Equity Crowdfunding vs Venture Capital Fundraising

NEW YORK--This was not Batman v Superman where emotions flare and somebody is flung out of the New York skyline. At the NYC Incubator last June 9, the Equity Crowdfunding vs. Venture Capital Fundraising talk was just a convivial talk about the differences between the two funding methods.

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Allen Jebsen seemed to have channeled Clark Kent as he took the side of equity crowdfunding at Start Engine with earnestness. Sumeet Shah of Brand Foundry Ventures, made light of the event, making fun of the fake fight. 

“We see VCs as collaborator,” Jebsen said.

“We consider (equity crowdfunding) a competitor,” Shah said, then playfully moving his chair away as he said that in front of Jebsen.

If you don’t know the difference, here’s one thing that should settle it for you.

An accredited investor in the US must have a minimum annual of $200,000, a joint income of $300,000 or a net worth of $1 million. Without this moolah, you cannot be an accredited investor, according to the Securities and Exchange Commission.

But in June 2015, the SEC enacted “Regulation A+” which resulted in a brand new fundraising category for use by smaller companies also called equity-based crowdfunding.  This is different from the reward system used by Kickstarter or Indiegogo. Equity crowdfunding actually affords investors (read: anyone) shares in the company with some type of ownership in the business. It levels the playing field.  Non-accredited investors or anyone can invest in Regulation A+ offerings. There’s more information on investopedia.com 

Venture capital is money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets.

Recently, the SEC adopted rules to permit companies to offer and sell securities through crowdfunding, including to individuals that are not accredited investors, which is anyone out there.

Some differences are obvious. Crowdfunding in general requires a lot of time and effort. When raising money from people you have never met, you better have a good product to show – that means, you’ll need great content and video – to make it easy for people to decide if you’re a good investment.  

Jebsen breaks it down: You can set the term. If you hit your goal, you can write an amendment. You can get a few hundred thousand possibly between 1 and 3 months; for $50 million, 4 to 6 months. If you don’t hit your goals, your money goes to escrow. You can choose to do equity or debt (convertible debt), if you don’t want equity crowdfunding.

You could say there is some overlap here, especially when it comes to the reason you want to get funded. Like VC money, you have to know why you have to take the money but Jebsen said it’s important to know your product more than conveying a message. But that’s about it.

When you approach Sumeet for funding, you’ll need to recognize how much funding you need, because you’ll need to know how to scale up to 18 months. Once you figure out the amount of capital you need, and then you’re good.  “I wished there were so many more whiteboards in the world, so you can put all your ideas (that will help make you a decision),” he said.

As for the other side of funding, Sumeet said it would be hard to get anything done with 6,000 investors.

 Why would you invest your money in a startup, as a non-accredited investor?  Jebsen said it could simply because you are a “believer or consumer of potential products.”  In advertising, it’s what’s called brand ambassadors.

StartEngine launched with two partners, Elio Motors and game publisher XREAL. Elio Motors is an alternative transportation startup as it has an “ultra high mileage car (84 MPG) and costs only $6800, perfect for first time drivers and college students.

“It’s less about product, but the democratization of investment,” Jebsen said. “You need to have a strong vision and message in equity crowdfunding.”

On the other hand, VCs can help startups do much bigger rounds if they see a billion-dollar opportunity while also giving you connections and instant legitimacy. It’s only important to know if you can meet your targets. Can you actually rely on crowds for your fundraising efforts?

You’ll have to think both options thoroughly to find out what you really want. But if you don’t have money and you want to invest, your only option is to try equity crowdfunding.

Allen Jebsen focuses on educating entrepreneurs everywhere of the new fundraising options available under the JOBS Act. Initially created in Los Angeles as an accelerator by Howard Marks, co-founder of Activision and Acclaim Games, StartEngine has grown to become the leading equity crowdfunding platform. Since June of 2015, when Regulation A+ was enacted, StartEngine has helped companies raise 17 million dollars from over 6,000 non accredited investors. StartEngine has continued to help companies raise capital under Regulation Crowdfunding, the newest rules to be enacted by the SEC on May 16th, 2016.

Sumeet Shah handles sourcing and managing new opportunities as a Senior Associate at Brand Foundry Ventures, an early-stage consumer product and device venture capital firm. He has 6 years of experience across the startup and private equity industries, formerly running new business strategies at Gist Digital and handling business development and project work at Gotham Consulting Partners.