I’ve become a very active investor and advisor to start-ups over the past two years, and I firmly believe one piece of legislation is going to fundamentally change business, investing, and entrepreneurship. In fact, I think it might actually unleash a torrent of changes that impacts the whole world in a very positive way. This piece is part 5 of a 5 part series about Crowdfunding, the JOBS Act, and what all of this means to you. Part 1, Part 2, Part 3, Part 4.
I’ve spent the last four pieces explaining what the JOBS Act is, and why and how I think it will change the world. This sort of begs the question–how do you use it to actually invest in start-ups (or, how to raise money for a start-up)?
Well, broadly speaking, everyone–entrepreneurs, start-ups and investors–who uses the JOBS Act will interact with each other will be through crowdfunding platforms. This piece will give you my analysis of each platform, and make recommendations on which ones to use, and to avoid.
Quick Warning & Disclaimer
Please pay attention, this section is VERY important: The JOBS Act rules have not all been decided on and written by the SEC. Things are changing as we speak. This is a very fluid situation, so if you plan on using crowdfunding to invest or raise money for a company, MAKE SURE you do A LOT more research than just reading these 5 pieces I wrote. You are giving someone you probably don’t know your money, so be serious and smart.
This disclaimer is ESPECIALLY true for my reviews of these equity crowdfunding platforms. As of right now, the only people who are allowed to invest in them are “accredited investors.” I am one of those. Chances are, you are not, and that means won’t be able to use these platforms until next year. Things WILL CHANGE between now and then. For example, just today the ban on general solicitation was lifted.
Also remember: I am not a (practicing) lawyer, and nothing I write should be taken as legal advice. This is all just my opinion, and we all know what opinions are like, right? This is especially true with me. After all, I did write a book called “Assholes Finish First.”
My Evaluation Of The Current Equity Crowdfunding Platforms
All this being said, I do have some decent experience using multiple different equity crowdfunding platforms as an accredited investor, with about 15 investments across 5 platforms, and active use of many others over the past 6-12 months. But again–I am not a professional angel or VC or investor. In fact, I may say a lot of things that are wrong in this section, because these observations are based only on my personal experiences and conclusions.
Based on this personal experience, here is my evaluation of the marketplace:
Tier 1 [The Clear Leaders]
1. AngelList [my profile]: AngelList is far and away the most famous, and currently the best, of the equity crowdfunding platforms. What they do is very simple: They provide a platform for accredited investors to connect with, and invest in, start-ups that are raising money. Sounds simple, but here’s the cool thing: They don’t try to get in the middle of the transaction. They provide the platform and do the intros, FOR FREE.
I can’t say enough about how AngelList has changed the start-up funding landscape. Naval Ravikant and Babak Nivi (also the guys behind VentureHacks) set out to disrupt the antiquated and (mildly) exploitive old school Silicon Valley Venture Capital space–and they have done it, and done it really well. I think a full explanation of what they’ve done is beyond the scope of this piece, but here are some high points:
–Deal Flow/Size: They are the big boys in the equity crowdfunding space. They have the most accredited investors (something like 6k I think) and the most start-ups (I think 29k) by far. They average like 15mm a month in money raised for start-ups (and I think thats an old stat). Just look at their list of done deals, it’s astounding what they’ve done, and this is BEFORE the JOBS Act has gone into effect.
–Quality: They have some amazing people who are active on their platform. I have a profile, but so do people like Tim Ferriss, Evan Williams, Mitch Kapor and Eric Ries and so so many others. And not just quality of investors, but I cannot think of a tech or internet or software start-up that does not have an active profile.
–Ease of Use: Its so easy to use and understand. They don’t fuck around with all the bells and whistles and bullshit. It’s clean, easy to use, and they only focus on the things that matter. The design is so good, you don’t even notice it. It just works (you’ll see this is a major problem with other platforms).
–Openness/Transparency: I love the way they operate the platform. Everything is transparent–whether your amounts are self-reported or verified by another party, the way recommendations work, the fact that if you pledge money and then renege, you are banned from pledging again–everything they do is about being open and honest and transparent and they do whats best for everyone, not just the money people. And not only that, they publish all kinds of legal docs for start-ups to use, give guidance and guidelines and information so that start-ups can negotiate with enough information to get a fair shake. But they protect investors too by putting all the info possible about start-ups out there. Companies can’t just hide bad news, or if they do, it quickly becomes apparent.
–Not just investing platform: They are doing some cool things that go beyond just investing. They have a jobs board now, and its amazing. Basically, great people post their resume and requirements, and start-ups compete to hire them. It’s incredible, and the quality of talent there is astounding. And beyond that, today they just announced a syndicate program (though it had been running in a sort of beta for awhile), and I think that is a game changer. You’ll see more of this type of thing in the next few months before non-accredited investors get to start investing.
In short, AngelList is the big dog in this field because they have earned that position through being great and creating value for all parties.
