Jon Soberg is a managing director at Blumberg Capital.
The long term potential of the JOBS Act looks very promising, but the implementation so far feels like watching paint dry.
Crowdfunding is getting a lot more hype in the aftermath of the JOBS Act implementation, but there’s a long road ahead.
Early stage risks
I have been on the record as a strong believer in crowdfunding for projects, causes, and pre-orders, but have voiced some concerns about equity crowdfunding. My concerns come primarily from the numbers. A large percentage of startups don’t make it — period. If we also assume that the best entrepreneurs will attract “smart” institutional money, there is an adverse selection issue. The top early stage investors see thousands of deals per year, and filter those down to only a handful of investments, and not all of those investments succeed. They say it takes a couple of years and $10M to train a new VC. Most individual investors don’t have the capital to make many mistakes, and the odds are not in their favor, especially investing in very early stage companies.
Credit to the innovators
However, some of the impressive innovators in the space are making me rethink my skepticism, I’m becoming much more bullish on equity crowdfunding. I still have some concerns about the risks, and the lawsuits that will inevitably follow the failures. However, the innovators are a step ahead. My apologies for missing some of the innovators, but I want to mention a couple in particular that I see as leaders:
- AngelList has always been a leader, but their latest innovation, allowing a lead investor to create a virtual fund and build a syndicate, is brilliant. This mechanism can allow a lead with significant expertise to vet a deal and bring in followers and build a substantial round without anyone taking inordinate risks. I am anxious to see how these syndicates form.
- CircleUp’s direct focus on consumer businesses, segments both companies and investors, building an ecosystem with consumer-focused company expertise. Their preference for at least $1M in revenue along with their specific focus mitigates some of the risks I alluded to earlier, and allows for solid due diligence, not to mention the fact that consumer businesses are more approachable for many investors.
- FundersClub co-invests with proven investors, including angels and VC funds, and they also get deal flow from the same sources. Their team vets deals and only a small portion make the cut, again addressing the risks I mentioned. One of Blumberg Capital’s portfolio companies recently completed a round and we all made space for FundersClub in the round. This approach seems solid.
And, of course, I would be remiss to exclude KickStarter and Indiegogo, who continue to blaze trails and set records. Neither is doing equity financing yet, but Indiegogo just raised over $10.5 million for Canonical’s Ubuntu Edge smart phone.
“Private IPO” platform
The most interesting platform outside of the US in my opinion is the new Bergfuerst platform in Germany. One of our portfolio companies, Urbanara, will be doing the world’s first “private IPO” in September. Bergfuerst targets later stage companies with proven track records going for growth rounds and Urbanara’s round in September will be the largest equity raise on a crowdfunding platform anywhere in the world. The process is much like one would expect, complete with the regulatory filings, prospectus, roadshow, and the actual IPO. After the IPO, it gets really interesting: investors have the ability to sell right after the IPO, so there is liquidity along with the crowdfunding. It is currently limited to accredited investors, and absolutely not available to U.S. investors due to regulatory limitations in the U.S. (As existing investors in the company, Blumberg Capital can invest alongside the Burgfuerst offering, but not in the offering itself).
Disruptions to angel and VC funding
Ryan Caldbeck, CEO of CircleUp, wrote a very forward-thinking article about this topic last year on VentureBeat where he covered some key points well. For the most part, I agree with his statement that crowdfunding will disrupt angel investing, but I also see the VC space changing and being disrupted. AngelList is enabling syndicates and significant funding rounds, along with platforms like Seedrs in the UK, FundingClub in the US, OurCrowd in Israel that act as virtual VCs; Bergfuerst in Germany is providing growth capital and liquidity. It is obvious to the casual observer that these new alternative sources of capital for entrepreneurs have already begun reshaping the landscape. The best platforms are also addressing the risks and needs at different stages extremely well. These platforms add value to the ecosystem, enable more good entrepreneurs to be funded — they work alongside great institutional investors, but also provide a level of competition.
The next few years are going to be fun to watch, and hopefully they will open up new opportunities for both startups and investors. Does this mean we will be buying closed end mutual funds with VC investments in a few years? I don’t think it will happen right away, but I hope we get there. The theory works, although if the JOBS Act seems like it is taking a long time, don’t hold your breathe waiting for the regulators to make early stage investing ubiquitous.
Jon Soberg is a managing director at Blumberg Capital and has been a serial entrepreneur, an executive at large corporations, a consultant, a financial analyst, and a robotics geek.