How leveraging the power of small checks can make a big impact to build companies and create generational wealth
Startup funding is evolving and growing past its reliance on venture capital. Founders are finding alternatives and taking control of their businesses with the help of what I call, “micro-angel” investors…people who make small investments from $100 — $4,999.
Micro-angel investment didn’t exist until a few years ago. To understand why, here’s a short history lesson.
After the 1929 stock market crash, the Securities Act of 1933 was passed to protect investors from losing money. It ensured transparency in financial statements and restricted access to high risk investments to accredited investors.
Accredited investors were expected to be financially knowledgeable and in need of less protection given by regulatory disclosure filings. Which simply means they had to be educated and smart about investments, aware of the dangers and be ready to handle the possible losses. The belief was that people with lower incomes were safer not venturing into the uncertain waters of investing.
The SEC requires an accredited investor to have a net worth of $1 million. Or an annual income of $200,000 or more for the past two years — $300,000 in combined annual income for spouses. Financial entities like banks, insurance companies, brokers and trusts are also regarded as accredited investors.
Anyone that could not meet these requirements was regarded as a non-accredited investor. About 10% of Americans are accredited investors. Although the SEC was trying to protect investors from losing money, they made it impossible for the non-wealthy to get in on early-stage investments. It also made it hard for businesses without access to high-end angel investor networks to raise money which is the reality of many Black founders.
Not only were entrepreneurs limited to who they could raise capital from, but this law was effective in helping the rich get richer (through access to better, higher yielding, higher risk investment opportunities) and the ‘poor’ stay poor by not having access to life-changing investments that can create generational wealth.
This changed with the creation of the JOBS Act.
JOBS Act and the Evolution of Crowdfunding
The JOBS Act was passed in 2012 by the Obama Administration to allow companies to raise capital from micro-angel investors as well as traditional accredited investors. Under Regulation Crowdfunding (CF) companies can raise capital to the limit of $1,070,000 per 12 month calendar year. These investments can be in the form of equity, tokens (secure token offering) or revenue share.
In April 2019, I became the first female founder to raise over $1 million in a Reg CF campaign, PopCom raised the legal limit of $1.07M in about 70 days. In May 2020, with the continued assistance of my team member Jared Korinko, we raised the legal maximum again for a total of $2.3M from crowdfunding.
The second option is through Regulation A. This rule lets companies offer $50,000,000 in stocks without going through SEC registration. This money can be raised via crowdfunding or private placement. This is basically like taking your company public. The SEC approval process is rigorous, timely and expensive. It’s along the lines of a traditional series A round but the difference is anyone can go online and invest AND you can take investments on a side note from accredited investors. It’s a good opportunity to raise significant capital and diversify your investors — you can accept venture capital and angel funding at the same time. This is a big deal.
Choosing A Crowdfunding Platform
If you decide to go the crowdfunding route, there are several crowdfunding platforms that connect micro-angel investors with businesses. Since the JOBS Act was passed, crowdfunding platforms have grown in number giving founders a variety of options of places to raise capital.
These platforms require your business to go through due diligence checks before getting listed and the SEC requires companies to file an offering statement. The SEC also places limitations on how much the investors can invest in a company based on their annual income. To participate in listed companies funding rounds, investors have to register and create accounts with verified personal information about their identity, income and assets.
Just like venture capital funding, crowdfunding has its pros and cons.
The advantages are:
- Faster, easier and less costly access to capital
- Your customers can fund your business and become brand evangelists
- You can focus on getting your product to the market while maintaining control of your business
- Investors do not take Board seats
On the other hand, the disadvantages are:
- The approval process to raise capital is often lengthy
- There are accounting requirements including a financial review or audited financial statements in GAAP format — which many new companies do not have
- If you’re not comfortable providing financial or proprietary information to the public, then you might not be able to run a successful campaign
- Raising money from many micro-angel investors requires you to be in constant communication with them while being transparent and educating them on the process. This will keep you occupied, it requires a team.
- Marketing the campaign requires money for ads, media/press placements, and a large network. You can’t rely on the platforms to bring traffic to your offering. They only promote it once you reach certain milestones (i.e. $45,000+ raised)
Now that you’ve weighed your options, here is a list of a few platforms that I have personally used and those of my peers who have raised significant capital through equity crowdfunding.
1. Start Engine
Start engine supports founders with legal, marketing, and consulting services as well as access to their 200,000 investor network. Funds can be accessed during an active campaign once you reach a certain milestone, meaning you can take cash out before it’s over. A fee of 6% is collected from what the business raises, sometimes it could be more. Over 300 businesses have raised $125,000,000 on this crowdfunding platform (including PopCom, we raised $2.3M on Start Engine). Funds can be raised in exchange for equities and tokens.
Republic funds startups with a focus on diversity. Republic claims 95% of the campaigns on their platform have been successful. Choosing their platform gets your business in front of over 500,000 investors. Startups pay 6% of total funds raised in cash. Republic denied my application along with several founders that I know. However two of my friends, Harold Hughes of Bandwagon and Mike T. Brown of Win-Win raised successful campaigns on Republic. According to a Republic team member, they look for companies that are generating $5,000-$10,000 in monthly recurring revenue (MRR).
WeFunder is one of the largest crowdfunding platforms. $144,000,000 has been raised for 404 startups. 7.5% of the money raised is paid as placement fees and investors are charged 2% to fund businesses. I first heard of WeFunder in 2016 when the Founder Mike Norman reached out to me to meet. I was living in Miami and Mike was looking for companies to leverage this new way of funding. I was considering crowdfunding for Flat Out of Heels, and I started the process and got started, however it fell through and I never ended up doing it. I think back then I was not that confident in Reg CF as a viable way to raise money.
4. Fund Black Founders
Built to finance Black businesses, Fund Black Founders is creating generational wealth. With a platform fee of 5% founders can keep whatever they raise. The offerings are reward based, so Black founders can focus on scaling without pressure from investors. The platform also provides resources and mentorship designed specifically for Black businesses. I learned about this platform when doing research, I don’t personally know anyone who has raised capital on this platform.
SeedInvest specializes in equity crowdfunding and is focused on early seed to advanced financing rounds for startups in the tech industry. SeedInvest claims that less than 1% of companies that apply are selected to raise money from its network of 300,000 investors. Founders are charged a placement fee of 7.5% and there is 2% charge for investors. I do not have any personal experience with SeedInvest.
Before selecting a crowdfunding platform, determine your goals, financial needs and the unique value you’re offering micro angel investors. This will help you find a perfect match for your business. I encourage you to apply for more than one since acceptance has become competitive and not everyone is approved to raise capital.
Founders now have an alternative to venture capital funds, making it possible to reduce dilution and scale at their own pace. For investors, anyone can invest in a business, sell their equity shares and recover initial investments with profit…or keep it and make massive profits at a successful IPO/exit (best case scenario).
The total amount of capital raised from crowdfunding is set to reach $350,000,000,000 by 2025. With more than 70% of crowdfunding campaigns surpassing their goals (crowdfunding platforms let investors join a wait list), founders can’t afford to ignore this opportunity.
If you are interested in learning more about crowdfunding and the steps to take for a successful campaign visit www.CrowdCoach.co — a new equity crowdfunding course launching in October 2020. Get on our mailing list for updates.