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Is equity crowdfunding the future?

I'm with a small development consultancy in Chicago that specializes in building and scaling technology for startups. The role we play with our client companies is very similar a CTO or tech co-founder, so we often get asked to help problem solve other areas of running a tech startup (ie. marketing, funding, etc). Obviously the largest issue startups face is raising capital, in our case, to fund development. Equity crowdfunding is a new method for raising capital and it all sounds pretty great, but its untested. I'm curious on the thoughts of other entrepreneurs/investors on the future of equity crowdfunding.

Here's a good article about it:http://www.entrepreneur.com/article/252315

16 Replies

Michael Brill
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
It will be huge. Also note that it's not limited to equity... debt and other forms of securities are included as well.For equity, people still need to understand how they're going to get liquidity... so if you're a small dev shop and plan to be a small dev shop then it's tough to explain how people get their money out.

Also, aren't you being paid by clients? Why do you need external money to fund development?


Zack Wilson
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Zack Wilson Entrepreneur
Solutions Architect at 20spokes
Thanks for your answer Michael. I realize now I didn't word that clearly: I'm asking on behalf of our clients, or potential clients, who are trying to raise capital to fund the development through us. I just like to be as informed as possible so I can speak on these kinds of issues and help them grow.
Rob Gropper
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
@ Bill, when his start-up clients get funding, more $$ is available to Zack's company.

I think crowd funding is long overdue. Plenty of politics behind the delays (not the least of which might be the fact that Wall Street bankers won't have as much control) but well worth the wait. Yes, less experienced investors will loose some money and yes there will be law suits (the attorneys are salivating already), but it is rather 'protectionist' to say that only wealthy individuals (accredited) are considered smart enough to invest in risky startups. Competition (in the angel and VC world) should be good for the market. Some crowd funding portals/market places have been in operation for over 2 years now so they should have pretty good data on fraud, controls, etc.
Michael Brill
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0
Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
If you have to help your clients raise money in order to pay for your services... probably need to look elsewhere for clients.

Specifically wrt Title III... there are two ways to look at it.

(1) If you can't get Venture, Angel, or Accredited Investor Portal financing, then you're at the bottom of the barrel and have to look at a Title III funding portal filled with amateur investors. I think this is how the current investment world will look at it. Note that there are no Title III funding portals until 1H16 as the rules still aren't defined.

(2) If you have a product that lends itself to tight customer relationships then you have the possibility of combining customer financing and sales/experience in a way that really builds a new type of market relationship. I don't know how many industries this applies to, but I'm definitely looking at it in wine... facilitating winery investment (primarily debt) where returns are both interest and heavy discounts on product and access to unique experiences. In this model, because the winery is actually still making money on the heavy discounts, their effective cost of capital is < 0%. The consumer gets a decent return plus wine plus social currency of investing in a winery.

So while Title III may be considered the last resort for capital initially, I think we'll see all sorts of clever approaches where it's more than just capital.



Jonathan Startz
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Jonathan Startz Entrepreneur
Co-Founder at MassCatalyst
My company utilizes certain parts of the Jobs Act for what it does, so I'm very familiar with the space. The short answer is that there is a tremendous amount of potential for Equity Crowdfunding to make a positive impact, but there are plenty of downsides.

People mistakenly think equity crowdfunding is "easy money" or rather an easy alternative to traditional funding for startups. It isn't. Not every tiny struggling startup with a neat idea will suddenly have dollars for development, even with Title III coming into play.

I don't think it's fair to say everyone investing under Title III will be amateur investors either. Accreditation has been a flawed requirement for a long time and doesn't reflect true sophistication. There are countless sophisticated, intelligent people who should be investing in asset classes like startups but can't currently. Yes, there will be a lot of amateur investor types who don't know what they're doing and lose money, but that happens plenty already with VCs and angels. At least they can better diversify their investments now.

Regardless, you can look at the UK and Australia to see that equity crowdfunding works and will be huge. There are pretty clear statistics regarding fraud, best practices, etc. A lot of it comes down to the platforms being operated responsibly (and well regulated).
David Still
0
1
David Still Advisor
Founder of Start-ups, Entrepreneur, Financier and Advisor

Until the investment tanks and there are 400 lawyers around the table, I have no opinion; i.e. I am not sure its mature enough to assess. REITS and bank syndications looked great for years but there were some great, good, bad, and legendary bad outcomes. I don't think any funding vehicle has a monopoly on goodness. Just another tough call.

Michael Brill
0
1
Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
@Val,I'm building a vertical funding portal so clearly #1 isn't my perspective... which is why I described a scenario #2 where a funding portal provides benefits that a venture or angel investor wouldn't. Please re-read the post less superficially and I think you'll see that I make the point that funding portals are not bottom of the barrel... even though that is indeed the mainstream perspective of professional investors.

As far as my tongue-in-cheek comment about finding new clients... Zack says: "...potential clients... who are trying to raise capital to fund the development through us." If you have the costs associated with facilitating the creation of your customers, you won't be competitive in your core business because you're spending too much time solving someone else's problems. Meanwhile, your competitors leave you in the dust because they sell into self-sustained customers and can focus 100% of their efforts on executing their core business. I, unfortunately, have direct experience trying to build a channel I sold into. It ends in tears.

S. Rowan Wilson, MBA
0
0
CEO & Founder; MaryJanesWorld.com
Regulation A with the new J.O.B.S. Act will change the face of funding forever. Over $13 trillion is sitting around to be deployed in the USA from self-directed Ira's alone with only 2% currently utilized. The average contributor has $250K to invest, is 55 years old and male. His wife may have the same more or less.
We are putting on a meetup event here to cover the topic for local entrepreneurs and investors. Take a look at some of our resources from Breakawayfunding.com to various attorneys and articles -http://www.meetup.com/The-Sound-NO-Holds-Barred-Start-up-Funding-JOBS-Act-Group/
Liza Taylor
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0
Liza Taylor Entrepreneur
Communication Specialist at Keyideas Infotech
Equity crowdfunding sounds great, but it is time consuming because you need to get a good number of people who are interested in your idea. A single email or a PPT won't make investors understand about your new business model. You need to meet them and it shouldn't be less than 6 months to get a nod from a member of the crowd.
Jake Carlson
1
0
Jake Carlson Entrepreneur • Advisor
Software Development Manager at Oracle
I'm CTO with MicroVentures, an equity crowdfunding platform. We've been raising money for startups for 5+ years, so I can vouch for the efficacy of the model. We vet and do due diligence on the companies we raise for to give investors the information they need to make informed decisions.



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