Crowdfunding
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Extra Crunch roundup: Influencer marketing, China’s tech clampdown, drafting growth teams
Before you hire a marketing consultant who doesn’t understand your products or commit to a CMO who has several years of experience — but none in your sector — consider influencer marketing.
If the phrase evokes images of celebrities hawking hard seltzer, think again: An influencer can be as humble as an enthusiastic Reddit user who manages your Telegram channel.
According to Uber growth marketing manager Jonathan Martinez:
“ … You don’t need to find influencers with millions of followers. Instead, lean toward microinfluencers for testing, which will bring cost efficiency and the ability to sponsor a diverse range of people.”
If your startup has a clear brand pitch, “an enticing offer” and “clear next steps,” you’re ready to reach out to influencers, he says.
In a guest post, Martinez explains how to structure offers that will maximize conversions and keep your representatives motivated to promote your products and services.
Full Extra Crunch articles are only available to members.
Use discount code ECFriday to save 20% off a one- or two-year subscription.
Image Credits: Julian Shapiro
This morning, we published an interview with growth expert Julian Shapiro, a founder and angel investor who also advises startups on the best way to present themselves.
Marketing is data-driven, but good storytelling is an art, says Shapiro.
To connect with consumers on an emotional level, “you need a mix of goodwill, what-we-stand-for ideology, social prestige and customer delight — among other affinity-building ingredients.”
Thanks very much for reading Extra Crunch this week!
Walter Thompson
Senior Editor, TechCrunch
Everyone wants to fund the next Coinbase
Image Credits: Nigel Sussman (opens in a new window)
“In celebration of Coinbase’s earnings report today, investors poured a mountain of cash into one of the company’s global competitors,” Alex Wilhelm writes in The Exchange.
Rolling up his sleeves, he dug into numbers from Coinbase, FalconX and FTX to give readers some perspective on the state of cryptocurrency exchanges.
How to hire and structure a growth team
Image Credits: tomertu (opens in a new window) / Getty Images
Companies that have reached $5 million to $10 million in annual revenue are more likely to assemble growth teams; it’s a smart investment for any startup that’s achieved product-market fit.
It can also be potentially disruptive: Early marketing and product managers may feel sidelined by new cross-functional teams that suddenly take a leadership role.
In a detailed walkthrough, senior director of growth at OpenView Sam Richard explains the core players needed to build a growth team and how to integrate them into the organization smoothly, and shares some useful experiments to run.
“Don’t expect a single hire to scratch the growth itch for you,” Richard warns.
“A brilliant hire is going to come up with ideas, but will absolutely need a team to support them, turn them into experiments and then make them a reality.”
Indiegogo’s CEO on how crowdfunding navigated the pandemic
Image Credits: Bryce Durbin
In an interview with Brian Heater, Indiegogo CEO Andy Yang spoke about how the pandemic has impacted the crowdfunding platform, the challenges of stepping into the role after the previous CEO departed, and how the company reached profitability.
The company wasn’t profitable when you joined?
We weren’t profitable. I joined and then we cut to profitability, or at least kind of a neutral state, and with any kind of change in leadership, some tenured folks opted out, and we basically became a new team overnight to kind of re-found the company, and we’ve been slowly adding people over the last couple years, but always with that eye on profitability and controlling our own destiny.
Kickstarter’s CEO on the future of crowdfunding
Image Credits: Bryce Durbin
Last week, Kickstarter announced that people have backed more than 200,000 projects with $6 billion in pledges since the company launched in 2009. Just 15 months ago, it crossed the $5 billion threshold.
Brian Heater spoke to CEO Aziz Hasan, who took over in 2019, about last year’s substantial of layoffs, the pandemic’s long-term impact on crowdfunding, and how he’s working to build a more resilient company:
I think for us some of the most important things are to really just understand how we’re operating the business, making sure that we are sufficient in the buffer that we have for the business to make sure that we’re operating in a way that we can feel confident that the team is going to have some stability, that they’re going to have this resilience.
Craft your pitch deck around ‘that one thing that can really hook an investor’
We frequently run articles with advice for founders who are working on pitch decks. It’s a fundamental step in every startup’s journey, and there are myriad ways to approach the task.
Michelle Davey of telehealth staffing and services company Wheel and Jordan Nof of Tusk Venture Partners appeared on Extra Crunch Live recently to analyze Wheel’s Series A pitch.
Nof said entrepreneurs should candidly explain to potential investors what they’ll need to believe to back their startup.
” … It takes a lot of guesswork out of the equation for the investor and it reorients them to focus on the right problem set that you’re solving,” he said.
