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Today, a massive change in investment financing goes live. Title II of the JOBS Act, designed to open up more investment capabilities and stimulate the new startup economy, is now in effect. It kills an 80-year ban on telling people that you are raising money.
And an even bigger change allowing ordinary people — read, those who aren’t millionaires — to invest is coming soon.
That’s music to the ears of Crowdfunder CEO Chance Barnett. Crowdfunder is a connector of startups seeking funding and investors seeking opportunities. The company, which has a strong local focus in L.A., New York, Mexico City, and Las Vegas, has helped consummate $22 million in deals already between over 31,000 investors and entrepreneurs, focusing on seed and Series A rounds between $500,000 and $2,000,000.
I asked Barnett what the changes mean — and what he sees in the future for investors, startups, and, yes, the average Joe.
VentureBeat: What, exactly, is changing?
Chance Barnett: For the past 80 years, it has been against the law for startups and small businesses in the U.S. to openly notify their personal network and the public more broadly that they are looking to raise investment capital — general solicitation. Startups and any private companies could not use their e-mail contacts, social media relationships, or otherwise to connect their network more openly toward the support of and investment in their business.
More open conversations about fundraising and investing were restricted to people with a net worth of over $1 million, or who make more than $200,000 — which qualifies them as accredited investors.
As of Monday, the ban on general solicitation is officially lifted, and startups who file with the SEC can generally solicit openly both online and offline, as long as they disclose how they are soliciting to the SEC in more detail within 15 days of soliciting.
Startups cannot, however, make the opportunity to invest open to anyone, but only to accredited investors.
VB: What effect will this have on startups? Founders?
Barnett: In short, as [venture capitalist] Marc Andreesen has said in his investing thesis that “software will eat the world,” it is now the case that software and the web is taking a giant leap toward eating early-stage finance and investing.
For more on the JOBS Act’s new provisions, see:
- What 6 startups and investment firms think about the JOBS Act changes
- How the JOBS Act will kickstart the innovation economy, with TechShop as a case in point
This has a profound impact on enabling startups to more effectively reach out to new potential investors, their existing networks, and a broader community to rally support for their business. In short, sites like Crowdfunder will help them create a streamlined process for broader public outreach towards their investment fundraising goals, a more efficient way to communicate and pitch their plan and businesses value, and bring them access to a large pool of investors with the click of a button.
For founders, significant value will be gained from:
- Accelerating funding: Time to funding can and will be reduced for promising and deserving startups. Even if a startup is making great traction, the process of finding and meeting and pitching and closing and getting money wired from investors takes many many months.
- Marketing and distribution: In the past, before online sites like Crowdfunder, it might take a founder four to six months or longer to find, meet, and get in front of 35 to 40 investors who fund their kind of startup, if they could ever get a pitch meeting or their direct contact information. Now, founders who show traction and receive quality lead investment and/or clear success in bringing in funding will gain visibility to large groups of investors in a way they never did before. On Crowdfunder today, we have nearly 1,000 investors and funds who are engaged, looking to invest, as well as syndicating deals online for other investors to follow on a round.
- Saving time: Startup founders will be able to focus a larger percentage of their time on executing their business rather than spending the majority of their time being a fundraiser on the road getting in front of what might not always be investors who are a match.
- Improving systems for pitching investors: Founders who pitch investors in the past have often been subject to the shortcomings of e-mail communication, hoping to get an investor to see, then open, and then read through a ton of text and attachments. With the standardized company pitch profiles and investment documents and offering on Crowdfunder, a founder has an online system that packages their business into an optimized online pitch in a more rich and powerful way. All the investor needs to do is click and view.
- Existing investors help syndicate: A good portion of the investment deals on Crowdfunder today were brought to us by investors and funds we work with or are partnering with. These startups who have lead investors who have already done diligence are often getting set up for more funding success with the earlier investors helping to syndicate the startup out to other investors on our network, serving as a signal of validation and potential reason for other investors to pay attention and look at the deal. This stronger syndication effect, and the social proof that comes along with it, doesn’t happen as often or in such a strong way, as it does on Crowdfunder.
