There’s been a lot of press about the official launch of Title III of the JOBS Act, and with good reason.
President Obama stated that ‘because of this bill, startups and small business will now have access to a big new pool of potential investors – namely, the American people’, which has led some, including CNBC’s Jon Marino, to quote the bill as ‘the biggest change to hit startup investing in years’. And yet, the floodgates did not open day one, no new unicorns were invested in or fell from grace, and today, the day after the launch, we find that Silicon Valley has not gone out of business.
In a market where angel investing is twenty times that of the UK, once you scratch away the initial buzz of the media towards this historic event, you find a layer of dissension and humbuggers quick to debate why the bill will fail to liberate a startup funding revolution.
Jeff Lynn of Seedrs, who lobbied for the bill, claims that it is not workable in its current form, offering little protection to investors, reducing the likelihood of success in their capital raising and making it likely that only lower-quality investments will choose to use equity crowdfunding.
Chance Barnett, CEO of Crowdfunding, wrote on Forbes that there are two barriers to it being a success:
- The $1,000,000 cap on the amount a company can raise through crowdfunding
- The costs companies would incur to meet the auditing required to do a crowdfunded round
The restrictions above, according to Chance, will lead to companies of lesser quality selecting this path as they have ultimately been unable to secure the capital elsewhere.
While I do not deny that there are some hurdles to come, I believe it’s premature to state that there will be disappointment on the parts of both investors and entrepreneurs, and point to the evolving nature of the industry here in the UK as proof.
Year one of equity crowdfunding in the UK, very little was raised and a lot of negative comments made. Most believed it too risky, saying it would never work as a replacement for angels or venture capital – and that is where the biggest mistake is made.
Equity crowdfunding is not a replacement for angels or venture capital – it compliments them both. As it’s grown and evolved in the UK we’ve seen it help all manner of companies, ranging from those that already have angels and VCs on board to those that may have never considered outside fundraising had it not been for the incredible marketing opportunity that equity crowdfunding offers.
Chance is right to point out that the average raise is closer to $2 million, but that is just an average. There are numerous cases of companies raising far smaller seed rounds, or no seed rounds at all, and growing into well-known businesses. Not every company needs that much to grow and using these stats to leap to the conclusion that ‘these hurdles will disqualify equity crowdfunding as a fundraising option for viable startups’ is a bit much. We know the stats on venture funds – most fail to return profits to their investors. Surely then, given that the funds are the ones cashing those seed checks that average out to nearly $2 million, the funds are wrong. See, I can make leaps as well.
While I disagree that the size limit of the round should be perceived as a hurdle, I do allow that the cost of fundraising may be off-putting. The only way to overcome this is to estimate the potential additional benefits that come from doing a raise, which include the marketing aspect and the acquisition of brand advocates. Just imagine getting in front of thousands, if not hundreds of thousands of potential customers, marketing your wares and then locking them in as customers for life by allowing them to be a part of your journey.
Unlike investing in a stock like Pepsi or Coca Cola, those who invest in you know that their efforts will directly impact on how well you perform. We’ve had some great ‘smaller’ investors come on board at SyndicateRoom and they’ve become our biggest brand ambassadors – they tell fellow investors about us, they look out for interesting companies that we may wish to list on the platform, and they each offer incredible feedback on how we, and our product, have developed.
Don’t overlook how powerful this is for the business. I can’t quantify it just yet, but I’d like to think it far outweighs the cost of an audit.