changes to securities laws in 80 years. On September 24th, Title II of the JOBS Act (a seven-part Act signed into law by President Obama on April 5, 2012) goes into effect. Here are the key questions to be asking.
Question: What is the change is that is going into effect?
Effective as of September 24, 2013, Issuers of shares (under New Rule 506c) may use general solicitations and general advertising to effect a private placement. Prior to this any public means of communication like magazines and television were excluded from avenues for raising money for companies unless they were public. You really needed to know someone who was raising money in order to invest. There must have been a pre-existing relationship. Now that pre-existing relationship doesn’t have to be there. So businesses can reach more potential investors, faster, via the Internet and social media.
Now private companies can use those mediums as well as the Internet and the social network to reach millions of potential investors. This reverses an eight-decade-old law.
Question: Can anyone invest? Is this crowdfunding for unaccredited investors that we’ve been hearing about?
No, not anyone can invest. While anyone can see the solicitation for funds, the completed sales, must only be to “accredited investors” and the Issuer (the company, broker/dealer or 3rd party Web platform) has the burden to verify that the investor is “accredited.” An accredited investor is someone who makes over $200,000 for the last 2 years or has a liquid net worth of $1M. Crowdfunding for unaccredited investors is still waiting on the SEC to come out with the proposed rules. Unaccredited investors that might see these solicitations cannot invest in these offerings. Companies accepting funds must be careful to verify accreditation.
Question: What is the maximum amount that can be raised?
Unbeknownst to many people there is no cap on the amount that can be raised. While this has always been there, the ability to use the Internet to reach more investors has the potential to lead to a lot more investment money. This influx into the economy could be a boon for businesses and jobs. This can be beneficial for startups, small businesses and even Venture funds.
Question: What are the risks?
There are many.
- First, as with any investment there are no guarantees that you will see a return, that you will get your money back or a timeline attached to if and when you see a return.
- Second, there is no review of the offering by the Securities and Exchange Commission. Solicitations can be online or offline and made to any potential investor. While forms need to be submitted to the SEC, there is no requirement for review of the offering by any State Securities Commission. Since State Securities police the markets there is an opportunity for fraud.
- Third, this is really buyer beware. Investors need to be cautious before they invest. Investors should only invest in people they know and trust and opportunities they believe in. They should take time to educate themselves about investing in the private markets and understand that in many cases the securities they buy will not be liquid, meaning they are not converted into cash easily. As a matter of fact in many cases you might have to hold on to them until the business sells, merges or goes public.
Question: What are the benefits?
The majority of wealth in corporations happens at their early stage. While there is a tremendous amount of failure after 5 years, companies that succeed not only create a vast number of jobs but a return on investment that exceeds many other investment opportunities. That being said, investments into high-risk companies like startups and small businesses should never equate to more than 10% of an individual investor’s portfolio.
- What does this change mean?
Issuers can reach moreWhy is this important?
- According to the IRS there are around 6M accredited investors in the USA.
- According to the Angel Capital Association:
- Only 10% of them invested in private companies
- However, those investors pumped $23B into those companies
- With the lift on the ban the potential to reach every 1% more of accredited investors represent another $2.3B into the economy and jobs
- Is this Crowdfunding?
- Crowdfunding is using the social network to solicit funds for an idea via an online platform likeIf a website like this is used under the new law and the solicitation is targeted to accredited investors, you could consider this the first wave of equity or debt-based crowdfunding.
- However the change in the law does not require the use of websites to facilitate theWe think this might be problematic because crowdfunding websites bring transparency to the process by forcing all the documents related to the offering online. This means there is a digital footprint of everything that happens. Digital footprints have been shown to increase transparency since people are afraid of repercussions. Not having a footprint of what people are offering or saying can lead to problems.
- When Title III of the JOBS Act goes into effect, businesses will be able to solicit both accredited and unaccreditedHowever there is a $1M cap on how much issuers can raise as well as caps on how much investors can risk. In what just went into effect, there are no caps on issuers or investors. This means investors can lose a great deal if they aren’t careful.
- By not forcing this to happen on SEC registered websites, it might be difficult to police theTitle III of the JOBS Act requires that these transactions take place on websites that are registered with the SEC.
Net-Net This could be a huge influx of capital upwards of $2.3B for every 1% more of accredited investors that begin to invest in private companies.
- All issuers and participants in the offer and sale of securities who may elect to utilize the new freedoms afforded by Rule 506(c) should proceed carefully and to generally solicit and market the offering of unregistered securities in a manner that doesn't draw unwanted attention.
- Issuers should consider hiring a law firm like Ellenoff, Grossman and Schole to review their documents and assist with filing their forms with the SEC.
- Issuers should consider listing their offerings through an “accredited investor crowdfunding platform” like SeedInvest that can help them follow the steps to be compliant.
- If you are an entrepreneur and you have never raised money before, you need to EDUCATE yourself before you getThere are resources:
- Success With Crowdfunding– Provides online step-by-step training and education including:
- Introduction to Crowdfunding
- Title II for Issuers
- Title II for Investors
- Crowdfund Investing for Dummies – Lays the groundwork for raising money using the Internet and is a resource for issuers looking to raise money from both accredited and unaccredited investors.
- Success With Crowdfunding– Provides online step-by-step training and education including:
This isn’t easy. Companies trying to raise money will have to work for it. Here’s a breakdown of what issuers need to confirm. (Some of this is repetitious to above).
- All solicitations must be accurate
- Companies need to make sure each potential investor receives a full private placement memorandum (these require lawyers and can cost at minimum $25,000) so this will likely mean that people using this means of raising money will be raising more than $500,000
- Companies, as mentioned above, must verify each investor is indeed “accredited”
- Form D will be expanded and require addition information including:
- Issuer information
- Issuer website
- Type of securities
- Details about purchasers (individuals or entities)
- Use of proceeds
- Description of general solicitation
- Description of verification methods
- File Form D within 15 days before general solicitation begins
- File an amendment to Form D within 30 days after completion of the offering
- Include a legend in offering materials for generally solicited deals
- For a period of two years, submit offering materials to the SEC for review and analysis (these materials will not be available to the public via the SEC website)
- For the first time in history the ban on general solicitation is lifted.
- No need to engage a middleman, no need for a broker
- However, they can only take funds from accredited investors.
- Prior to this change accredited investors self-certified their status
- Now the burden of certification falls on the shoulders of the issuers
- Con – Investors might not want to release their privateIssuers might not have the manpower to read through all the documents to confirm accreditation. If issuers do not follow reasonable verification procedures, they may be in violation of the 1933 Act resulting in significant penalties, including rescission rights on behalf of investors.
- Pro - Accountants or lawyers can act as the proxy forThere is talks about US Treasury creating a plug-in to the IRS tax tables for investors to print off a government issued accreditation certificate which would solve this problem