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Crowdfunding for Startups: An Incumbent’s Market

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TheCrowdCafe Posted by:   November 05, 2012

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Crowdfunding for accredited investors is on the horizon. Implementation of Title II of the JOBS Act, which lifts the ban on general solicitation and advertising of security offerings, will kickstart this new funding mechanism, allowing companies to efficiently solicit and raise capital from a large (or small) number of accredited investors online. While the SEC is well pass their Congressionally mandated deadline of July – hmm, still trying to figure this one out – many in the industry are cautiously optimistic that we’ll see action by the end of this year. Or, you know, early next. As for crowdfunding under Title III of the JOBS Act, where we can all participate, the real democratization of capital, Q4 2013 is starting to look optimistic; a topic for another post – or novel.

Accredited crowdfunding has big implications for both traditional small businesses and tech startups, and everything in between; but we’re going to focus in on the startup side for this article. Who will be the crowdfunding platform of choice for high-growth/high-risk startups? While a slew of new crowdfunding platforms jockeying for this position have garnered much of the media attention, there is a segment of existing companies that has remained largely ignored in context of startup crowdfunding- yet these companies are in hugely advantageous positions to capitalize on the advent of accredited crowdfunding for startups.

These existing companies are ‘startup social networks,’ networks that, among other things, connect startups with investors. With existing deal-flow (companies) and capital (investors), the market is already made, and offering a crowdfunding solution is a natural decision. In fact, it’s a decision many have already made. Let’s take a look at who they are.

Naval and Babak have built one of the most venerable brands in Silicon Valley, a position that certainly lends a hand to attracting quality deal-flow. Over 5,000 investors use Angellist and the platform has facilitated, through introductions, more than 1,800 transactions. This adds up to $1.3 billion in funds raised. Rest assured, between the company’s new Docs functionality and a hugely implicative partnership with Secondmarket, a crowdfunding foundation is being built. It also helps that Naval indicated in a Congressional hearing on the JOBS Act in September that Angellist is interested in developing new products as regulations permit. (Check out Bill Carleton’s excellent live-blogged summary of the hearing.)

Efactor is a social community for early-stage companies, a University for startups of the sorts. If a network is a connected group of objects, Efactor’s primary objects are (i) startups, (ii) investors, (iii) mentors, (iv) online resources, and (v) offline events. I don’t expect Efactor to launch its own crowdfunding platform, but I do suspect they’ll partner with others. If they choose to do so, with over one million members in 185 countries across 90 industries, Efactor will put some serious weight behind platforms they align with.

EquityNet has been steadfastly building its network since 2005. The platform counts over 12,000 investors as users and has helped entrepreneurs raise more than $104 million. EquityNet has developed a number of tools to guide both entrepreneurs and investors; one such tool, Enterprise Analyzer™, is a patented process for algorithmically assigning risk/return profiles to private companies. The company is busy preparing for accredited crowdfunding under Title II. Just recently it launched a set of free crowdfunding tools, including a startup risk calculator aimed at helping businesses better identify and evaluate key business risks.

With a strong foothold in the Midwest, GoBigNetwork consists of 20,000+ investors and has served over 300,000 startups. Crowdfunding is a already a done deal. Co-founder and 8-time entrepreneur, Wil Schroter, has been building his teams’ crowdfunding platform since May,, which is live today for perks. Ramping up for accredited crowdfunding, the company isn’t pulling punches on paid acquisition – try googling any variation of ‘crowdfunding’ and check out the paid ads.

David Rose and his team at Gust, formerly Angellsoft, have spent the last 8 years building a global infrastructure for seed-stage financing, distributing their software largely for free. (Build the network first, monetize second; we’ve seen this before.) The outcome: their software now powers more than 1,000 investment organizations. Gust has approximately 150,000 startups and 45,000 investors on its platform globally. As for monetization – excerpting from a wonderfully detailed answer on Quora - take it from David, “Among the forthcoming tools you will see are things like background checks and online deal closing facilities for investors; integrated 409A valuations and enhanced fundraising tools for entrepreneurs; regional ecosystem portals and data analysis for governments and media partners, and an almost infinite number of other possibilities for revenue generation…” Online deal closing facilities for investors… yep!

Positioned as “an investment bank for startups,” Microventures is a network of over 4,000 accredited investors who have funded $4 million in transactions. The company heavily curates deal-flow, doing due diligence on deals before delivering them to investors. While many of the transactions on their platform appear to be secondary offerings (tranches of shares in facebook, yelp, etc.) their marketing certainly hints at competing for primary crowdfunded offerings post Title II.

You may be wondering where FundersClub, sitting on $6m of freshly raised cash, fits in this picture. Well, there are myriad accelerators/incubators that operate independently from the above networks. I see a huge opportunity in connecting these disparate nodes and building a pipeline of accelerated/incubated deal-flow for investors. I suspect FundersClub is looking to do just this by ‘api’ing out’ their process/platform. Of course, this is pure speculation.

This isn’t to say new crowdfunding platforms targeting the early-stage market can’t succeed. Opportunities to differentiate will exist through niches, i.e. geographies or industry verticals, or investor affinities such as University alumni whose capital is likely to be biased. But it won’t be easy. The pursuit of key assets that these ‘startup networks’ already possess will stymie many of the new entrants, mainly: (i) capital; (ii) reputation; (iii) companies; (iv) investors; and (v) validated experience. And it’s important to note a clear distinction between users and investors: investors invest. Acquiring investors will be an order of magnitude more expensive than acquiring users.

As for IndieGogo and Rockethub, the heavy hitting perk-based players who intend to support equity crowdfunding, I have a suspicion they’ll avoid competing on this front, electing instead to target for-profit projects. Think of investing in an indie film, CD, or book and receiving a percentage of the eventual sales. How awesome would that be? An radical new consumer experience. Big changes coming to the creative industry, and a big opportunity to facilitate them.

One last point to entertain, if you don’t mind. Between hiring on Angellist, offline events on Efactor, business plan software on GoBigNetwork, investor tools on EquityNet, and deal flow management products on Gust, connecting entrepreneurs with investors is only one spoke in the proverbial wheel…

Investment crowdfunding isn’t a portal play, it’s an ecosystem play.

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