Equity crowdfunding off to promising start

In May, the SEC finalized its long-anticipated new rule that opens the door for more investors to take part in the most exciting—and risky—realm in the investing universe: innovative startups.  Previously, only “accredited” investors ($200K/yr income or $1 million in assets) were allowed to take these risks, and thus to reap the outsized rewards that can accrue to early investors in companies that are not yet available in the public stock markets.

Indiegogo announced this week that it will begin allowing small companies to offer equity investments on its platform, rather than just the rewards-based pre-sales that have been the core of crowdfunding up til now.  Many small companies have used crowdfunding platforms to get rolling and prove that there’s a ready market for their new products, only to turn to the super-rich when the time came to scale up for mass marketing their innovations.  Oculus, for example, raised millions from early adopters, but it was equity funders who reaped the windfall when the company was sold to Facebook for $2 billion.

In these early months, the potential is just beginning to be realized.  According to WeFunder, the largest equity crowdfunding portal so far, about 55 companies have successfully raised a combined total of $12 million from small investors.  WeFunder is currently hosting several dozen offerings, which range from local distilleries to a wildly innovative new design for small internal combustion engines (this one has raised a quarter million dollars so far!), and a new outdoor equipment company started by designers who helped build Mountain Hardware (which sold for $36 million).

Of course, the risks of getting an equity stake in a startup are just as outsized as the potential, if rare, returns.  As WeFunder puts it, “Startups either win big or go bankrupt. You could lose all your money. Consider them more like socially-good lottery tickets.”

As always, the more you wager, the more you might win, but these new equity funding portals let you start cautiously, with minimum investments that vary from $100-1000.  Indiegogo’s equity portal will be offering a wider audience for a subset of the companies listed with its partner, Microventures, a platform that claims to stringently filter its offerings to assure higher probability of success. Microventures seems to be fulfilling the first half of that promise, with 95% of the companies they’ve worked with during the past five years reaching their funding targets (these were more traditional accredited-investor offerings).  Time will tell how the success rate pans out for the new crop of crowdfunding investors.

One more variation that may be of interest is thematic Investment Clubs that are popping up on the WeFunder platform.  These are organized and managed by “domain experts” who pick the companies to back.  Current clubs include Food Future (“a scale-up accelerator in food & agriculture with a social purpose”), locally-oriented clubs in Wichita, KS and Davis, CA, a club manned by grads of MIT’s Sloan School of Management, and one dubbed The Order of the Orange Hand, which includes almost 300 alumni of the Y-Combinator and targets promising new tech startups.

There’s no doubt that while these are still the early days, this dynamic new sliver of the investing universe will add a touch of excitement for many “ordinary” investors.  Just remember to not go overboard; in fact, we’d suggest you do little more than dangle your feet over the side to get a feel for these turbulent yet oh-so-enticing waters.

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