Inside the New Forces Shaping Crowdfunding's Future
When President Obama signed the JOBS Act into law last week, he ushered in what will likely become a new paradigm of investment opportunities and alternate avenues of start-up funding. The Securities and Exchange Commission, which will regulate the new era of crowdfunding, has 270 days from the day of the bill's signing to formulate its regulations.
Sensing opportunity, plenty of entrepreneurs have jumped in to launch crowdfounding platforms in advance of the SEC regulations. Because funding platforms take a percentage of online transactions, the business model is lucrative: little overhead, with plenty of revenue potential. It's a chicken-and-egg situation, too. Entrepreneurs will be looking to post their businesses on platforms with the most registered investors; investors will likely sign up for sites with the most entrepreneurs.
"There will be no shortage of players," says Naval Ravikant, the co-founder of Angellist and an angel investor. "Right now there are more plans from companies that plan to start a crowdfuning platform than companies that plan to raise from crowdfunding."
Joking aside, like any burgeoning industry, early entrants are devising ways to differentiate themselves from competitors.
The act will allow business owners and entrepreneurs to raise up to $1 million from small-time investors online. Technically, crowdfunding has always been legal, but the bill provides the framework for investors to receive actual equity for their investments—not mere "rewards."
Crowdfunder.com, for instance, positions itself as the crowdfunding site for the masses, noting that its platform will "give everyday people the opportunity to invest that used to be the sole privilege of the 1%." And like many of the crowdfunding start-ups launching, its founders are keen on advertising how much money is theoretically invested in start-ups once the SEC sets its regulations. The site proudly displays that when the site goes live, there will be more than $15 million of committed investments. WeFunder.com, another crowdfunding upstart, claims to have $10.6 million ready to be invested.
But it's wise to be skeptical of such claims.
"I call them the pretenders," says Rod Turner, an angel investor and serial entrepreneur. "They say 'If we could do it, we have $10 million of investments on hand. Or $3 million. Or $12 million. We're just waiting. It's gonna be great.' Well that's neat, but that's kind of vaporware. Nothing can happen until the SEC does its bit."
Turner, by the way, is hedging his bets. He has his own crowdfunding start-up in the works, "Start.ac," a partial acronym for "Start a Company."
Turner says he plans to differentiate his crowdfunding start-up by offering mentoring opportunities to entrepreneurs posting their companies on his site. He's also planning to borrow a tactic from the more established crowdfunding companies, like Kickstarter, which offer "rewards" for company milestones. That way, he can launch the site before the SEC regulations are announced, generate users, and implement an equity-investor module later on.
The legislation also raises an interesting question among the current crowdfunding stalwarts like Kickstart and IndieGoGo, as well as sites like Angellist that seem to be positioned well to institute an investment vehicle.
"In our case, we're waiting to see how the rules shake out," says Ravikant. "If the rules look like it's viable for high quality companies to use and we can do it in a way that would prevent—or mitigate—fraud, then I think it is something that we want to offer high quality companies that are raising to angels or VC's already. But we want to wait and see what the rules are like."
Slava Rubin, the founder of Indiegogo, is more optimistic that his site will be be able to take advantage of the new regulations. The company, which was founded in 2008, makes its money by charging a 4 percent fee on the total money raised—and a 9 percent fee on a round of funding that did not reach its target.
"We know that it will take nine months to come up with the defined regulations," says Rubin. "But we are actively involved to help those figure those things out, and look forward to having it locked down. It's hard to tell you exactly what w're going to do, but we're leaning forward."
But Indiegogo's biggest competitor, Kickstarter, is keeping silent on the subject. A request for an interview about the JOBS Act was declined, with a company spokesperson noting "We are going to pass on participating in an interview regarding the JOBS Act for the moment."
"Kickstarter is not going to do it, because they're very happy with their core business and they realize that adding this other functionality could distract—or detract—from core business," suggests Naval Ravikant.
The Crowdfund Act could signals a momentous shift in how start-ups will seek investments in the future. And while the SEC assembles the regulatory framework, it's curious to note how crowdfunding is quickly changing the landscape of traditional investments. Some critics suggest that start-ups that crowdfund for cash will be black-listed from more traditional investors, but that may not be the case.
"A few years ago, a VC would have said, any company that went out on the street begging for donations is not VC-fundable," says Ravikant. "But if you look at Kickstarter, companies are basically begging their customers for money in advance of having created a product, and it works. And in fact, with VCs, it's a positive signal now, because it shows them there's demand."
Run a Successful Crowdfunding Campaign
A surge of competition and a struggle for market share will likely define the next few years of crowdfunding.