“You get this one shot to kind of influence what they think they need to believe to get an investment here … if you don’t do that … we could get pretty off base.”
Online retailers: Stop trying to beat Amazon
Image Credits: TravelCouples (opens in a new window) / Getty Images
Going up against global e-commerce behemoth Amazon might seem futile, but smaller players can leverage value adds that give them a leg up when it comes to ensuring a loyal customer base, says Kenny Small, vice president SAP and Enterprise at Qualitest Group.
“The reality is that Amazon’s true unique selling proposition is its distribution network,” he writes in a guest post. “Online retailers will not be able to compete on this point because Amazon’s distribution network is so fast.
“Instead, it’s important to focus on areas where they can excel — without having to become a third-party seller on Amazon’s platform.”
The China tech crackdown continues
Image Credits: Nigel Sussman (opens in a new window)
Edtech and fintech have been in the Chinese Communist Party crosshairs in recent weeks — now, chat apps and gaming are among the targets.
Beijing filed a civil suit against Tencent over claims that its WeChat Youth Mode flouts laws protecting minors, and state media criticized the gaming industry as the digital equivalent of passing out drugs to kids, Alex Wilhelm writes in The Exchange.
He writes that the “news appears to indicate that we should expect more of the same as we’ve seen in recent months from the Chinese government: More complaints about the impact of ‘excessive’ capital in its industries, more tumbling share prices and more held IPOs.”
5 ways AI can help mitigate the global shipping crisis
Image Credits: Yuichiro Chino (opens in a new window) / Getty Images
In an increasingly on-demand world, shipping delays and disruptions are a major roadblock to customer happiness.
AI can help, says Ahmer Inam, chief artificial intelligence officer at Pactera EDGE, who offers five strategies for using AI that can help startups understand supply chain disruptions and prepare for a Plan B.
“While AI won’t protect startups, manufacturers and retailers from these types of disruptions in the future, it can help them sense, anticipate, reroute and respond to them more effectively.”
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Pro tips from the team behind Kickstarter’s most funded app
Here at memoryOS, we have a saying we repeat often: “Most of the Kickstarter happens before the actual Kickstarter.”
Preparation is the key. But even if you understand that most of the work is done in advance, you should still prepare yourself for some sleepless nights after the launch date. The usual startup mantra will apply to your crowdfunding campaign just as well: Measure, analyze and adjust along the way.
As you may know, crowdfunding fits some B2C products better than it does others. So to give you our product context here, memoryOS is a gamified app that teaches memorization skills with the help of virtual mind palaces and interactive microlessons taught by our co-founder, two-time World Memory Champion, Jonas von Essen.
Image Credits: memoryOS (opens in a new window)
Before becoming the most funded app on Kickstarter and getting it 6,400% funded (and carrying it further to the Indiegogo platform right after), we spent countless hours researching down the rabbit hole of crowdfunding tips and tricks. We also had calls with several top-tier crowdfunding project creators who were kind enough to answer our questions and share bits of knowledge from their experience.
We’re sharing our approach (and secrets) to building a successful crowdfunding campaign because we know just how tough it can be to launch your own product. So here is a complete 10-step guide:
Find a unique idea
You should have a unique idea for a product that would solve at least one problem for your target audience. The proven approach is to set two major hypotheses right at the start and then work on getting them tested:
- Does your product work and solve the problem as intended, and is it better than what’s out there? This is usually referred to as the “proof of concept” stage.
- Are there enough people who are willing to pay for your product for you to build a sustainable business?
You will need to build a base prototype to test the first hypothesis and, if it works, you can then work on turning it into an MVP or a short demo version for your future commercial product. You can then get people to test it for free and prepay for the full version.
Getting people to actually back their interest with their wallet means you already have customers, not merely enthusiasts, and it significantly increases the chances of a successful project.
Yes, it’s important that you get people to pay a minimum reservation deposit at this point and receive their commitment to pay the remaining amount for the full product later on. Getting people to actually back their interest with their wallet means you already have customers, not merely enthusiasts, and it significantly increases the chances of a successful project.
Get user feedback
As soon as you have something to test, conduct short surveys to better understand your customers by gathering and analyzing the reasons why and for what purpose(s) they would want your product.
Here at memoryOS, we called the first couple thousand of our leads and had many insightful conversations to help us connect to our audience on a more personal and emotional level.
Once you have a demo or prototype for the users to test, make sure to add a feedback form right at the end of their experience (or gather feedback using Google Forms for surveys, or via email inquiries).
