David Cummings on Startups

Thoughts on Startup Crowdfunding

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David Cummings

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Earlier today I was at the Southern Capital Forum on a panel about early stage investing and crowdfunding. Based on the JOBS Act passed last year, soon non-accredited investors will be able to invest in startups. There are a number of unknowns about how the law will actually be implemented as well as how it will affect the fundraising market.

Here are a few ideas from today’s panel:

  • For tech startups that are difficult to understand, crowdfunding likely won’t do too much
  • For tech startups and consumer-oriented startups with a good marketing story, crowdfunding will provide another market validation option (e.g. crowdfunding could be a precursor to an angel round or replace angel rounds)
  • Standard deal considerations that are applicable to an angel round are also applicable to crowdfunding (e.g. having everyone invest via a single LLC, making the terms fair and consistent with the market so that the startup can raise money in the future, etc.)
  • Non-accredited investors are already investing in startups, so this legitimizes some of that activity

Overall, there’s significant enthusiasm that crowdfunding will have a material impact on the startup world. I’m looking forward to seeing how it all plays out.

What else? What are your thoughts on startup crowdfunding?

Comments

2 responses to “Thoughts on Startup Crowdfunding”

  1. Tom Blue Avatar
    Tom Blue

    I am really hoping crowdfunding improves private company investing. Speaking from experience, I never wanted to take VC funding because I wanted control over my company. We have seen competitors in our space be shutdown by their VCs because they were unprofitable and didn’t have huge amounts of revenue. With that particular company, I/we could have shrunk down expenses and made the thing hugely profitable which could have lead to more product growth. Secondly, I don’t like the terms VCs receive like being paid out first upon exit.

    Do you think the JOBS Act will remove these issues? If so, maybe I should start looking for more money now. 🙂

    Reply
  2. Tim Boeckmann Avatar
    Tim Boeckmann

    In the UK, equity crowdfunding has been established for a couple of years. Over here, we have less restrictions (rightly or wrongly) on who is allowed to invest in startups. There are also very attractive tax schemes to protect investors called SEIS (seed enterprise investment scheme) and EIS (enterprise investment scheme), giving tax breaks if the investments work out and rebates if the investments fail.

    For many, crowdfunding has become another stage in the funding playbook, sitting between friends & family and angel rounds. There are a number of benefits when raising through a crowdfunding platform including:
    – The platform handles a lot of the pitch and promotion work,
    – Once participation reaches about 30%, the rest of the money seems to come in before the funding deadline,
    – It can be a good marketing exercise for many B2C products,
    – It can be a good gauge whether or not the general public thinks the idea is viable,
    – In an industry when many parties seem to take a commission for introductions, the platform is the only middle man taking its slice of equity or commission.

    For investors, the platforms play a key role in presenting businesses that are real. It is not the platform’s job to vet the idea, but ensuring the legitimacy of the business is important.

    Crowdfunding in the UK is mostly seen a good initiative, generally free from fraud and malpractice. Many businesses that might otherwise not have been funded, have found the finance needed to march on with their endeavour. With the support of most crowdfunding platforms and the UKCFA, the authorities are looking for ways to regulate the industry.

    A selection of the different crowdfunding models include:
    Seedrs (nominee structure), Crowdcube (direct ownership), SyndicateRoom (backed by a lead angel), BankToTheFuture (offering crowdlending and direct ownership).

    Reply

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