New companies usually restrict their initial stock and bond offerings to "accredited investors," otherwise known as rich people. Now there's a way for ordinary folks to get in on the ground floor. The new investment channel is risky. But a study shows it might turn into an important funder for the smallest mission-driven businesses.
In mid-May, the Securities and Exchange Commission (SEC) rules took effect allowing anyone with Internet access to invest small sums in startup companies, with a maximum permitted offering of $1 million per year. "Regulation crowdfunding" is a lot like Kickstarter, with one big difference: The sites connect funders with offerings. When you send money through Wefunder or SeedInvest, you get stocks or bonds instead of CDs and thank-you notes.
The early results indicate that crowdfunding investors are seeking businesses that have a social mission. A third of the first 50 offers under the regulation crowdfunding exemption are by social enterprises, according to a study by the law firm Drinker Biddle. Another study estimates that social enterprises claim just 5.7 percent of all entrepreneurial activity in the United States. Seven of the first 50 crowdfunding offers are from benefit corporations or certified B Corps, and nine more are traditional corporations that have strong social or environmental missions.
"Crowdfunding is more likely to succeed when you have a good story to tell, and social enterprises have good stories," said Rob Esposito, a Drinker Biddle associate and co-author of the study. "Social entrepreneurs also embrace innovation quickly. And these kinds of businesses often find it difficult to raise early-stage financing through traditional methods, because traditional investors don't see them as competitive. So it makes sense that they would turn to people who support their mission."
The SEC protections don't change the fact that 3 out of 5 startups fail within the first five years. "Putting capital into a business that has no revenue, that might not necessarily have a commercially available product, is effectively gambling," Doug Melsheimer, managing director at the boutique investment bank Bulger Partners, told the Boston Globe.
Perhaps crowdfunding investors have had a few too many. The study found that eight of the first 50 issuers make alcoholic beverages, including two distilleries, two breweries, two bars, a liqueur maker, and a maker of frozen cocktail popsicles. But the most successful offering so far is by a benefit corporation.
Beta Bionics, which is developing a "bionic pancreas" for people with type 1 diabetes, will soon become the first crowdfunded company to hit its $1 million annual investment maximum. Co-founders Ed Raskin and Ed Damiano are quick to point out that they aren't in this for the money. "We have no interest in flipping,'exiting,' and making venture investors rich off this technology," they wrote in their business description. "Rather, we want to bring this first in class technology to as many people with type 1 diabetes as possible—this is our public benefit corporate mission in a nutshell." Damiano, a Boston University professor, has a son with type 1 diabetes.
"I suspect you'll find a clear correlation between success in crowdfunding and companies that have a community focus," Esposito said. "It could be a place or a cause. Someone who belongs to that community is likely to invest, and they are likely to share the pitch with their friends."
Image courtesy of SeedInvest