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Hustle Fund backs Fintor, which wants to make it easier to invest in real estate
Farshad Yousefi and Masoud Jalali used to drive through Palo Alto neighborhoods and marvel at the outrageous home prices. But the drives sparked an idea. They were not in a financial position to purchase a home in those neighborhoods (to be clear, not many people are) either for investment or to live. But what if they could invest in homes in up and coming cities throughout the U.S.?
Then they realized that even that might be a challenge, considering that with all their student debt, affording a down payment would be impossible.
“There was nothing available out there besides a crowdfunding platform, which when we first signed up, took away $1,000 from our account that we didn’t have, and then our capital would be locked up for three to 10 years,” recalls Yousefi.
So the pair started doing research and spoke to 1,000 individuals under the age of 35. Eight out of 10 said they would like to invest in real estate but were deterred by all the barriers to entry.
“There is clearly a large demand for access to real estate,” Yousefi said. “And we wanted to give people a way to invest in it like they can in stocks, via a mobile app.”
And so the idea for Fintor was born.
Yousefi and Jalali founded the company in 2020 with the goal of purchasing homes via an LLC, and turning each into shares through an SEC-approved broker dealer. Individuals can then buy shares of the homes via Fintor’s platform. Its next step is to sign agreements with individual real estate investors or bigger real estate development firms to list their properties on the platform and give people the opportunity to buy shares.
And now Fintor has raised $2.5 million in seed money to continue building out its fractional real estate investing platform. The startup aims to “fractionalize” houses and other residential property, giving people in the U.S. access to investment opportunities “starting with as little as $5.” The company attracted the interest of investors such as 500 Startups, Hustle Fund, Graphene Ventures, Houston-based real estate investor Manny Khoshbin, Mana Ventures and other angel investors such as Cindy Bi, Skyler Fernandes, VU Venture Partners, Minal Hasan, Andrew Zalasin, Alluxo CEO and founder Safa Mahzari, SquareFoot CEO and founder Jonathan Wasserstrum and Teachable CEO and founder Ankur Nagpal.
Image Credits: Fintor
Fintor is eying markets such as Kansas City, South Carolina and Houston, where it already has some properties. It’s looking for homes in the $80,000 to $350,000 price range, and millennials and Gen Zers are its target demographic.
“Fintor can give the same return as the stock market, but at half the risk,” Yousefi said. “As two [Iranian] immigrants, we’ve seen how much this country has to offer and how real estate sits at the top of everything, yet is so inaccessible.”
The pair had originally set out to raise just $1 million but the round was quickly “way oversubscribed,” according to Yousefi, and they ended up raising $2.5 million at triple the original valuation.
Jalali said the company will use machine learning technology to filter and rate properties as it scales its business model.
“We’ll use ML to categorize neighborhoods and to come up with the price of properties to offer to potential sellers,” he added. “Our ultimate goal is to create indexes so that people can invest in multiple properties in a given city. That creates diversification right away.”
Elizabeth Yin, co-founder and general partner of Hustle Fund, believes that Fintor is solving a generational problem with real estate.
“Retail investors have almost no access to great real estate investments today and the best opportunities are reserved for the select few,” she told TechCrunch. “Not to mention that in addition to access, retail investors often need a lot of capital in order to have a diversified portfolio or be accredited to join funds.”
Fintor’s approach to securitize real estate assets will give millions of investors who are not accredited investors access they would otherwise not have had, Yin added.
“Simultaneously, it provides increased liquidity to property owners, while improving the user experience for both parties,” she said. “Effectively this becomes a new asset class, because it’s entirely turnkey and is fractionalized, which opens up many new pockets of investors.”
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Gumroad wants to make equity crowdfunding mainstream
Gumroad, a startup that helps creators sell their work, is raising $6 million at a $100 million valuation. While $1 million of that total is reserved for AngelList co-founder Naval Ravikant and Basecamp founder Jason Fried, the remaining $5 million is being raised with a twist: anyone willing to fork over at least $100 bucks can invest in the round.
Founded by Sahil Lavingia, Gumroad is using a new SEC regulation, passed today, that increases the maximum amount of money that can be raised in an equity crowdfunding campaign. Now, investors and founders can raise up to $5 million per year from crowdfunding, up from $1.07 million the year prior.
The increase might not turn heads in a world of $90+ billion valuations, but Lavingia thinks the new rules could revitalize a path to raising capital for venture capitalists and founders alike. Unaccredited investors — whether its users, friends or non-accredited investors — could become the new limited partners.
“If this works, startup founders will start to be able to go direct more frequently,” Lavingia said.
Despite venture capital growing as an asset class, alternative ways to raise are becoming increasingly popular to help founders maintain ownership and to access capital.
