Zack Miller, 1/13/2014 @ 7:45AM
With all the negativity and skepticism swirling around the SEC’s recent proposition to liberalize the laws of equity crowdfunding, it’s time for some contrarian content that sheds some more positive light on the topic.
For those of you who have not been keeping current with recent developments, in 2012, the JOBS Act was signed into law as an attempt to stimulate job growth in the US by encouraging investments in small and medium businesses. The most recent proposal from the SEC was a 585-page document [.pdf], which if signed, will enable investors of all shapes and sizes to invest in startups via equity crowdfunding platforms.
The Crowdfunding Skeptics
The risks of allowing a law like this to come to fruition are clear. Former SEC chief accountant Lynn Turner said in an interview with Bloomberg Bloomberg News, “What we are talking about are companies that in all likelihood are not going to be winners, and they are being invested in by people who clearly don’t have the expertise and financial smarts of venture capitalists.”
Wealthfront CEO and Stanford professor, Andy Rachleff is another skeptic of the everyone’s-an-angel-investor phenomenon, comparing crowdfunding successes to the stories fisherman like to tell about “that one time they caught a big fish”.
Barry Schuler, author of “The dark side of equity crowdfunding“, refers to crowdfunded capital as “dumb money”. He makes the point that institutional investors add an invaluable element of professionalism that can help guide a young company towards profitability.
From Crowdfunding to Crowdbuilding
To all the skeptics, I’d like to introduce a phenomenon that we at OurCrowd have named, crowdbuilding. Through our equity crowdfunding of over 30 startups in 2013, we’ve identified an interesting phenomenon: that the risk involved in startup investing incentivizes equity crowdfunding investors to get involved and assist their investments in any way they can. Ultimately, this personal involvement exposes these fledgling companies to a lot more then just “dumb money.”
OurCrowd teamed up with fellow leading equity crowdfunding platform CircleUp (yes, we crowdsourced this article) to bring you some examples that feature the tremendous and unique power of the crowd. You can follow the writing of CircleUp CEO’s Ryan Caldbeck on Forbes, as well.
Crowdfunding brings introductions to new (institutional) investors
Early stage capital has become increasingly difficult for startups to access. A fairly common element of crowdbuilding that our portfolio companies have benefited from is introductions to other angel and institutional investors.
PulmOne, one of our portfolio companies based in Israel, has created a device that enables doctors to perform lung function testing in their offices, instead of a hospital or larger facility. An individual investor in the company was so impressed with PulmOne, that he flew the management team and their device to his home country. There, he organized a test center for the company to run preliminary tests in order to diligence the device. This investor has since funded PulmOne’s next investment round. This initiative is a prime example of the unexpected consequences of taking equity investments from the crowd.
Having a crowd of investors improves product development
During the early stages of getting a business off the ground, companies often alter their products and business models to be most appealing to the market in which they are competing. Many startups find themselves in a perpetual state of development throughout the first few years of their existence.
CircleUp portfolio company, 18 Rabbits is an organic granola and granola bar manufacturer that utilized the power of crowdbuilding to optimize their product. Experienced investors gave important feedback about packaging and site redesign to help enhance the sales of their product. These small contributions from the crowd, which contain professionals with decades of consumer product experience, often provide big returns for the company.
A gaggle of business development pros
Business development is a vital part of a company’s operations. Specifically for early stage companies, the focus on expansion and growth has to be a full time commitment.
After finishing a round of funding, support for our companies continues through our mentorship program and assistance in business development. Israeli startup MUV Interactive developed a technology that turns any surface into a touch screen. At an organized investor event, MUV had the opportunity to pitch their product to the Brazilian Chamber of Commerce. The first question in the ensuing Q&A following the presentation had to do with how much it would cost to acquire their innovative technology. Due to the early nature of the company, they settled on the potential sale of roughly 12,000 units.
And just a month or two ago, Webydo, an OurCrowd portfolio company that provides website-building tools to professional designers, was invited by a relatively small investor from the crowd to attend a barbeque that a senior executive from a major technology company was to attend. A major biz dev discussion is now underway.
This post funding support by a crowdfunded company’s new investor community keeps the business development momentum moving towards growth and expansion.
Exposure to the media is a great way for companies to achieve publicity. Gummy vitamin manufacturer Smarty Pants, was featured in a Wall Street Journal article, thanks to a well-connected CircleUp investor. This gave the company added visibility and credibility by the fact it was featured in the mainstream media.
Contacts in the media world are an invaluable asset when starting a company and when you tap the crowd, investors are frequently happy to tap their media networks.
New Source of Customers
Entrepreneurs focus a great amount of their time and resources reaching out to potential customers and clients. The effects of crowdbuilding lend a helping hand to these entrepreneurs, often causing investors to double as salesmen.
OurCrowd portfolio company, NativeFlow, was introduced to a potential strategic partner in Japan through an individual in our investor community. After meeting with the president of a large, well established Japanese VC, the company began exploring options of distribution in the Japanese markets. The networking efforts by the crowd invested in these companies often yield more valuable results then the initial capital they invested.
The final crowdbuilding element that we’ve witnessed is key hires. CircleUp portfolio company Willa Skincare, a producer of natural skincare products for women, was in the market for a CFO. An individual who had invested in the company heard about their search and personally placed a qualified CFO in the position.
Employee referral programs now account for roughly a third of new hires according to the Society for Human Resource Management [.pdf]. This statistic is especially poignant in the crowdfunding industry due to the thousands — and soon to be millions — ofinvestors with skin in the game and dedication to their investments’ success.
The investor / startup synergy via equity crowdfunding platforms
Although there are valid concerns about the emerging crowdfunding market, the potential for prosperity is huge. The desire for both the companies and investors to profit in this new asset class has developed a mutual aspiration and drive towards success as incentives are totally aligned. This combination of young, enthusiastic entrepreneurs, partnered with worldly, eclectic early-stage individuals sets the stage for a truly disruptive, highly profitable new way to invest.
Big thanks to OurCrowd Marketing Manager, Dani Forman, for all his help in putting this article together.
Do you have examples of how crowdfunding has brought unexpected value to a startup? Let me know in the comments.
Source : Forbes