WEFUNDER AT A GLANCE
Locations: San Francisco, CA and Boston, MA
Team Members: 8
Impact: Helped companies raise $3 million in investments under Title III of the JOBS Act since May 16, 2016
Now that US law allows privately held companies to raise investment from everyday people — so-called unaccredited investors — anyone can now financially support the companies they care about. (For more on the law, see previous page.) A number of investment crowdfunding platforms have emerged to meet the growing demand for these opportunities; think Kickstarter, but for investment deals. One such platform is Wefunder, which connects both accredited and unaccredited investors to offerings from a wide range of companies seeking to raise capital. We spoke with co-founder and president Mike Norman about this new type of opportunity and what it could mean for the future of investment.
In simple terms, can you explain the new crowdfunding provision from the JOBS Act?
Mike Norman: Before May 16, 2016, you generally had to be pretty wealthy in order to be allowed to invest in privately held companies. The specific threshold was $1 million in net assets, not including the value of your primary residence, or $200,000 of annual earned income — $300,000 for couples.
The JOBS Act allows anyone to invest in companies they care about. It could be a local food store or a tech startup; you can invest as little as $100 to help that vision come true, and hopefully make some money at the end of the road.
Is there something you wish everyone understood about crowdfunding?
MN: I wish everyone knew that this is not just for equity. Some people use the term “equity crowdfunding,” but you can structure it as debt or equity. For a lot of community or locally owned businesses, offering equity doesn’t make sense because for an equity investor to get a return, oftentimes there needs to be a sale of the business, like an acquisition by a larger company or an IPO. If it’s a locally owned business and it plans to stay locally owned, that doesn’t always happen. One of our more successful campaigns, Hops and Grain, a brewery in Austin that has raised close to $600,000 with us, is using a revenue-sharing contract where they share a percentage of their revenue up to a certain amount with the people who invest. It’s technically a loan; it’s a debt instrument. A lot of the investors in Hops and Grain are everyday people who love their beer. They want to be able to sit in the building they helped finance. It’s a change in the way people are able to own a piece of the companies they believe in and help get them off the ground.
This idea of community ownership was impossible until this year for early-stage companies. This is going to be a tremendous opportunity for all types of businesses, not just the high-tech startups that we’re used to hearing about when it comes to fundraising.
Do enough people know about this yet?
MN: A lot of business owners are only familiar with the traditional forms of raising capital, which is either, “I’ll go to my rich uncle” or “I’ll go to the bank for a loan.” I don’t think we’ve broken into the general consciousness around this being an option for companies, and the same thing from the individual perspective.
Regular people have not been able to invest in startups since the Securities and Exchange Commission was formed back in the 1930s, so they never even heard about the opportunities. So it’s not only letting people know that things have changed, but letting people know, “Hey, this thing changed that you didn’t even know prevented you from doing something.” [Laughter]
What’s good is that we’ve got a bunch of great success stories under our belt. It’s going to be important for us to get more and more out there. People are happy; it’s about spreading tangible examples of how this works in practice rather than, “Oh, the law has changed. Now I can do this abstract thing.”
Unaccredited investors are often scared of the investment space because of a heightened sense of risk. What sort of due diligence are you undertaking before you put a company on the platform?
MN: Our regulatory responsibility as a funding portal is to make sure that the company discloses all of the information required in Form C. This is a formal filing with the SEC that has to include a bunch of information about the company: who the majority owners are, what the indebtedness of the company looks like, a general outline of the shares that have been issued, any past offerings. Things have to be factually correct. It’s not necessarily our job to tell people what they should and should not be investing in; it’s our job to make sure that all the information they need to make that decision for themselves is up on the company’s profile.
People should go to the profiles and check things out. They can ask questions of the founders right there on the profile. Investors should make sure they have all their questions answered before making the investment.
Let’s say I’m a company interested in raising money this way. What are the first steps?
MN: The first step is getting familiar with all the requirements you have to go through. The flip side of investors having all this legally mandated information is that the company has to provide all that information. It’s not generally an issue with companies, but they should know that they have to make all these disclosures about their business and make them public in order to be able to bring on these investors.
Then make sure you have a community already together that you can go out to. More than 50 percent of the investment dollars are coming from companies’ existing customers, community members, users — folks that know the business already and are excited about what it’s doing. Companies should really think about, “How big is that community of people I’m going to be able to talk to about the offering, and how likely do I think it is that they’re going to invest?” Remember, invest means that people put in $100 or $200 — we’re not talking about asking someone to write huge checks.