Up until this point, Gumroad has raised more than $8 million from investors, including Kleiner Perkins, First Round, Max Levchin and SV Angel, as well as others, since 2011. But today marks what Lavingia views as a long-term shift in how Gumroad raises capital. If all goes well, Gumroad will continue raising via crowdfunding on an annual basis until it goes public.
Now that companies can raise $5 million per year through crowdfunding, platforms like WeFunder, StartEngine, SeedInvest and Republic, which Lavingia is using, have a better chance to shake up the modern fundraise.
So far, Gumroad has raised $3.4 million of its $5 million goal across commitments from 3,458 investors. Investors in the crowdfund include part-time creators on Gumroad, Lavingia’s Twitter followers, YouTubers, as well as Figma founder Dylan Field and partners from VC firms. In order to promote a diversity of investors, Gumroad has capped total investments from individuals at $1,000 for the first few days.
The startup is giving up 6% of ownership as part of the financing event, and the investors will only receive equity stakes once the SAFE note turns into a round. This process could take a year, Lavingia said. The conversion round to make it happen could be an IPO, acquisition or $10 million priced round. The priced round will likely happen next year through a Reg A round, the annual limit of which is $75 million, the founder said.
The SAFE’s cap is placed at a present-day 3.5x revenue multiple. In 2020, Gumroad brought in $9.2 million in net revenue, up 87% from the year prior, generating $1.08 million in net profit, up 286% from the year prior.
Background
The new, higher crowdfunding investing cap has some downsides, according to institutional investors. A simple one is that it is an administrative burden to give hundreds of people equity in your company for a small amount of money. Another issue, one investor told TechCrunch, is that institutional investors are sometimes experts in investment areas, which is helpful in a way hundreds of smaller investors might not be. Finally, the max of crowdfunding is still $5 million a year, so the method may be less effective for later-stage companies like, say, Stripe, which needs traditional investors to buy in.
Despite these concerns, the recent Gumroad raise is a continuation of two trends of which Lavingia has been on the forefront: building in public and the democratization of venture capital. He livestreams every Gumroad board meeting through Clubhouse and Zoom, and shares business metrics that most private companies decline to report, such as revenue and profit. (In fact, I knew about this plan to raise months ago after reading one of his newsletters.)
Readers will also remember that Lavingia was one of the first people to use the AngelList platform to create a rolling fund, which uses a 506(c) SEC regulation that allows investors to publicly solicit investments on an ongoing basis. The move was met with controversy at first, since venture capital funds have historically been raised behind closed doors.
“People were upset at the rolling fund, so imagine when they see that you are cutting out the whole industry [of venture capital],” Lavingia said, referring to a conversation he had with AngelList’s Ravikant.
One thing to be wary of, Lavingia says, is the Testing the Waters dynamic. Under Reg CF and A+, startups are able to differentiate between offering and selling securities. Offering simply allows a founder to “test the waters” and see if interest is there for a crowdfunded round. Despite this guardrail, commitments aren’t capital. For example, a startup could get $1 million in commitments but wind up only raising $100,000, Lavingia said. The conversion rate for intended buys versus actual buys could leave some founders in a thorny spot.
His way for combating this is to be obvious about red flags and transparent, which is already in line with Gumroad’s thesis.
“I preceded this fundraise with a blog post that I’m the only person who works on Gumroad as an employee,” he said. “I want to scare off anyone who is like this is weird [from investing].”
Other than Lavingia, Backstage Capital’s Arlan Hamilton has used Republic to crowdfund her firm’s operating fees. Hamilton made history earlier this month when she raised $1 million in eight hours for her fund. Today, she similarly opened up investments in her firm in light of the new cap and has already closed $2.4 million.
When Hamilton spoke about the raise at TC Sessions: Justice, she said she expects another asset class to be born because venture is a “broken” and “old” system.
“I’ll probably pivot Backstage, we’ll find ways and we’ve already started,” she said. “If you look at our raise we did in the Republic, it didn’t exist the way we wanted it to exist, this ability to go to the crowd as a fund.”
2014: income <$10,000
2016: raised first $1.2M fund
2020: deployed first $1M “check”
2021: raised $1M in 8 hoursDon’t give up.
— Arlan
(@ArlanWasHere) March 15, 2021
“The way it starts is not by a normal person doing it,” Lavingia said. “It’s by someone who is at the tip of the spear, someone who has an interesting angle, and then it gets sort of democratized over time.”
The fact that a founder turned part-time venture capitalist is using crowdfunding to raise money for his own company is a meta headache on its own. But the founder sees this as an opportunity to make crowdfunding mainstream and an attractive asset class.
Long-term, a public crowdfunding round in startups could be just a small drop in a startup’s financing pre-exit, but one that could empower thousands of normal people to own startup equity for the first time.
