The Reality of Equity Crowdfunding
This past week, the SEC’s new equity crowdfunding rules enacted under the JOBS Act officially took effect, so as of last Monday, previously non-accredited investors (basically those with less than $1M net worth, excluding their home) can finally start investing directly in startup equity.
In this week’s issue we’ve featured a post from Jason Calacanis about equity crowdfunding. Jason is certainly one of the most bullish public advocates for the new rules, and it’s easy to understand why, given that he is the leader of one of the largest AngelList syndicates. However, in his post Jason paints a picture of a world where every mom and pop will be able to share in the wealth created by technological disruption, a vision I believe is overoptimistic.
Jason explains how he envisions lower income individuals being able to benefit from the new rules by investing a few hundred dollars directly into technologies that they use and love in their everyday lives. He cites Google and Facebook as examples of companies that many people could tell were going to be huge successes so they could have made huge returns on them if they were able to invest in them early. Although I appreciate his enthusiasm I think many in the tech world would disagree with this utopian view of crowdfunding. Primarily there are two main flaws in this argument:
- At least as crowdfunding stands now, the Googles and Facebooks of the world would have never needed crowdfunding. The great companies that every mom and pop know of are either so obvious to early stage investors that their rounds would fill up immediately, or they are past the stage of accepting seed funding.
- Every mom and pop should not be investing just because they love a product. It is difficult for active angels to make enough great investments to deliver a positive return on their invested capital, and they are arguably seeing orders of magnitude more tech products than your average consumer. Therefore this idea of mom and pops investing in a handful of products that they love is more likely to lead to cash being funneled into the next cat selfie app, than it is to deliver life changing wealth creation to the masses.
I am in full support of expanding equity crowdfunding eligibility, but I think that overall it will only have a small impact on the startup financing community, which will materialize primarily at the margins. I see the biggest impact being a small influx of new equity investors that were previously just below the accredited investor limit but are very involved in the tech community (think younger tech company employees, students, and early adopters). In addition, will we probably continue to see more growth in certain niches, such as consumer focused hardware startups, where non-equity crowdfunding campaigns (such as Kickstarter) have already had a huge impact on enabling startups to test ideas and launch products before having to raise outside capital. Hopefully the ability to offer equity in addition to pre-orders or perks, will only help to expand the amount of money that capital intensive companies can collect to prove their concept before reaching institutional rounds.
In general I support anything that generates more competition and greater transparency in the financing process, and hopefully gives entrepreneurs more options, as this will help grow the startup ecosystem further. But I do not think that equity crowdfunding for all will be a game-changer in the broader sense. It will be interesting to watch how this new source of capital evolves and if we see any major rocket ship companies, that got their start via equity crowdfunding, take off over the next few years.
-Mike Droesch, Founding Editor