[Disclaimer: Though I have no direct connection to either founders of AngelList–I’ve never even met them in person–the brother of one of the founders, Kamal Ravikant, is a good friend and advisor for my new company, Story Ark (which we haven’t put on Angel List yet, ironically! It’s coming soon, I promise, we’re literally too busy with real work to even do a website yet). I don’t know if this is a true conflict of interest, but I thought I’d lay it out there just in case.]
2. WeFunder [my profile]: I left my last disclaimer for Angel List to the end because it was so slight as to not really be relevant. But I have a MAJOR disclaimer I need to lead with on WeFunder:
I like WeFunder so much, I FUCKING INVESTED IN THEM.
So yeah, I have a conflict of interest here.
That being said, this disclaimer should actually be the ultimate endorsement. I literally JUST invested in them last week. This was because, after months of interactions with them–on multiple different levels that included several exchanges with their CEO–I was so impressed with pretty much everything about the company, I HAD to put money in. [NOTE: I think they may still be raising, if you have money and are an accredited investor, I’d obviously recommend it].
WeFunder has not been around as long as AngelList, so they are nowhere near as big in terms of investors or start-ups listed. And though they have a really slick and usable design, I still think it can be improved. They have a few advantages in my opinion though:
–They are not solely tech/internet focused: AngelList is not officially limited to the tech/internet space, but that is pretty much all they have. It’s very very Silicon Valley focused. WeFunder is not. They have tech start-ups, but they also have a ton of other companies. They even have a FLYING CAR COMPANY!!
I do happen to have an inside track on their future plans in this space, so I won’t say too much about it. I think I can say this: They will probably never be a huge threat to AngelList in the Silicon Valley space, but they do not plan to limit themselves to the tech/internet space, and have very aggressive, and I think very intelligent, plans on how to expand to other markets (and quite frankly, there’s plenty of room for both of them even in the tech/internet space).
–They make it so easy to invest: One of the advantages with AngelList–that it doesn’t try to get into between the investment transaction–is actually one of the problems with AngeList: It can sometimes be a pain in the ass to invest, because you have to use third parties like SecondMarket to complete the transaction (which I think sucks). WeFunder doesn’t do this. They walk you through a very simple and intuitive process to not only accredit you, but they take your money through ACH, which–once set up–makes it super simple and painness.
–WeFunder is the safest, most reliable platform (so far): Again, a long involved discussion of the ways equity crowdfunding platforms put your money into start-ups is beyond this piece, but I know all the ways, and WeFunder uses the best way possible, both for investors and start-ups. A very basic description:
A start-up applies to raise through WeFunder. They do a TON of due diligence. They meet the founders, vet the financials, they do everything a good investor should do. Then if they accept the company, they put them on their platform to raise money (now only from accredited investors, but soon anyone).
But that’s not it. They pool all the investor money into a single purpose LLC, and then they use that LLC to invest the money raised into the start-up. This benefits the start-up because they don’t have to deal with dozens or hundreds of investors, they just have to deal with WeFunder and thats it. This benefits the individual investor because of the same reason; they don’t have to worry about the start-up taking more money and diluting them to nothing, or getting screwed in some way. Their investment is backed by the expertise and power of WeFunder.
Here’s WeFunder does thats the smartest: They take only a small management fee, and they make ALL their profit on the exit from the start-up (and take no preference on the money). Without getting into super complicated finance explanations, what this means is that their incentives are perfectly aligned with the investors: They CANNOT make money without us making money too, and they make money at the same rate we do. It’s fair and smart and easy.
I think that’s about all I can say about them without disclosing things they don’t want me to talk about. But trust me, they are all good and I am super excited about them as a company.
Tier 2 [Good Options]
3a. FundersClub [they won’t let you see my profile]: This is a really good platform. Well run, clean and smart design, great investing co-partners, good start-up companies, all the i’s dotted and t’s crossed. I funded a company through them, and the process was easy and simple, almost as good as WeFunder. Here’s why I don’t have it in the first tier:
It’s owned by a VC firm. And quite frankly, I don’t trust that their incentives are perfectly aligned with mine. This is basically an AngelList syndicate, except run as a separate platform.
I am NOT saying that they are thief’s or con men or are going to steal from investors or anything like that. They are well respected and deserve their sterling reputations. But if given the chance, I would rather use platforms that I know represent me first, not themselves.
3b. CircleUp [my profile]: CircleUp falls into a very similar thing as FundersClub; well run site, great team, great companies, very professional–but with a conflict I am not super excited about. They are a platform that focuses on consumer and retail goods companies with established financials looking for a serious raise. I funded a company through them, and it went well.
BUT–they are backed by the CEO of Starbucks (among other companies), and have strategic partnerships with Proctor & Gamble and General Mills. I may be totally unfair with this statement, but I just don’t trust that. I want people taking my money to be only on my side (and the side of the company I am investing in). This factor makes me mark them down a tier.
Tier 3 [Legitimate, but I haven’t used for investing yet for some reason]
4. SeedInvest [my profile]: SeedInvest looks good, is run well, and is professional. I haven’t used them to invest in any companies though, and they don’t have many available. I am reserving major judgment on them until I use them, but they look decently promising.