“I’m basically trying to become a private-market Chamath,” he said, referring to the billionaire behind Social Capital credited with the recent boom in popularity around SPACs. “I want to build a huge brand associated with investing in private equities, startups, and having an army of people that I can use and wield in different ways.”
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Why VC funding is falling out of favor with top D2C brands
In 2020, venture capitalists unceremoniously broke up with D2C brands and product-based businesses.
Many watched as the consumer brands in their portfolios rushed to make hefty layoffs and eke out more runway and grew more concerned with their business models.
Some simply monitored the “lackluster” Casper IPO or skimmed articles about Brandless and others “imploding” and started pulling a slow fade on D2C brands — not taking pitches, not following up.
Many product-based brands, as it turns out, are no longer interested in chasing venture capital.
Last year, investors adopted a wait-and-see approach to all new investments and prayed portfolio brands could cut their burn significantly enough, stay relevant and ride things out.
Product-based businesses fell out of favor and venture capitalists, if they did invest last year, mainly focused on AI startups, or companies focused on data collaboration, data privacy and healthcare (mostly founded by men, might I add).
From a distance, it sounds like direct-to-consumer founders were left destitute and desperate for financing, wounded by every slow fade or hard pass, beholden as ever to the whims of Silicon Valley.
But as Hal Koss so eloquently shared in his “DTC playbook” post-mortem, this wasn’t a one-way breakup; this parting of ways is actually mutual. Many product-based brands, as it turns out, are no longer interested in chasing venture capital, playing the “grow-at-all-costs” game and relinquishing partial control to investors, despite the pandemic and the uncertain circumstances many founders find themselves facing.
Through my work running and scaling Bulletin, I’ve followed thousands of product-based businesses ranging from indie beauty brands selling clean serums and cleansers to sex tech companies making couples’ vibrators and foreplay accessories. I’ve followed them on Instagram, in the press and across various platforms, and in many cases, I’ve spoken to their founders directly.
Over the past two years, I interviewed executives at more than 30 women-owned businesses for my upcoming book, “How to Build a Goddamn Empire,” and had long phone calls with dozens of independent brands and makers as Bulletin got a handle on how the pandemic was impacting customers. And I noticed something new and remarkable about what founders want now, in 2021, compared to what they wanted in years past.
Back then, I’d get dozens of cold emails and DMs asking how I successfully raised VC and what the unspoken rules might be. I’d hear from business owners who were considering a raise or gearing up for one. Product-based entrepreneurs approached me at panels or Bulletin events and say they wanted to be the “Glossier for X” or the “Away for Y.” Many younger founders didn’t even know what venture capital really was, but they saw it as symbolic validation for the business, or the only way to get “big.”
Now, brands would rather scrape by than pursue an injection of funding on someone else’s terms; just ask the Gorjana founders or Scott Sternberg. Many brands that saw astronomical growth in 2020, like Rosen, Golde, Entireworld and others that spurred similar growth for Etsy and Shopify are fully bootstrapped businesses, and proudly so.
Some founders I’ve spoken to have even outright rejected offers for investment. A lot of D2C brands are interested in learning about alternative forms of financing like bank loans, lines of credit and crowdfunding, and ask about iFundWomen or Kickstarter, observing the success of other fully crowdfunded brands like Dame and Pepper.
Venture capital, from my vantage point, has lost its sheen for a lot of product-based brands. They’re not destitute and desperate for financing. They’re actually scoffing at the prospect and trusting they can succeed, scale and maintain long-term profitability without swapping equity for cash. They’re tripped up by what they’ve been reading in the media, or they’ve survived or even thrived during COVID, as a fully bootstrapped company, and feel more conviction than ever that the “grow slow” approach is the right move.
They’re reading the same stories about layoffs and tenuous unit economics at massive D2C companies and agreeing with Sam Kaplan that the old playbook — pricey customer acquisition practices, rapid scale, endless rounds of funding — is out of date. It’s 2021 and we’re midpandemic. These brands want to turn a profit.
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From surviving to thriving as a hardware startup
When a friend forwarded this tweet from Paul Graham, it hit close to home:
Startups are subject to something like infant mortality: before they’re established, one thing going wrong can kill the company. Hardware companies seem to be subject to infant mortality their whole lives.
I think the reason is that the evolution of the product is so discontinuous. The company has to keep shipping, and customers to keep buying, new products. Which in practice is like relaunching the company each time.
I don’t know if there is an answer to this, but if there were a way for hardware companies to evolve more the way software companies do, they’d be a lot more resilient.
