Startups Consider Crowdfunding to Raise Investment Capital
It is the mother’s milk of Silicon Valley startups – money, often from investors, to get going and keep growing. And next week new federal regulations will give startups and investors more ways to find each other.
Previously, the Securities and Exchange Commission banned companies from advertising publicly to potential investors on TV, radio, in print or at seminars.
This means companies could, for example, use crowdfunding websites to put their ideas to the world. And investors could use those sites to find the next big thing.
KQED’s Joshua Johnson recently spoke with Mike Norman, a co-founder of Wefunder, a crowdfunding website for equity investment. The company is based in San Francisco and Boston.
Here’s an edited transcript:
Joshua Johnson: Wefunder was one of the companies that lobbied really hard for the SEC to update these rules. These changes came about in the JOBS Act, which passed last year. What’s your take on how that change worked out? Did you get what you wanted, or is there more to do?
Mike Norman: What will change next week is really the first part of the changes implemented by the JOBS Act. We will get the ability to have startups advertise and generally solicit for investments. The part that gets us equally excited will happen next year where everyone will be able to invest in startups. So right now, the drop on the ban on general solicitation allows startups to advertise their fundraising opportunities, but you still only invest if you are an accredited investor, which means you either have $200,000 in income or you have a net worth of more than $1 million.
Johnson: Why should we trust the crowd to drive investment? Crowds are often wrong, groupthink can be a very dangerous thing. Isn’t there some value in the struggle to get capital that forces startups to really play their A-game?
Norman: I think there’s a lot of value to that, and on Wefunder we actually require that a startup already have raised money from one investor offline and set the terms. Then you’ll be able to put your company up on Wefunder and broadcast it out to the universe of investors that could be really passionate and interested in what you’re building, to help them follow on in the terms that have been established offline. So, I do think there’s value in that initial conversation with an investor that has more experience to decide exactly what the price and the terms of the investment should be.
Johnson: How big of a market do you think there is for this type of investing?
Norman: This is a huge market. If you think about the way investing works right now you have to have a very broad personal network of individuals that make enough money and are connected to the startup scene to go out and raise capital. The vast majority of people that meet those wealth restrictions are not directly connected to startup communities. They do not live in Silicon Valley or in New York or in Boston. They’re spread out around the country. And they’re really interested in investing in companies, they just have no way to find out about opportunities to do so.
Johnson: It occurs to me also that sites like Wefunder might help to diversify investors in Silicon Valley. You know as well as I do that a lot of the work being done in Silicon Valley is being done mostly by male investors and entrepreneurs, mostly white investors and entrepreneurs. This might go a way toward a little more diversity.
Norman: That’s absolutely right. So many more individuals are going to be able to see these companies and have a chance to invest. Most of the time the conversation around crowd investing revolves around access to capital. The piece that doesn’t get spoken about as much is how valuable this can be to companies outside of just the capital. If you’re raising from traditional investors in the Valley, they’re writing you checks for $50,000 and so on and so forth. Oftentimes they’re not really embedded in the industry that you’re building your startup to impact. With crowd investing, what you’re going to be able to do is broadcast out what it is you’re building. Say you’re building an enterprise application … you’re able to tell the world about your application, and the fact that you’ve had some early traction with good investors on board. All of the sudden a hundred executives from different Fortune 500 companies can see what you’re building.
Now, they might not have the ability to put $50,000 or $100,000 into your deal, but even if they only put in a few thousand dollars, and they’re tracking what you’re doing, and they really believe in what you’re building, now you can possibly have an advocate for yourself in the sales process moving forward. You’re just getting so many more individuals involved.