How Crowdfunding is Disrupting Venture Capital
Updated: Sep 21, 2020
Since the formation of the SEC during the Great Depression era, it has been mostly illegal for the average American investor to invest in early-stage companies and startups. The government allowed people to spend a weekend at a casino and gamble away their life savings on the roulette wheel, yet prevented those same individuals from investing hard-earned dollars in a promising founder or startup. When Title III of the JOBS act went live in 2016, that all changed.
Today, investors from any background and any level of wealth can invest in exciting early-stage founders and startups for as little as $100. These “mini” angel investors are a completely new source of capital for early-stage, private market companies. And this asset class of investing in high-risk but high-potential-reward companies is new for most individuals who weren’t previously accredited investors ($1 million net worth or over $200,000/year in earnings).
Equity crowdfunding is disrupting the way that startup founders raise capital and the types of investments that investors can invest in. This is leading to an increase in diversity of founders and ideas that are being funded, and depends more on the “wisdom of the crowd” rather than the traditional angel or venture capital investor.
When most people hear “crowdfunding”, they think of Kickstarter or Indiegogo, where backers might get a t-shirt, a product, or a shout-out; this is called rewards crowdfunding. Equity crowdfunding is changing the game because the earliest supporters become actual financial investors in the company, meaning they get equity (such as common or preferred stock) in exchange for their investment.
What does this mean for investors? Well, for the Kickstarter backers of the Oculus campaign back in 2012, instead of getting an $800 headset in return for their investment, those 7,500 investors would have likely gotten an 80X+ gain on each $800 invested ($64,000) when Oculus was acquired by Facebook for $2B in 2014. Not bad for a two year investment.
While this unlocks a new asset class for investors to diversify their portfolio outside of public market stocks, bonds, and REITs, this also unlocks new potential for the founders and entrepreneurs. Instead of simply raising capital, businesses are finding out that equity crowdfunding has numerous other advantages, such as gaining thousands of brand ambassadors and champions, getting massive marketing exposure, and being able to leverage the massive potential benefits of networks and connections.
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Brian Belley's Book pick: Ender's Game, by Orson Scott Card