One of the values of this kind of regulation crowdfunding is that you can have hundreds of investors coming into your business; it’s a small piece of risk for a large number of people to believe in what you’re doing.
“Every company that has some type of consumer-facing component is going to want to reserve at least a part of their financing for their customers and community members.”
One of the concerns entrepreneurs commonly have with crowdfunding is that there are going to be too many shareholders or stakeholders to deal with. Have you seen anything in that regard?
MN: We’ve done offerings where we’ve had 100 investors come in, and we haven’t had any issues. We’re very thoughtful about how we construct the software to make sure that an entrepreneur is not going to be distracted by 100 different investors saying, “Hey, I think this is what you should set your next quarterly goals at,” or whatever. We mediate the entire interaction between the investors and the entrepreneur through Wefunder such that the entrepreneur can focus on building the business, which is what the investor should want anyway.
A big piece of that is also expectation-setting. You should not expect that just because you invested $500 into a company you’re going to be sitting in on board calls, and so on. That’s something we’re very careful about positioning right.
Are you finding that there’s an investment round that this is typically good for? Are you seeing more Seed-Stage or Series A?
MN: We’re seeing across the board, and also seeing companies where Seed or Series A don’t really apply. We have one company, Beta Bionics, which has received a $5 million investment from one of the largest pharma companies. Five million dollars from one main investor, obviously, is at least a Series A-style investment. And then we’ve got folks raising C rounds, and we’ve got folks using debt securities. It really does span the board.
I think a key piece is that it doesn’t have to be your entire round. You might be raising a bunch of equity investment from institutional investors — like we saw with Beta Bionics — or you might have a bank loan that this is going to complement to give you a little bit more liquidity. It’s really a complementary form of capital-raising and not something where, if you’re going down this route, this is the only way that you’re going to accept funding.
Are businesses allowed to advertise this crowdfunding to their consumer base? Is there anything that people should know about that?
MN: There are some restrictions in terms of what you can talk about. You can’t or you shouldn’t talk about the terms of the offering. You can’t say, “Hey, this is a great investment. Buy for $5 a share.” But, you can absolutely say, “Hey, we’re raising money. We’d love to have you be a part of it. Come to our Wefunder page to see how you can participate.” That’s absolutely allowed.
What are you predicting as the future of the crowdfunding space? How large do you think this could get?
MN: I think it could be huge. If you think about the breadth of companies we’ve already seen be successful, meaning the variety of stages, and then the fixes that are coming through on the legal end to make this even easier for companies to take advantage of, I think every company that has some type of consumer-facing component is going to want to reserve at least a part of their financing for their customers and community members. An important thing to realize — and companies are thinking about this already — is that the fundraising piece is important, but it’s also a really powerful marketing channel. [See page 74 for more on this.]
People want to help businesses they believe in, and this gives them that identity and piece of the upside to be able to say, “Hey, I absolutely want to pitch in and help in ways that I can.” All of the hundreds of investors that will come into a specific company through their round will then be the best advocates they’ll have and will pay non-financial dividends down the line.
What’s giving you hope for the future?
MN: The traction we’ve gotten already is giving me hope; the fact that we’ve seen a few different use-cases in different industries with different securities work well speaks to the fact that this is applicable to so many different companies in different spaces at different stages. I think that as things get easier and easier, it’s going to become part and parcel of the way all companies think about fundraising moving forward. That’s really exciting.
4 Types of Crowdfunding
1 // REWARD-BASED
The most common type of crowdfunding, wherein an individual gives money to a project, initiative, or business in exchange for a “reward,” which is typically a product or service. Think Kickstarter or Indiegogo.
2 // DONATION-BASED
Crowdfunding where individuals provide capital as a donation with no expectation of return — reward or otherwise. This type of crowdfunding is most often used for social or charitable causes. Think GoFundMe or CrowdRise.
3 // DEBT
Crowdfunding that allows entrepreneurs to raise capital as loans to be paid back over a set time period with predetermined interest rates. These campaigns work well for ventures looking to raise money without having to give up ownership of their companies.
4 // EQUITY
Crowdfunding that allows investors to put money into private companies in exchange for a small piece of ownership in the company. This type of crowdfunding has typically been reserved for accredited (meaning rich) investors, but since May 16, 2016, it is open to unaccredited investors because of the JOBS Act.