How to get started with Investment Crowdfunding.
How to Invest in Startups and Other Investments via Crowdfunding
When most people think of crowdfunding, they think of Kickstarter projects or Prosper loans. However, there are crowdfunding opportunities for investors who are looking to own part of a startup or get into the real estate market.
In this article, we’ll examine the types of crowdfunding opportunities that exist for people who are looking for a significant return on their investment. We’ll also cover how investors can expect to make money as part of a crowdfunding effort to invest in a startup or real estate. Finally, we’ll cover some of the more popular platforms for investing.
Crowdfunding a Startup
Technically speaking, almost all startups are crowdfunded. Although they aren’t advertised on Indiegogo and the crowd that funds them might be noticeably smaller than a typical crowdfunding effort, it still meets the definition of crowdfunding.
Startups often receive funding from multiple sources. One investor might purchase 20% of the company, while another might purchase only 5% of the company. The people who founded the company will contribute some of their own money as well, and retain a majority ownership.
That’s a classic example of multiple people financing a startup. In other words, it’s funded by a crowd.
During subsequent rounds of raising capital, that crowd could grow in size. It may be true that the shares will be diluted, which might worry some early investors, but it’s still a crowdfunding effort.
Traditional Crowdfunding Sites Don’t Offer Investments
You might think that sites like Kickstarter and Indiegogo are crowdfunding a startup with investment opportunities. However, that’s not actually the case.
When you contribute to a company on one of the traditional crowdfunding sites, you’re not buying stock in the company. You have no equity ownership. You have no say in who gets elected to the board of directors. It’s not the same thing as buying a piece of the company.
With Kickstarter, for example, you’ll be entitled to certain rewards depending on the extent of your investment, but you won’t receive any stock. That’s a key difference between traditional crowdfunding and investing in a startup.
Accredited vs. Non-Accredited Investors
As of this writing, the only people allowed to invest in startups are accredited investors. These are people who are authorized by the Securities and Exchange Commission to invest in privately held companies. That’s because they meet certain financial criteria: They have a net worth of at least $1 million (exclusive of their primary residence) and they’ve earned at least $200,000 for each of the past two years ($300,000 if they’re married).
So, if you’re interested in crowdfunding a startup and you don’t qualify as an accredited investor, you’ll find that you’re severely restricted in your ability to purchase private equity. However, you’re not completely out of options.
The JOBS Act
On April 5th of 2012, President Barack Obama signed the JOBS Act into law. One provision of that act holds great news for unaccredited investors who’d like to crowdfund startups.
Under Title IV of the law, the definition of “qualified investors” is broadened to allow unaccredited investors to purchase the equity of privately held companies. However, there are certain restrictions. Unaccredited investors can’t invest more than 10% of their income/net worth per year in the company. That’s a safeguard to prevent them from losing the ranch on a risky investment.
Another restriction is that entrepreneurs will need to wait 60 days after publication in the Federal Register before they can turn to the crowd to raise capital. During the initial two month period, only accredited investors can purchase equity.
The new regulations allow entrepreneurs to raise as much as $50 million from accredited and non-accredited investors. That opens the door for countless unaccredited investors to speculate on companies with significant growth potential in their early stages.
Becoming Part of a Crowdfunding Effort for Startups
If you’d like to help crowdfund a startup, there are plenty of opportunities available to you. Simply put, there will always be entrepreneurs who are looking to fund their next great idea.
Fortunately, you don’t have to go any further than the convenience of your own home office and personal computer to find some great crowdfunding opportunities. You might be one of the lucky ones who gets a piece of the next Uber without even walking out the door.
Here are some of the best platforms for locating crowdfunding opportunities.
One of the best benefits of crowdfunding is that it allows you to lower your risk with a diverse portfolio. The website Prosper is a great example of that: Instead of funding a loan all by yourself, you fund it with the help of others and earn a return proportional to the amount you contribute. Crowdfunding is a great risk management strategy.
FundersClub allows you to diversify your startup investments the way that Propser allows you to diversify your lending. Instead of a cash outlay of $50,000 in one startup, you can instead invest as little as $3,000 in a venture capital fund that, for all intents and purposes, operates similarly to a mutual fund. Instead of putting all of your eggs in one basket, FundersClub gives you the opportunity to spread your investment across a spectrum of startups, thus lowering your risk.
However, even with the limited risk, FundersClub still requires investors to be accredited.
SeedInvest describes itself in three words: “Startup investing, simplified.” It’s another website that provides an online opportunity for investors who want to get in on the startup action.
The company goes out of its way to brag about how much it vets startups before listing them on its site. SeedInvest describes the whole process as a funnel that involves five steps: startup application, pre-screening requirements, screening committee, investment committee, and finally listing on the website.
SeedInvest doesn’t require investors to be accredited. Although there are some startup opportunities listed on the site that require accredited investors, the company also offers opportunities for people who haven’t reached accredited status.
In short, if you’re looking to invest in a startup and you’re not an accredited investor, put SeedInvest on your short list.
“Now the crowd can invest in game-changing entrepreneurs.”
That’s the marketing line that you’ll see when you visit CrowdFunder. The site makes a good boast about the fact that startups can be funded by non-accredited investors.