Looking back on our startup journey at Minut, I remember several moments when we could have died. However, surviving several near misses we learned to tackle these challenges and have become more resilient over time. While there will never be one fully exhaustive answer, here are some of the lessons we learned over the years:
Subscription revenue is the only revenue that counts
While you can sell hardware with a margin and make important early revenue, it’s not a sustainable business model for a company that requires both software and hardware. You can’t cover an indefinite commitment with a finite amount of money.
Many hardware companies don’t consider subscriptions early enough. While it can be hard to command a subscription from the start (if you can, you might have waited too long to launch), it needs to be in the plan from the beginning. Look for markets where paying subscriptions is the norm rather than markets that operate on a one-time sale model.
Set high margins and earn them over time
It’s tempting to set low prices for hardware to attract customers, but in the beginning you should do the opposite. Margins allow for mistakes to be rectified. A missed deadline might mean you have to opt for freight by air rather than boat. You might have to scrap components or buy them expensively in a supply crunch. Surprises are seldom positive, and you don’t want to use your venture capital to pay for them.
Healthy margins can also be used to cover marketing costs while you learn what kind of messaging works and what channels you can sell through. If that wasn’t enough reason, starting with relatively high prices will help you avoid another common mistake, selling too much at launch.
This might seem counterintuitive — why wouldn’t you want great success out of the gate? The reason is that you will inevitably make mistakes with your early launches, and the bigger the launch, the bigger the blow. There are plenty of companies who achieved amazing crowdfunding success and then failed to deliver even the first units. Startups tend to chase growth at all costs, but for hardware startups in the first few years there is such a thing as too much of a good thing.
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Will new SEC equity crowdfunding rules encourage more founders to pass the hat?
The flow of venture capital in 2020 has been surprisingly strong given the year’s general uncertainty, but while investors have showered plenty of dough on growth-stage companies, seed-stage startups are down 32% last quarter compared to the year before.
There have been plenty of recent conversations about alternative funding routes for founders, and one of those oft-overlooked paths has been equity crowdfunding. While crowdfunding platforms like Kickstarter push consumers to back unrealized projects in exchange for products or other services, equity crowdfunding allows consumers to actually invest cash and receive a piece of the company. It’s not a conventional path, but it can be a viable option for companies that have a close relationship with an engaged customer base.
The Security and Exchange Commission’s Regulation Crowdfunding guidelines were adopted under Title III of the JOBS Act back in 2016, but because many entrepreneurs were unfamiliar with how to participate, many of the startups that have taken advantage of it haven’t been the highest quality. The tide could be turning: This week, the SEC updated some of its guidance on crowdfunding, eliminating some ambiguities and increasing the amount of capital companies can raise from both accredited and nonaccredited investors. Additionally, companies can now raise $5 million per year using equity crowdfunding, compared to the previous limit of $1.07 million.
But life has gotten easier in other ways as well for founders pursuing this fundraising type and the platforms that seek to simplify it.
Wefunder is one of a handful of equity crowdfunding platforms that have popped up in the last few years. Before a company can raise on its platform, Wefunder vets them before allowing them to tap into their network of amateur investors who can invest as little as $100 with the median investment sitting at $250. Last month, 40 companies launched on Wefunder and collectively raised $12 million, according to Wefunder CEO Nicholas Tommarello.
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Financial institutions can support COVID-19 crowdfunding campaigns
The economic impact of the COVID-19 pandemic adversely affected the financial outlook for millions of people, and continues to cause significant fiscal distress to millions more, but such challenging times have also wrought a more resilient and resourceful financial system.
With the ingenuity of crowdfunding, considered to be one of the last decade’s greatest “success stories,” and such desperate times calling for bold new ways to finance a wide variety of COVID-19 relief efforts, we are now seeing an excellent opportunity for banks and other financial institutions to partner with crowdfunding platforms and campaigns, bolstering their efforts and impact.
COVID-19 crowdfunding: A world of possibilities to help others
Before considering how financial institutions can assist with crowdfunding campaigns, we must first look at the diverse array of impressive results from this financing option during the pandemic. As people choose between paying the rent or buying groceries, and countless other despairing circumstances, we must look to some of the more inventive ways businesses, entrepreneurs and people in general are using crowdfunding to provide the COVID-19 relief that cash-strapped consumers with maxed-out or poor credit do not have access to or the government has not provided.
Some great examples of COVID-19 crowdfunding at its best include the following:
- Consider Woks for Washington, in which a pair of sisters set up a GoFundMe page to raise funds that contribute to paying local restaurants to provide meals for essential workers, the homeless, and others in need, inspired by World Central Kitchen’s own programs.
- Or look at Kingston Mines, the historic and famous blues club in Chicago, where a similar crowdfunding campaign literally kept the lights on and the hot water running.