5. EarlyShares [my profile] This company looks really great in a lot of ways; good design, easy to use, etc. But I have no fucking idea how good they are, because they have basically nothing up for me to invest in, and the few things they do have ups–that are reward based raises–are terrible. But It is a real company that raised real money and has a solid team. So we’ll see what happens.
6. Fundable [my profile]: This is a strange company to me. They have a nicely designed site, they have a decent reputation in some circles, but I am not liking it. The companies they list seem very weird, and very few I have ever heard of. They arrange raising in a weird way, the investor profiles are not easy to use, and something about the site just feels off to me. Maybe it’s just me.
7. Microventures [they won’t let you see my profile]: They are very aggressive in emailing me (nut not annoying) and they have a good reputation, and actually–a few really good companies listed. But I have to be honest: It’s hard for me to get past their TERRIBLE site design. It’s just so bad, it genuinely makes me question a lot about this company. Look, if they were a manufacturing company, then I would not even think about the fact that their site looked like it came from a cheap, ten year old template. But when you are a WEB PLATFORM, and you aren’t at least doing a good job making your site look nice…I have to question what you understand about the internet.
8. Crowdfunder [my profile]: I have to be honest: These guys really need to make major improvements. This platform is just not well run, in almost all aspects, and most of the companies listed on here are not good at all.
I am not saying it’s bad people who run it, or anything like that, it just feels like a soup sandwich. Their CEO is constantly writing pieces on Forbes that seem to me, well–just not engaged with the reality of the crowdfunding business or community (this piece for example, which is very confusing to the layman, and inaccurate in parts). It’s almost like they tried to take a bunch of aspects of all different types of crowdfunding, and slam them together into one platform, and as result, it is difficult to use at best, and nonsensical at worst.
I am not saying this as some amateur. I have money, and I invest, and this platform makes very little sense to me.
Tier 4 [Avoid These Platforms At All Costs]
I’m actually not even going to list these. I don’t want to give them press. Just know this:
If you want to avoid fraud, DO NOT CROWDFUND WITH ANY PLATFORM THAT IS NOT SUPER ESTABLISHED! If you’re judging my list, this mean Tiers 1 & 2 are totally fine (and Tier 3 is probably OK too).
If you do that one thing correctly, you almost certainly won’t be defrauded. You may lose money by investing in something that doesn’t work–that is the nature of high risk start-up investing–but at the very least, you won’t get stolen from.
Here’s a good piece about the economics of crowd funding & why to stick with big platforms.
APPENDIX: Quick Explanation Of The Other Types of Crowdfunding Platforms
I have described the equity crowdfunding platforms only; i.e., the platforms that enable you to invest money in a company, that you then take ownership in. These platforms are still only available to accredited investors, but will open up to all investors in summer of next year.
There are many other ways to “crowdfund.” One of the most confusing things about crowdfunding is that this single term is used to describe at least three distinctly different types of economic activity, each of which are governed by three different set of rules. Let me quickly run through them:
Reward-based crowdfunding (i.e., pre-order platforms): This is Kickstarter and Indiegogo, and what most people think of when they hear “crowdfunding.” This is where you pledge a certain amount of money, and you get a reward. Kickstarter hates it when people say this, but this type of platform is essentially a pre-order platform for consumer goods. Yes, other things can be funded and often are, but the vast majority of successful campaigns on rewards-based platforms are for deliverable consumer products. The platform vets the submissions to some extent, but is not legally responsible for anything that happens after the pledge. Someone can raise a lot of money on Kickstarter, and then not deliver anything, and there is no legal recourse for anyone–which has happened.
I am active on both of the major reward-based platforms, here is my Kickstarter profile and here is my Indiegogo profile. I won’t go over these types of platforms, as they have been around for a long time and most people already understand them.
Peer-to-peer lending platforms (i.e., loans): I think peer-to-peer lending is fantastic, but it is VERY different than crowdfunding. Here is a basic description, and two of big platforms, FundingCircle and Somolend.
People Investment Platforms: I am SUPER suspicious of the effectiveness or intelligence of these platforms. Basically, you give money to “promising” young people, and then take a cut of their future earnings for a limited time. Here’s how it works.
FINAL THOUGHTS & QUESTION FOR READERS:
A few things:
1. Yes, I know parts of this series were confusing to some of you. I plan to clarify a lot of it in the piece I will put on Huffington Post later on. If there are things you were confused by and want more explanation on, email me and ask I’ll try and address them.
2. Do you guys have any interest in me going over the 15+ companies I have already invested in, and explaining why I choose them?
3. I am allocating myself at least 500k of investment capital for equity crowdfund investing over the next five years. I plan on averaging about 5k investment per company, which would give 100 investments over this time. Would any of you be interested in me cataloging these companies I invest in (and as a result, you can possibly invest in them as well)?
This is Part 5 of 5. Once I finish this series, intend to compile it all, revise it, and turn it into a long post for other media outlets. Any comments, corrections, ideas or arguments are welcome: email@example.com