As Steve Case has said, it’s ridiculous that anyone can gamble and be guaranteed to lose money, but there are strict regulations around who can invest in early-stage private companies and earn (in some cases) a 27% IRR on their capital. *
The Entrepreneurs Access to Capital Act helps to redress this. It allows small businesses to raise $1 million, from a limit of 10% of income or $10,000 from individual investors, without registering their companies with the SEC. Currently, entrepreneurs are prohibited from doing so under the Securities Act of 1933, which requires companies who wish to sell securities to register and provide extensive information about strategy, future plans, ownership, management, etc. It was created before the Internet age to protect investors by promoting full disclosure of information.
For small businesses, registering a company is timely and costly in management fees, accounting fees, and legal fees. As an alternative, entrepreneurs have been using crowdfunding sites like Indiegogo, one of our portfolio companies, to raise money for their companies through online donations.
Currently, these Crowdfunding sites don’t give donors any equity in the companies. About a year ago, the Crowdfunding Campaign to Change Crowdfunding Law raised $1,321 (out of a $1,099 Goal) through Indiegogo’s campaign platform in order to fund a petition against the Securities Act. They hired the Sustainable Economies Law Center to write to the U.S. Securities and Exchange Commission and request they exempt securities offerings up to $100,000 with a limit of $100 per investor. This petition and the support it garnered from the public caught Capitol Hill’s eye.
The House of Representatives has since then overwhelmingly approved (407-17) the “Entrepreneur Access to Capital Act,” which amended the Securities Act by allowing the following:
Transactions involving the issuance of securities for which
a) The aggregate annual amount raised through the issue of the securities is $5,000,000 or less; and
b) Individual investments in the securities are limited to an aggregate annual amount equal to the lesser of-
ii) 10 percent of the investor’s annual income
Although the act still needs to be passed in the Senate, it’s a promising start.
The recent Jumpstarting our Business Startups (JOBS) act also provided a boon to crowdfunding, by allowing non-credited investors to participate in funding rounds for a startup company.
With public support, the passage of this type of crowdfunding legislation would not only provide entrepreneurs with the money they need to fund innovation, it would also be easier for people to become angel investors.
For background, Indiegogo is an online platform for anybody to raise money for his or her campaign, whether it be an author’s novel, an entrepreneur’s invention, or a filmmaker’s documentary. Danae Ringelmann, Slava Rubin and Eric Schell co-founded Indiegogo in 2008 to enable anybody with a great idea to make that idea happen. The company has experienced extraordinary growth: in March 2011, it had funded around 20,000 campaigns in 159 countries. Today, it has helped raise millions of dollars for over 50,000 campaigns across 205 countries.
The platform allows anyone to tell their story by creating a campaign profile, which includes an image or video and written story. At Indiegogo, you set a funding goal and offer perks to contributors, while sharing the campaign with your network, engaging fans, tracking information about contributors, and collecting money.
One of our favorite stories is that of Jessica and Sean Haley, who desperately wanted a baby but whose insurance did not cover fertility treatment. Hours after they posted “Help the Haleys Have a Baby,” money started coming in, and they reached their goal of $8,050 including $423 from a complete stranger.
We love the added value Indiegogo creates for fundraisers. They enable campaigns to offer perks in exchange for contributions, which engage fans, build trust, and provide an opportunity for more people to get involved. One campaign offered a free morning wake up call to anyone who donates over $25. Indiegogo also helps campaigns gain and measure traction using the “GoGo Factor,” which is tracked automatically and uses a custom algorithm to determine which campaigns get promoted on the homepage, on the site’s blog, or in media mentions. The factor takes into account funding, comments, shares and other campaign activity.
Online fund-raising has been popular for nonprofit groups and charity events for several years, but it is only recently beginning to spread to other sectors. Indiegogo allows anyone with any cause to fund for his or her campaign.
Slava Rubin, CEO of the company, has a few tips on how to maximize results:
- Set a two-month Deadline: The deadline for fundraising should be set for between 1-120 days, but the site sees best results on campaigns that are around 60 days long.
- Upload a video: Rubin says campaigns with videos raise 122% more money.
- Start now!
* One last point: the 27% IRR calculation I referenced above is from the Kauffman Foundation for angel investors in groups. Investing in startups is highly risky and we discourage it unless you can readily lose the capital you’re investing…because most of the time, you will lose that capital.
All of the crowdfunding sites suffer some selection bias, insofar as the best entrepreneurs will get capital directly from value-added VCs/highly knowledgeable angels, not from strangers on a crowdfunding site. Crowdfunding sites can alleviate that systematic problem by becoming vehicles for value-added angels and great startups not just to connect, but to document, diligence, and execute their transaction. Gust.com, Angel.co, and Second Market have all done this successfully, by being value-added on top of existing networks of investors and investees.
I’d be very cautious about investing in a startup on a website in the hopes of a financial return. VCs do this as an industry, and average returns for the VC industry are mediocre at best. However, if you are looking for rewards-based returns, e.g., getting your name in a movie, or being happy that you helped someone have a baby, then you can be very comfortable investing through crowdfunding sites such as Indiegogo.