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Crowdfunding is a method used by small business owners to raise money for their businesses. Some of the common platforms used for crowdfunding include Kickstarter, GoFundMe and others. These crowdfunding platforms allow folks like you and I to invest in these companies. Prior to the 2012 JOBS (Jumpstart Our Business Startups) Act in 2012, we couldn’t invest in startups without being an accredited investor. An accredited investor, as defined by the Securities Exchange Commission (SEC), is someone who earned more than $200K the last couple of years (or $300K combined with a spouse). Or someone who has $1M in net worth, excluding their primary residence.
Thanks to the JOBS Act, the opportunity to invest in startups opens doors for more people to become investors through equity crowdfunding platforms.
I caught up with Wefunder, a relatively new equity crowdfunding platform to learn about their investment opportunities. Keep reading to learn more about their approach to equity crowdfunding, also known as regulation crowdfunding.
1. What is regulation crowdfunding?
Regulation Crowdfunding is a way for startups and small businesses to raise capital. It was unlocked by the JOBS Act, which President Obama signed into law in 2012. Unlike Regulation D, which is focused on “accredited investors”, Regulation Crowdfunding allows companies to raise money from unaccredited investors as well as accredited investors. Companies can raise up to $1.07M per year through Regulation Crowdfunding. And investors can invest in startups they love, or founders who catch their eye.
2. Why is this a potential opportunity for our readers to build wealth?
Until Regulation Crowdfunding came along, the only people who could invest in startups were accredited investors. Jason Calacanis invested $25K early on in Uber, and made $125M in their IPO — that’s a 5,000x return. But he was already a millionaire. And now he has 125 more millions. Nowadays, more and more startups are remaining private for longer (i.e. their Initial Public Offerings are coming later). That means that more wealth is being created before the IPO. Investing in startups is highly risky. And highly illiquid — i.e. you are locking your capital up for a number of years. But Regulation Crowdfunding at least provides an opportunity for ordinary people to participate in the wealth that fast-growing startups are creating.
3. What are the risks associated with it?
Most startups fail. Even if they do succeed, your money will probably be locked up for many years. The good news is that by lowering the minimum investment amount to $100, Wefunder allows investors to build up a diversified portfolio.
4. What is a reasonable ROI our readers could expect from an investment? And over what time period?
There is no easy answer here. It really depends on the type of portfolio that investors want to build. There is a wide range of investment opportunities on Wefunder — from debt to equity, early stage to later stage, etc. A non-profit in Seattle offered a 2% interest loan paid back over 15 years — investors in that offering were probably more focused on tackling the affordable housing crisis in Seattle than earning a financial return. On Wefunder’s homepage, we try to prominently flag the risks, and encourage investors to invest for the right reasons: “Do it because you love the founders, the product, or the vision. But don’t do it to make oodles of money. Startups are super risky”.
5. How should they go about choosing which companies to invest in?
Everyone will have different motivations here. Personally, I am highly motivated by what I see as socially impactful companies. For example, I like investing in founders of color, because I believe there are systemic biases working against founders of color in the conventional finance system. I also invested in Chattanooga FC, a soccer club, because I thought it was cool to be an owner of a soccer club. From a financial perspective, I like investing in founders who I believe are outstanding — they have that brilliance, that tenacity, that drive, and that charisma.
6. What are some success stories – a company on the platform and an investor?
One company that raised with us recently, which I love, is called Caribu. They have an app that lets young children chat with their grandparents on the phone. The app enables the grandparent to read a digital book to their grandkids. I have seen this first-hand with my own daughter Felicity , who is three. Normally, she doesn’t want to chat to my mum and dad when they call from the UK. But with Caribu, my mum can be reading to her for 15 minutes, and Felicity is hooked! It’s one of the most incredibly transformative products I have ever seen! And a really cool and impactful use of technology. Max Tuchman is the CEO, and was the first Latina founder to raise $1M+ on Wefunder. She raised $1.4M from 1,609 investors last year. Startups in Florida (where Caribu are based) generally have fewer financing options than startups in Silicon Valley, so for a woman of color in Miami, we were proud to get $1.4M to Max and her team.
On the investor side, there are now over 100K to choose from! To pick one at random, I will go with Daniel, who invested $150 in Black Sands Entertainment. His comment when he invested, was exactly what we love to see — people investing because they care about the company and its mission, rather than because they want to make a quick buck: “As a fellow African American and anime lover, I am proud to (finally) be represented in this medium and wholeheartedly believe in this project’s success. Much respect”.
7. How does this type of investing model compare to traditional stock market investing?
The two main disadvantages of Regulation Crowdfunding / Wefunder are (1) these investments are much, much riskier than a public company; and (2) these investments are highly illiquid (i.e. it will probably be years before you have an “exit”). Whereas investments in the stock market can be bought and sold immediately.
On the other hand, there are several benefits of investing in early stage, private companies through a platform like Wefunder: (1) the potential upside is higher. There are no 1,000x investment opportunities in the public markets. But very early stage private startups very occasionally have explosive growth potential; (2) you might be able to “get in early” in companies on Wefunder. Whereas, by the time a company is public, the investment opportunity is more easily visible to anyone; (3) perhaps most importantly of all, if you are one of the first 100 investors in a company, you get to be “along for the ride”. If you’re one in a million investors in Amazon, there’s no real relationship with the company or Jeff Bezos. It’s a financial transaction. With Wefunder, investors can strike up a relationship with the founder. They can give product advice, or share a recent job posting on their LinkedIn. They can actually move the needle in terms of helping the company (their investment) to succeed. It’s cool to be involved, to be a part of the journey. On Wefunder, we hope investors have those motivations, instead of (or at least as well as) being motivated to make big financial returns.
Taken from https://www.moneyandmimosas.com/growmoney/can-you-make-money-as-an-investor-with-equity-crowdfunding