5 Reasons Venture Capitalists Are Becoming Fans Of Equity Crowdfunding
It seems counter-intuitive: Some of the venture capitalists backing tech startups are now boosting a seemingly competing money source for their portfolio companies: equity crowdfunding. But leveraging equity crowdfunding alongside more traditional money sources can be a powerful combination, especially for consumer-facing companies.
“You’ve got the most loyal customer ever. They’ll never leave,” said Buck Jordan, managing partner of Wavemaker Partners in Los Angeles, of the small-fry investors who use equity crowd-funding to grab a previously unavailable piece of pre-IPO startups. Jordan said Wavemaker is now urging many of its portfolio companies to consider crowd-funding as part of their money-raising strategy.
“We actually plan on leveraging crowdfunding quite a bit, particularly on companies that are consumer-based and easier to understand,” he said.
Through Wavemaker predecessor Canyon Creek Capital, Jordan was an early investor in Pongalo, a Los Angeles streaming-video company specializing in Spanish-language content. Pongalo has both a subscription on-demand service and an ad-supported service, and owns digital rights to several large libraries of ‘telenovelas’ from Mexico and South America, including the original source for ABC’s English-language hit TV show ‘Jane the Virgin’.
As Pongalo CEO Rich Hull considered bringing in additional funding to better compete in the cut-throat online-video world, Jordan urged him to work with SeedInvest, a New York-based platform for equity crowdfunding, as part of his fund-raising
“This crowdfunding thing is counterintuitive to me,” said Hull. “I think we’re all kind of conditioned to think about crowdfunding and wince because we’re all conditioned to think about Kickstarter back in the day, or supporting someone with cancer on a GoFundMe page. But when the smartest guys say, ‘You need to do this,’ I thought I should take a look.”
Pongalo previously had raised about $5 million in seed funding, Hull said, and was beginning another round through traditional venues. But creating a corps of literally invested brand ambassadors made a lot of sense.
“We can go out to the most passionate people on our site and say, ‘Hey, you can own a piece of this,'” Hull said. “Hopefully it resonates with them. But ultimately what we’re trying to do is, sure, get them to invest a little bit, but essentially to become an army of word-of-mouth marketers. I want them to be so passionate about that little piece that they own that they go out and tell their friends, ‘You should watch this, you should go out and sign up for this.'”
Equity crowd-funding came out of the JOBS Act of 2012 and subsequent enabling laws and SEC regulations.
It provides a way to buy into privately held companies without being “accredited,” SEC-speak for those with at least $1 million in assets or $200,000 in salary, said Alexandra Tynion, a principal at SeedInvest. The new laws have allowed a flood of smaller investors (SeedInvest has 200,000 people invest in companies on its platform) to grab a share of a hot startup that otherwise they couldn’t touch.
Jordan said that the equity crowd-funding space has matured quickly in a short time, as investors and companies better understand the rules and opportunities. And companies such as SeedInvest provide a level of due diligence and vetting that can give investors a better chance to pick winning companies. As the sector matures, and people better understand how it works, it should become an even more powerful tool in the startup’s playbook for success.
Three years into the new rules, we’re seeing an evolution in how equity crowd-funding is viewed. Increasingly, said Tynion, institutional investors and startups alike are embracing equity crowd-funding, and so are the smaller investors who were previously shut out.
- Deciding to tap traditional funding sources or equity crowd-funding is “not a black or white issue,” Tynion said. Pongalo is one of many startups going side-by-side with traditional and crowd-funded raises. That can provide something of a best-of-both-worlds opportunity for at least some companies.
- Using a platform such as SeedInvest can be efficient for startups. For instance, if a company makes it into onto the platform, SeedInvest’s experts will provide guidance and support for a company in preparing offering documents and other specialized, complicated processes.
- It can be time efficient too, giving a company an answer in less than two months. That short period is both a limit and a blessing, ensuring a small company isn’t stuck in a six-month-long road show trying to raise VC money with no guarantee of success.
- Going through a site such as SeedInvest may save some legal and other fees that are absorbed by the platform as part of its process.
Pongalo’s original campaign, which Hull says was modest in size because of his initial skepticism, was quickly oversubscribed. Now, the company has expanded the raise. With the campaign nearly done, Pongalo already has more than $470,000 committed. Not surprisingly, Hull pronounced himself pleased with the experience so far.