VB: With this change, what place will crowdfunding grow to fill in the bootstrapped/friends-and-family/angel/VC spectrum?
Barnett: Crowdfunded investing will have different roles across these stages. At Crowdfunder, we see the market in two basic ways:
- Investment ready: There are companies who meet our criteria and are ready for funding. These are companies that are seed stage/Series A type deals with first-money in or lead investors. These are not idea or inception stage companies. They have validated themselves in some significant way — funding, traction, revenue, etc. With these companies, our growing investor network fills the painful gap for startups of angel/seed capital and Series A. For founders who don’t already have a deep set of relationships and experience with investors, finding seed and Series A capital is extremely challenging these days. Doubly so for the social entrepreneurs we connect with early stage impact investors — as that investment market is even less clustered/developed compared to traditional tech/startup investing.
- Not investment ready: Companies who aren’t ready for investment and don’t meet our criteria. These companies are generally the 0-12 month old companies with little traction, little or no revenues, and lack a well-defined product or service offering. While they think they need investor relationships and capital, what they often need most are the foundational elements of a well shaped plan, offering — docs/legal — advisers/team, and a few initial potential investor relationships to help determine what the right terms might be for their funding round. For these companies, Crowdfunder puts them on a track to help them get investment ready, help build important relationships and connect them to their local community and mentors/investors through our CROWDFUNDx local initiatives, and we offer our Contribution/Rewards-based funding tool as a way to circle early support/money and begin building community.
VB: We’ve seen some huge successes — $10 million-plus such as Pebble and such — in crowdfunding for no equity. Do you envision similar things for crowdfunding with equity?
Barnett: Yes and no. We will see break-out investment raises get funded in a matter of days or weeks in the near future in a way that just didn’t happen in the “offline” world of investing. And we will see deals get oversubscribed. There are upsides to the viral nature of online collaborative platforms like Crowdfunder, and some trade-offs too.
We’ve seen rewards-based campaigns get many times more their initial goal, and the mechanisms for allowing this is simple in the rewards-based world. Top startup companies get oversubscribed as well, but not by five to 10 times or more as you see with rewards-based crowdfunding.
Investment is a different process than rewards-based funding. Investment has stricter parameters and important legal implications, so founders need to be thoughtful about what they’re doing. Raising capital should not be a goal within itself, but a means to an end for growth and improvement.
It takes a little more forethought and planning on the investment side to take in additional capital and oversubscribe your startup. Founders just need to plan for it in the right way if they are open to it happening.
VB: Do you anticipate companies still doing perks like Kickstarter does when crowdfunding for equity?
Barnett: Yes, there will be “blended” offerings that mix investment options with rewards.
I see this being particularly attractive for both consumer products and for entertainment related fundraising, where you have fan/social appeal and the potential for great rewards.
VB: Which industries/verticals/types of startups will this be best for?
Barnett: Film, music, and consumer electronics companies will likely be the first to have more visible successes that incorporate these kinds of things in a creative and innovative way.
VB: Everything in government takes a long time … does the SEC still need to weigh in on this, are there any other regulatory/legal steps, or is it open season next week?
Barnett: Title II is final and goes live Monday. Title III is expected to be proposed by the SEC this fall and voted on and passed in early 2014.
VB: What regulation remains around crowdfunding? accredited investors?
Barnett: Title III, which will allow non-accredited investors to participate and invest, bringing a tremendous new wealth of capital to the market to back deserving startups and social enterprises.
VB: How would you sum up what this change means for startups and investing?
Barnett: Only a single digit percent, perhaps close to seven percent, of all eligible accredited investors in the US have actually made investments. Title II will not only deeply engage and bring online the existing active investors to sites like Crowdfunder, but will also bring more investors into the market by engaging a larger percentage of the overall accredited investor market in the U.S.
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