Entrepreneurship | May 21, 2019

Equity crowdfunding changes who gets financed

Roodgally Senatus
ImpactAlpha Editor

Roodgally Senatus

ImpactAlpha, May 21 – Three years after the equity crowdfunding exemption in the Jumpstart Our Business Startups, or JOBS, Act took effect, startups and other small businesses have raised a total of $187.5 million via a growing number of platforms.

Hundreds of thousands of smaller (and non-accredited) investors have helped companies raise up to $1 million (per year). Now comes research that suggest equity crowdfunding has potential to provide crucial risk capital for women and minority entrepreneurs, who are often overlooked by traditional funding sources.

New York-based Republic, for example, allows people to invest as little as $10 and earn a return if the startup succeeds. Republic touts an investor base of more than 100,000 and an average investment size over $500. Early-stage private companies run campaigns to raise up to $1 million from the pool of unaccredited investors. The firm has now helped fund more than 60 companies, a 95% success rate, says Republic’s Chuck Pettid.

Driving the growth: “Funding platforms like ourselves have made a dedicated effort to get both the public and entrepreneurs excited about the new regulations,” Pettid told ImpactAlpha.

Among the startups Republic has helped raise funding is Pigeonly, which offers an affordable way for incarcerated individuals to communicate with friends and family; SkillMil, a startup that allows veterans to find civilian jobs by matching their military skills to corporate skills; and Nori, a blockchain-based marketplace for removing carbon from the atmosphere.

Broader motivations

Before the new rule went into effect, some companies raised capital via the Title II rule of the JOBS Act, which allowed entrepreneurs to advertise their securities offerings to only accredited investors. Under this rule, companies were required to take “reasonable steps” to prove their investors’ accreditation. This limited the investor pool for companies.  

StartEngine, a separate platform, has launched more than 450 offerings, among the most since 2016. All equity crowdfunding platforms, which includes SeedInvest, MicroVentures and NetCapital, have helped more than 1550 companies raised much need capital.

Wefunder, a public benefit corporation, has helped more than 279 startups raise more than $92 million from hundreds of thousands of investors (including rounds that pre-dated the 2016 rule). Its biggest success story is Zenefits, which went on to raise more than $500 million after initially listing on Wefunder. Other success cases include Ginkgo Bioworks, which closed $270 million in its latest funding round, and Rappi, which has since raised $339 million. Earlier this year, more than 2000 fans of the Chattanooga, Tennessee soccer team, the Chattanooga Football Club, invested about $650,000 in their local team.  

Though equity crowdfunders earn a return, Wefunder’s Jonny Price, who earlier led KIVA U.S., told ImpactAlpha, “their motivations to invest are so much broader,” than financial rewards.

Democratizing fundraising

Equity crowdfunding has the potential to help more women and minority entrepreneurs — often overlooked by traditional funding sources — access funding.

New research suggests that women have higher success rates than men in regulated crowdfunding. Although men have larger funding targets, women-led campaigns held a 57% rate of successfully reaching their funding target, compared to a 43% rate for men.

At Republic, a quarter of the companies funded have founders of color (vs. an industry average of 1%); 44% have are female-led (vs. 13% in traditional VC). Wefunder has helped more than 279 startups raise more than $92 million. Of those, 18% are female-founded, also beating the venture capital average. The firm doesn’t track minority-founded companies. Wefunder’s XX accelerator targets female and immigrant entrepreneurs.

Crowdfunding is also changing who writes the checks. In 2017, for example, 8% of partners at VCs were women and women accounted for 22% of angel investors. At Republic, that 30% of investors have been women.  

Dennis Price contributed reporting.