However, the line is a bit premature. As of now, CrowdFunder only allows accredited investors to buy equity in startups.
If you’re interested in crowdfunding startups as a non-accredited investor, though, you should give CrowdFunder a browse. You’re allowed to sign up with the stipulation that you’ll invest when you’re allowed to do so under Title III of the JOBS Act.
As of this writing, CrowdFunder offers investors the opportunity to get in on startups such as:
- Sierra Lifestyle, Inc. – Sells summer and winter sportswear and sports equipment. The company currently has four retail stores in California and three online stores. Sierra Lifestyle also has $12 million in sales.
- Aquathings, Inc. – Another business that caters to people who love the outdoors is Aquathings. In this case, the interest is specifically geared towards water sports such as scuba diving and water skiing. The company is seeking to raise $500,000 via convertible notes.
- Mine Shaft Brewing – How would you like to get in on the next Sam Adams beer company? If you invest in Mine Shaft Brewing, you’ll be aligning yourself with the team that helped transform Sam Adams from an unknown microbrewery to a household name. The company is seeking $9.4 million and offering equity in exchange for an investment. Mine Shaft Brewing also pays a generous 8% per year on the amount invested.
Founded in 2004, SecondMarket exists to bring liquidity to illiquid markets. The company uses state-of-the-art software solutions to handle private securities transaction. These include capital formation strategies, private company secondary, or mergers and acquisitions. The company streamlines the whole investment process, reducing errors and saving investors money.
Right now, though, the company’s customers consist only of law firms, private companies, and investment funds. It’s an option to keep on your radar, whether you’re an accredited investor or not, because one day it’s likely to appeal to a broader market.
If you ever wanted to be part of something called a “syndicate,” then AngelList is for you. As the name implies, AngelList caters to angel investors. In this case, those investors join groups called syndicates.
A syndicate on AngelList gives accredited investors a way to invest in startups without all the time-consuming hassle of reading every entrepreneur’s latest business plan. Instead, investors can a join a syndicate with a lead who will research the latest and greatest opportunities. Investors who are part of a syndicate entrust their startup investment money with the lead and offer something called a “carry” in exchange for his or her services.
Here’s how it works. A syndicate lead gets $200,000 from her syndicate members to invest in a startup. The syndicate members promise the leader a 15% carry. She decides to invest in a great new company that turns a profit and makes a lot of money. All the investors get their money back, plus they split 80% of the profits. The leader, however, gets 15% of the profits for her effort (that’s the carry). AngelList gets the other 5%.
AngelList is a great example of crowdfunding done right. If you’re an accredited investor, you get to select which lead you want to work with and contribute what you want to the investment opportunity.
Unfortunately, there are no opportunities for non-accredited investors at this time on AngelList. However, it’s an opportunity that you should continue to monitor in case that changes.
If you’re looking for a great site that aligns investors with entrepreneurs, look no further than CircleUp. The “Circles” identified at the site are separately managed private funds that invest in companies on the platform. They act as an alternative to direct investments in companies.
You can join a circle based on its theme or its leader (or both). If you want to invest in startups with a lower minimum, there’s a circle for that. Alternatively, you can join a circle because it’s led by somebody whose judgment you trust.
However, CircleUp only welcomes accredited investors at this time. The company’s FAQ indicates that, at some future point in time, the company will be open to non-accredited investors. So it’s another one to watch if you’re not yet wealthy.
Gust is a Software-as-a-Service platform that streamlines the process of locating and investing in great startups. The platform also allows entrepreneurs to communicate, collaborate, and connect with some of the smartest investors and angel investor networks. Gust supports the whole investment relationship, all the way from elevator pitch to exit.
As of this writing, more than 1,000 investment organizations in over 80 countries use the Gust platform. More than 200,000 startups have used Gust to connect with over 45,000 investors.
A familiar refrain here, though: Gust only supports accredited investors right now. However, as the rules are slowly changing, its platform will have a great deal to offer once those startup investment opportunities are opened to the crowd.
No matter which platform or investment opportunity you choose, remember that the way to make money by investing in a startup is to eventually sell your shares of stock for more than you paid for them. That’s why it’s important that you consider the overall valuation of the company before making your decision. If you’re really convinced that an expensive company has the potential for triple-digit growth or is the next Facebook, then by all means put your money into it. However, if you think that the company is poised for only modest growth in a competitive space, be sure to invest in it only if the price is right.
There are several ways that you can sell your equity position in a company that you helped crowdfund. One way, and probably the best, is if the company goes public. You’ll still need to get some lawyers involved, but you’ll probably be looking at a very lucrative payout when that happens.
There’s also the possibility that the principals will want to buy back your position in the company because they think it’s poised for growth. That’s another attractive option to cash out because you can probably name your price.
Finally, there’s a possibility that somebody else might want to acquire the company. When that happens, you’re once again in a great bargaining position and stand to earn a nice return on your investment.
Wrapping it up
Crowdfunding has always existed when it comes to startups. Thanks to new technologies and new laws, crowdfunding startups is an opportunity that’s going to be available to millions of investors who weren’t previously qualified. However, most opportunities, as of now, still exist only for accredited investors.