Crowdfunding has revolutionized the way that individuals and start-ups raise money or capital for personal and business purposes. According to Pew Research, one in five Americans report that they have donated money to an online crowdfunding project on sites like Kickstarter or Indiegogo. Though crowdfunding platforms are a popular way to help an individual in need, equity crowdfunding platforms have become a popular way for investors to gain a stake in a new or promising company. Here are some guidelines to help investors find the best crowdfunding platform:
There are a number of crowdfunding platform options, and not all are created equally. The best crowdfunding platform for an investor will not be the best platform for the average Joe looking to get his hands on a cool new piece of tech.
One of the core differences is what you get back for the capital you invest. Do you receive equity or a product? Kickstarter, for example, is a donation-based site where one receives a sample or product in return for a monetary donation. Donations tend to be smaller, and the “investor” does not receive a share in the company. In fact, some sites may even be able to keep a percentage of donations even if their fundraising goal is not met.
CircleUp, in contrast, is an example of an equity crowdfunding site. Investors become direct shareholders in the companies listed on CircleUp. As a result, some equity crowdfunding platforms may limit opportunities to accredited investors. If you’re looking to make a financial investment with potential for a return on your capital, then equity-based platforms are what you are interested in.
In addition, equity crowdfunding platforms are regulated by Title III of the JOBS Act, which states that securities-based crowdfunding campaigns are limited to $1.07 million in equity. While investments are probably more than the $15 donation you’d see on Kickstarter, the regulation does seem to limit investments to smaller companies and earlier-stage start-ups.
Among the equity-based crowdfunding sites, there are a number of options. Do you have a specific industry that you would like to target? What about the lifecycle stage of the company? Choosing the best crowdfunding platforms requires research on the industries that it hosts.
CircleUp, for example, focuses exclusively on consumer and retail companies that are in a high-growth stage. There is a dearth of capital for companies in this space that have roughly $1-10M in revenues, because they are too small for traditional private equity firms and don’t have the same attention from the venture capital community as technology companies.
Other platforms focus on earlier stage startup companies or work with companies in a variety of industries. MicroVentures, for example, has both late-stage and early-stage investment opportunities in FinTech and even space travel. Meanwhile, sites like Lending Club focus on peer-to-peer debt.
It’s important for potential investors to understand the differences and strengths of the various platforms.
These will be the people who you will be investing alongside.
Some equity crowdfunding platforms allow the average investor to enter the ring, while other crowdfunding platforms are accessible to accredited investors only, such as CircleUp. In order to find the best crowdfunding platform, you need to determine which investor base is appropriate. Is anyone allowed to invest, or should only accredited or sophisticated investors have a share in the company? Are you looking for a site in which investors give a minimum of $5,000 or $100? Those are the types of questions you may ask.
The crowdfunding teams are as different as the companies featured on their platforms. It is important that equity crowdfunding platforms employ investor-facing professionals who hold securities licenses and have worked with institutional or accredited investors in the past.
Platform teams at other crowdfunding platforms include successful serial entrepreneurs with lengthy experience managing a variety of different companies, as well as people with backgrounds in a specific industry the platform is focused on. Some platforms may employ teams with experience in the finance industry or private equity, while other platforms may employ teams with tech experience.
The specific background may not make a team better or worse, but one should consider whether the team’s background matches what the platform offers.
Consider how the platform identifies opportunities and whether there is a review process before an investment is added to the platform. Some platforms have a philosophy that any company looking for funding should be made available to investors, and ultimately investors can decide whether to participate. Other platforms are more selective, and base their decisions on how appropriate the company is for their investors. For example, a site like SeedInvest only approves 1% of companies that apply to use the platform. This platform is probably more selective than a site that hosts more than 300 companies, which means that it is tailored to its investors.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Securities Crowdfunding for Intermediaries, Crowdfunding from the Investor’s Perspective and Crowdfunding from the Start-Up’s Perspective. This is an updated version of an article that first appeared April 22, 2013.]
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