Equity crowdfunding is finally here! Since May 16, 2016, you’ll now be able to invest in startups on an equity crowdfunding website, even if you’re not an accredited investor.
If you’re reading this and it’s past May 16th, leave a comment and let me know what questions you have about this new fundraising medium.
In the past, we’ve gone through some of the pros and cons of raising money using Title III of the Jobs Act. Also, I’ve put together a YouTube video to help bring more light to this new marketplace, which I’ll embed below.
I want to talk about a few of the things that you can expect when raising money or investing through equity crowdfunding, along with a few of the predictions that I have.
Before I get to that, I wanted to mention a few companies like Indiegogo, StartEngine, SeedInvest, and CrowdBoarders, which have intentions to get involved with equity crowdfunding for non-accredited investors. I’m looking forward to seeing the other platforms that emerge.
Keep in mind that not all companies are as excited about this new fundraising medium. In fact, Kickstarter has firmly expressed that they have no intention of getting into the equity crowdfunding arena, telling Fast Company that “The investment model is powerful and there’s a need for it, but it’s also limiting…Not all creative ideas are meant to be investment vehicles.”
Also, at the time of writing, CircleUp has decided not to open up their platform to non-accredited investors and the cofounder of OneVest believes that it’s not going to be a mainstream option for sophisticated tech founders, saying “While Title III of the JOBS Act seemed to be promising back in April 2012 when the law was passed, we at 1000 Angels (a Onevest) company are disappointed with the outcome.
We see it will be very challenging for startups to raise financing under this framework that doesn’t really adjust to the reality that early stage startups face and includes a steep cost of capital.”
My predictions for the marketplace
I think that we’re definitely going to see a surge in interest regarding equity crowdfunding for non-accredited investors, especially among young and first-time entrepreneurs.
Investors are likely going to be drawn into the industry to “make money” or invest in the next Facebook, Uber, or SnapChat. Just think, you could buy a lottery ticket each day for a year or invest in a high risk tech startup. At the same time, I also think we’re going to see investors who really simply want to own the product or own a bit of a company who’s mission they agree with.
While there will be many new entrepreneurs who are going to want to raise money for their next brilliant idea, there will also be savvy marketing entrepreneurs who will use this new vehicle as a way to get publicity for their company. One of the most misunderstood reasons as to why people launch Kickstarter and Indiegogo campaigns is quite simply for the marketing exposure and to build a tribe.
I’m willing to bet that for the next 2-3 years, this portion of the industry will be fueled by success stories. Since success and failure will also be a juicy news story, the media is going to hype this up, maybe even with titles like “Could this be the next Mark Zuckerberg?”
Another little-discussed principle of marketing is that the more something is seen, even in a negative light, the more people who already wanted to engage in that activity will engage in it. This means that the “bears” who warn the public against investing will simply spur on interest in this field.
“Rather than making the private public, preventing a behavior requires the opposite: making the public private. Making others’ behavior less observable.” – Contagious: Why Things Catch On
One of the things that I look at when assessing the growth potential of an industry is whether this new website, platform, or app is simply bringing an existing behavior online, like giving, fundraising, or investing, or it’s seeking to create a new habit in its users. Creating a new habit is always harder.
In the case of equity crowdfunding, it’s creating a new habit in some ways, but it could also capture the existing habit of retails investors who actively care about managing their portfolio and “picking stocks.”
Overall, there’s one word that is responsible for all human behavior: emotion. While yes, smart investors are able to detach their emotions from investing, the majority of investors do not. The same is true of entrepreneurs.
The more that emotions are heightened in this industry, the more activity you’ll see on these platforms. In particular, I think that this is why a secondary market would lead to extreme high growth in this sector. Lastly, it will be interesting to see the service providers that emerge around this industry.
Warning
I’m a big believer in fundamental principles that don’t change, regardless of situation or time period. Here’s one such principle:
“We tend to employ mental shortcuts when:
- There is too much information and we need something to focus on
- We’re not very knowledgable about the product, service, or problem.
- There is uncertainty.
- We’re not thinking straight or our rational thought is affected by our emotions.
- To avoid mental strain and decision making fatigue” – Influence.
The reason that emotional investors aren’t the best investors is because they use mental shortcuts as the underlying reasoning behind their decisions.
For example, just because the price of a stock is going up means that it’s in demand, that investors must know something they don’t know, and therefore, it’s a good buy.
Another example would be that because Bob is super smart and has investing experience and Bob is buying this stock, I should buy this stock. There are a lot of smart people, including economic Nobel Prize winners, who have picked horrible stocks or made dumb forecasts.
Beware of how your emotions are going to affect your decisions as you enter the equity crowdfunding realm!
My Plan
I do think there is a bias to focus on the ROI of an investment, rather than on what you can learn from the experience. Also, there isn’t much talk of how you can leverage investments in other ways, like meeting new people or gaining knowledge in a particular industry.
I’m planning on investing through this medium. For me, I’m going to be using Y Combinator’s approach to investing, which I explain here. I’m also going to be using these investments to build relationships with entrepreneurs and other investors that could lead to future collaborations or projects. Finally, I’ll be using Tim Ferriss’ angel investing principles as guidelines (here’s another good article on the topic). But, I could look back on this post in the future and think that’s pretty dumb.
I’d love to hear what your thoughts are on equity crowdfunding for ordinary folk and what your plans are in this industry! Let me know by leaving a comment below.