- Then, of course, there is the most obvious COVID-19 relief solution out there: A more functional face mask (or a more fashionable face mask) to improve protection for everyone from contracting the coronavirus.
The possibilities presented by crowdfunding in this age of the coronavirus are endless, and financial institutions can certainly lend their assistance. Here is how.
1. Acknowledge that crowdfunding is not a trend
Crowdfunding is a substantial and ever-so relevant means of financing all sorts of businesses, people and products. Denying its substantive contribution to the economy, especially in digital finance during this pandemic, is akin to wearing a monocle when you actually need glasses for both of your eyes. Do not be shortsighted on this. Crowdfunding is here to stay. In fact, countless crowdfunding businesses and platforms continue to make major moves within the markets globally. For example, Parpera from Australia, in coordination with the equity-crowdfunding platforms, hopes to rival the likes of GoFundMe, Kickstarter and Indiegogo.
2. Be willing to invest in crowdfunded campaigns
This might seem contrary to the original purpose of these campaigns, but the right amount of seed-cash infusions to campaigns that are aligned with your goals as a company is a win-win for both you and the entrepreneurs or causes, especially now in such desperate times of need.
3. Get involved in the community and its crowdfunding efforts
This means that small businesses and medium-sized businesses within your institution’s community could use your help. Consider investing in crowdfunding campaigns similar to the ones mentioned earlier. Better yet, bridge the gaps between financial institutions and crowdfunding platforms and campaigns so that smaller businesses get the opportunities they need to survive through these difficult times.
4. Enable sustainable development goals (SDG)
Last month, the United Nations Development Program released a report proclaiming that digital finance is now allowing people from all over the world to customize and personalize their money-management experiences such that their financial needs have the potential to be more readily and sufficiently met. Financial institutions willing to work as a partner with crowdfunding platforms and campaigns will further these goals and set society up for a more robust rebound from any possible detrimental effects of the COVID-19 recession.
5. Lend your regulatory expertise to this relatively new industry
Other countries are already beginning to figure out better ways to regulate the crowdfunding financing industry, such as the recent updates to the European Union’s handling of crowdfunding regulations, set to take effect this fall. Well-established financial institutions can lend their support in defining the policies and standard operating procedures for crowdfunding even during such a chaotic time as the COVID-19 pandemic. Doing so will ensure fair and equitable financing for all, at least, in theory.
While originally born out of either philanthropy or early-adopting innovation, depending on the situation, person or product, crowdfunding has become an increasingly reliable means of providing COVID-19 economic relief when other organizations, including the government and some banks, cannot provide sufficient assistance. Financial institutions must lend their vast expertise, knowledge and resources to these worthy causes; after all, we are all in this together.
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Entrepreneurship and investing as social good
Sree Kolli is co-founder of Conduit, a premium investment platform that connects founders with successful operators, family offices and select VCs worldwide.
2020 has been a year of social upheaval. Around the world, society is identifying different problems in our culture and pushing for widespread change. While there are notable steps we can all take, from altering exclusionary company policies to signing action-oriented petitions, the VC and investment world has another, often overlooked option: Investing in change-the-world startups.
Increasingly, angel investors and institutional funds have begun allocating a portion of their funds to startups focused on diversity and social good, whether focused on democratized access to healthcare and education, or larger scale issues like climate change.
Initially, shifting funds to empower social good may seem like a hefty feat, however investors can embrace this mindshift in three simple steps: (1) redistributing stagnant investments; (2) leveraging democratized access to change-making startups; and (3) identifying founders tracking toward success.
Allocating more investments to foster change
Most of the world’s money is tied up in stagnant places. Whether invested in real estate, bonds or other traditional vehicles, this capital typically often shows conservative returns to investors — and has negligible impact on society. The intent isn’t malicious.
Most family offices and private wealth managers strive to minimize losses and these sorts of uniformed portfolios are safe. Even the most seasoned investors should incorporate more variety into their portfolios, determining where they can make profitable investments that yield higher returns while advancing societal good. Investors can take small steps to get more confident in expanding their strategies.
To start, reframe your thinking into seeing the potential opportunity rather than the risk. A good way to do this: Look at how high-risk public equities performed over the last five years and compare it to ventures within tech. Investors will see a significant disparity and the opportunity to make different returns.
The idea is not to put an entire profile in a single venture. Rather, an investor should take a portion of their portfolio in a high-risk investment sector, like public equities or fund structures, and put it in a similar risk profile with a better return. Gradually increasing these increments, starting at 15% and slowly scaling up, can help investors to see outsized returns while making a difference in the process.
