How Come, One Year Later, Equity Crowdfunding Is Still Waiting For Its Moment?

For all the talk about demand for financial innovation, investors are careful about how - and with whom - they place their money. Creating an opportunity does not necessarily mean the realization of that opportunity.

In an environment in which less risk and more certainty is being demanded, crowdfunding has to prove its value to those with money, not those who want it. JL


Esha Chhabra reports in Fast Company:

Goldman Sachs estimates that equity crowdfunding can be a $1.2 trillion opportunity–that’s more than payments, small business lending, and consumer lending together. "It’s not an easier way to raise money. It’s just a different way to raise money. Equity crowdfunding is like online dating for investors and startups. It will take time to catch on,”

Kickstarter made it easy to support an aspiring entrepreneur. Now Americans can take it one step further: Don’t just support an entrepreneur, invest in them. In May of 2016, Title III of the JOBS Act went into effect, making it legal for anyone to invest in a private company, opening up investing in willing startups to any American. Now, you don’t need a million dollars to join a fundraising round, you can help a company you believe in–and get a small ownership stake–for just $500.

A wide range of platforms have sprung up to help facilitate this transaction. But while it’s been nearly a year since the new law was passed, equity crowdfunding hasn’t skyrocketed. Manny Fernandez, a Silicon Valley angel and founder of DreamFunded, an equity crowdfunding site for accredited and non-accredited investors, says that a lack of information, awareness, and some common misnomers have prevented the space from flourishing. “When online dating launched, people didn’t hop on it and love it immediately. Many thought it wasn’t their style, because they preferred meeting people in person. Equity crowdfunding is like online dating for investors and startups. It will take time to catch on,” he tells Fast Company.That said, there have been some success stories. Indiegogo, which has raised more than $1 billion for the many non-equity projects on its site, launched an equity option in November, partnering with MicroVentures, an equity crowdfunding site that has raised $85 million for startups from accredited and non-accredited investors for companies such as the Republic Project, an L.A.-based digital ad startup, which was later acquired for $14.5 million by a publicly traded company. Equity crowdfunding is gaining momentum, albeit slowly. Four weeks after the launch, Indiegogo had seen $600,00 in investments. And that may just be the beginning: Goldman Sachs estimates that equity crowdfunding can be a $1.2 trillion opportunity–that’s more than payments, small business lending, and consumer lending together.
DSTLD, a Los Angeles-based apparel brand, has raised $1.75 million from 1,698 investors through equity crowdfunding on SeedInvest, one of the biggest raises by a fashion brand using this mechanism. It hopes to hit at least $2 million before closing the campaign.
“A lot of companies end up taking shortcuts to appease the hungry growth machine that is venture capital. This is a very viable alternative to that path,” says Mark Lynn, cofounder of DSTLD. Individuals can invest in DSTLD for upwards of $500; the largest, so far, has been $50,000. He encourages other brands with a consumer-friendly product or service to consider it.
“Let’s be clear, it’s not an easier way to raise money. It’s just a different way to raise money,” he says. “But if you have a product that’s exciting to the public with an interesting story, this is a great way to connect with customers, market yourself, and fundraise simultaneously.”
It’s that trifecta–of engaging with customers, building brand recognition, and funding the company–that attracted Chicago-based Aristotle Loumis to try equity crowdfunding as well. He runs Ellison Eyewear, a direct-to-consumer brand, which sells handmade sunglasses produced in a family-run workshop in Greece. The company has a give-back program to support cataract surgeries in India through their sales.Ellison Eyewear set out to raise $50,000 on Republic, another equity crowdfunding platform; it’s already crossed that threshold and is nearing $75,000. Asked if he would have rather just raised that small amount through angels, he says that the company is doing both.

The bonus, however, he says, is the ability to share that raise publicly and thus market yourself to not just angels, but everyday consumers as well. Title III made it legal to publicize a fundraising effort. Rather than keeping it behind closed doors, companies can openly solicit for funds from anyone. But there are some challenges.
It’s not easier, Lynn explains, because like any fundraising, it involves extensive hours of marketing the company, liaising with potential investors, and filling out paperwork to meet regulations. For instance, companies looking to raise more than $500,000 must undergo a financial audit by an independent third party.
In addition, payment methods are still limited: only ACH or wire transfers. Credit or debit cards are not allowed. Lynn learned that the hard way. DSTLD and SeedInvest signed on with FirstData, a credit card processing and payments company, to accept their first batch of investments on the site. However, FirstData froze the transactions. “They had never seen anything like that before, transactions for an equity crowdfunding site. So we were in limbo for a month because we couldn’t process the payments,” Lynn recalls.
The charges were ultimately reversed, and SeedInvest and DSTLD apologized for the glitch. Investors, Lynn says, were understanding and many came back to invest. “But it is a hassle, particularly if someone wants to make a small investment.” DSTLD has also attracted interest from international investors, especially Canadians, he says. However, as of now, they can only invest $10,000 or more. For DSTLD, which tries to be millennial-friendly and wants to make itself accessible to all its consumers, that’s a tough sell. “We’re trying to get that dollar amount lowered. But to pay $35 on a wire transfer for $500 doesn’t make sense. So we have to make it more cost-effective for smaller investors,” he says.
While DSTLD and Ellison Eyewear are both consumer-facing companies, Rabble, a new equity crowdfunding platform, is focusing on solely impact: Any company with a social or environmental mission and a financial return will be eligible to raise money on their site.
Their first venture is a real estate project in Detroit, seeking $535,000. David Alade and Andrew Colom left real estate and banking in 2014 to start a company that would redevelop blighted neighborhoods in Detroit. They raised $2.2 million in equity to fix up 40 housing units. Now, they want to extend that model to single family homes. The duo have purchased 65 homes for $10,000 to $50,000 each. They want to use the funds raised for renovation work.

Detroit, in particular, allured Rabble for two reasons: The city’s recent renaissance with a revival of small businesses, artists, and makers, and secondly Umber Bawa, founder of Rabble, says, “the city itself presents a very attractive investment opportunity because for decades it has been challenged with bankruptcy, racial tension, political corruption, poverty, and crime, which has in turn led to population decline and declining property values.” The new homes will be affordable, he explains, and help bring life back to blighted neighborhoods. So this deal checks both boxes: impact and financial return. Equity crowdfunding is the right match for this project, Bawa says, because it “is enabling young, passionate entrepreneurs to give back to their community by enabling the people of that community to give back in the form of property investment, and earn strong returns at the same time. This is the circular economy working in its most productive form.”
In equity investments, backers get a percentage of the financial upside of a given project. For debt arrangements, backers get a fixed figure on a quarterly or a semi-annual basis (details vary for each project). Equity crowdfunding was designed to level the playing field, make it easier for everyday Americans to put their money where their mouth is, and share wealth creation.
But sharing wealth creation can also mean sharing wealth destruction. Before letting a project on its platform, Rabble performs due diligence in three categories: project feasibility (the track record of a team, ability to meet development targets); financial risk (ability of team to meet or exceed financial performance); and impact (social or environmental positive impact).
However, Bawa warns: “Not all platforms have stringent diligence processes, so investors should investigate the level of diligence each team undertakes prior to making an investment of any kind.”
Bottom line, investing is a risky business, particularly in early-stage companies, and equity crowdfunding doesn’t mitigate that risk. What it does do is make it easier to tap into new pools of capital, says Fernandez of DreamFunded: “I really want to make it easier for people to raise money who are not connected to the Valley, and equity crowdfunding has the means to do that. You don’t have to be sitting here [in the Valley] to find deals or fundraise anymore.”