Crowdfund my startup, please!

Mitchell Hartman May 16, 2016
HTML EMBED:
COPY
General atmosphere during TechCrunch Disrupt NY 2015 in New York City. Noam Galai/Getty Images for TechCrunch

Crowdfund my startup, please!

Mitchell Hartman May 16, 2016
General atmosphere during TechCrunch Disrupt NY 2015 in New York City. Noam Galai/Getty Images for TechCrunch
HTML EMBED:
COPY

The Securities and Exchange Commission has ushered in a new era of small-investor equity crowdfunding under Title III of the JOBS (Jump-Start Our Business Start-Ups) Act. It allows ordinary investors, subject to various regulatory restrictions, to purchase equity shares in small businesses that publicize their investment opportunities on new crowdfunding platforms, such as NextSeed, FlashFunders, SeedInvest and Wefunder. The companies started advertising their new ideas on those crowdfunding platforms Monday.

“Small businesses can turn customers into investors or fans into owners,” said Richard Swart, chief strategy officer at NextGen Crowdfunding, an information clearinghouse for this new market.

Ted Zoller, a fellow in entrepreneurship at the Kauffman Foundation, said these companies could use the help.

“Three in five fail in the first five years,” said Zoller. “There is a distressing reduction in the number of startups, and this is at a time when the cost of starting up is at an all-time low. It’s the early stage Valley of Death — the proof-of-concept period of a venture where the dollars just aren’t very abundant. Unfortunately they’re the hardest dollars to get.”

One venture that went looking for investors on the Wefunder platform on Day 1 of equity crowdfunding was N1CE. It’s a line of frozen cocktails — margarita, mojito, pina colada and strawberry daiquiri — in a paper cone, one shot of alcohol in each. The product is the brainchild of three top electronic dance music DJs — Ingrosso, Axwell and Alesso — on the Euro-American summer festival circuit.

Last summer, they sold around 250,000 N1CE frozen cocktails, said spokesman Thomas Van Hare. This summer, he expects sales to quadruple, at minimum.

“Every bit of capital we raise is going into the marketing,” said Van Hare. “And this capital gives us the ability to grow faster.” The idea is to turn every new investor into a brand ambassador, talking up the frozen cocktails to friends and fellow partyers.

But Peter Cohan, an angel investor, business lecturer at Babson College and author of “Hungry Start-up Strategy,” said “buyer beware” should be the watchword for any equity-crowdfunding deal an investor considers.

“It’s going to be great for the companies and bad for the investors,” said Cohan. “The odds of investors making any money on it are incredibly low. I think they should all expect to lose their money.”

Cohan said investors will likely have limited or inadequate information about the companies, and the odds of many of them surviving, let alone taking off and getting acquired or going public, are low.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.