A world of passion at your fingertips
For startups of all sizes, democratized access to investors will accelerate the use of capital for social good. Until recently, only the world’s wealthiest people had exposure to premium capital, but crowdfunding and accelerator programs have ushered in new opportunities, forging connections that might not have otherwise been possible.
These avenues have opened new doors for investors and startups. Access to developed networks or innovation hubs like Silicon Valley are no longer make-or-breaks for those looking to raise capital. Extended global opportunity for startups also means investors have more options to find promising ventures that align with their values, regardless of their location.
But while crowdfunding and accelerators have made the world more accessible, they come with sizable challenges. Despite making early-stage investment more obtainable, crowdfunding often does not bring the most valuable investors to the table.
Crowdfunding also inundates platforms with poor-quality deal flow, making it more strenuous for investors to connect with fruitful opportunities. Meanwhile, various accelerators and incubation platforms have emerged, which have advanced global connection, but tend to be quite noisy.
To succeed, entrepreneurs need more than capital. Rather, they need strategic support from experienced investors who can help them make decisions and scale in an impactful way. With a world of ideas at their fingertips, investors should take time to sift through their options and find the ideas that move them the most, prioritizing quality deals and looking toward platforms that curate promising connections.
Empowering entrepreneurs poised for success
Now is the right time to invest in startups. People who innovate during the pandemic have triple the hustle of those who build in safer economies. But while the timing is right, it’s equally important that the fit is right. I’m a big believer in investing in potential: Ambition, unwavering tenacity and empathy are desirable qualities that can help bring game-changing ideas to fruition.
If an investor funds a passionate leader with a strong vision and ability to attract talent, then the groundwork is laid to build something meaningful. When considering the change-makers to invest in, ask: Is this the right person to be building this company? Do they have the ability to attract and lead talent? Is the market big enough, and is there a significant enough problem to build a company around?
If the answer isn’t yes to all of these questions, it’s important to gauge if you can see a theoretical exit, or if the company is pre-seed or Series A, if they have the ability to scale to a decent size.
Despite this, investing in startups, no matter how good their intentions, can scare investors. One way to overcome trepidation is to invest in larger-stage startups that seem less risky and then wade into earlier-stage startups at your own pace. Special purpose acquisition companies (SPACs) are also becoming an interesting investment option.
SPACs are corporations formed for the sole purpose of raising investment capital through an IPO. The proceeds are then used to buy one or more existing companies, an option that could decrease anxiety for risk-averse investors looking to expand their comfort zone.
Any strategy an investor chooses to embrace social good is a step in the right direction. Capital is a tangible way to fuel innovation and bring about impactful change.
Democratized access to startups yields more opportunity for investors to find ventures that align with their values while diversifying their profiles can provide tremendous results. And when that return means disrupting the status quo and empowering societal change? Everyone wins.
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In pandemic era, entrepreneurs turn to SPACs, crowdfunding and direct listings
If necessity is the mother of invention, then new business owners are getting very inventive in the ways in which they access cash. Relying on some long-tested and some new avenues to raise money, entrepreneurs are finding more ways to get public market cash faster than they would have in the past.
Whether it’s from Reg A crowdfunding dollars, Special Purpose Acquisition Companies (SPACs) or direct listings, these somewhat arcane and specialized financing vehicles are making a comeback alongside a rise in new funding mechanisms to get to market quickly and avoid the dilution that comes from private market rounds (especially since those rounds are likely to come at a reduced valuation given market conditions).
Some of these tools have existed for a while and are newly popular in an era where retail investors are driving much of the daily fluctuations of the public markets. Wall Street institutions are largely maintaining their conservative postures with regard to new offerings, so secondary market retail volume growth is outpacing institutional. Retail investors want into these new issues and are pouring into the markets, contributing to huge pops to new public offerings for companies like Lemonade this Thursday and creating an environment where SPACs and crowdfunding campaigns can flourish.
The rise of zero-commission brokerages and the popularization of fractional trading led by the startup Robinhood and adopted by every one of the major online brokers including Charles Schwab, TD Ameritrade, E-Trade and Interactive Brokers has created a stock market boom that defies the underlying market conditions in the U.S. and globally. For instance, daily trades on Robinhood are up 300% year-over-year as of March 2020.
According to data from the BATS exchange, the total trade count in the U.S. was up 71% and May trading was up more than 43% over 2019. Meanwhile, E-Trade daily average revenue trades posted a 244% increase in May over last year’s numbers.
Don’t call it a comeback
The appetite for new issues is growing and if many of the largest venture-backed companies are holding off on going public, smaller names are using SPACs to access public capital and reach these new investors.
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