Maybe you’re an entrepreneur with a promising business concept but you’re not sure how to secure the financing you need to get your idea off the ground.
You know you can’t expect big venture capitalists to come knocking down your door. But what if you could pull together the funding you need from a large pool of small investors who are willing to accept small equity shares in exchange for early-stage financing support?
In the past, those types of investment opportunities have been limited to accredited investors like investment banks, hedge funds and established venture capital funds-that is, big players who have substantial capital to invest in often risky emerging ventures.
Crowdfunding democratizes that model, as we explained in our earlier article on how crowdfunding works, opening up those investment avenues to smaller players (though you should beware if you’re considering participating in these platforms: all standard warnings about investor risk apply. More on that below).
Indiegogo launched its online equity crowdfunding platform, the first in the United States market, on November 5 in partnership with MicroVenture Marketplace, a registered broker-dealer firm. With a minimum investment of $100, investors can create an account and support a fledgling company in exchange for a small ownership stake.
The platform provides a range of information to educate potential investors, including: a company summary and highlights, investment documents, financials, industry and market analysis, competitors, executive team, investment terms and press.
At the time of writing, only a small number of companies are open for equity investment on the Indiegogo platform, including a social media network for musical collaboration; a Washington D.C.-based craft distillery and cocktail bar; an online role-playing game; and a tech-enabled game ball for kids. The pool of options is likely to expand as interest picks up.
The new equity crowdfunding service represents an evolution for San Francisco-based Indiegogo, launched in 2008 with a primary focus on rewards-based crowdfunding for entrepreneurial ventures. And it may end up being good business for Indiegogo-the company gets a 5% cut of all equity funding raised through its platform, as well as processing fees charged to investors.
By embracing equity crowdfunding, Indiegogo is essentially helping to create a new kind of marketplace through which entrepreneurs who lack access to traditional debt and equity markets can pursue capital formation.
“In a lot of ways, this levels the playing field,” Indiegogo CEO David Mandelbrot tells The New York Times. “This was one of the few areas of the law where citizens were treated differently based on the amount of wealth that they have.”
Equity crowdfunding offers even small investors a chance to be a venture capitalist. But as we’ve noted previously, investors should be cautious about taking part in equity crowdfunding projects. Some of these potential investments may pose a higher risk profile than other investment opportunities found through publicly registered equity offerings.
To reinforce that point, SEC regulations limit the amount of money a small investor can place into equity crowdfunding initiatives in any 12-month period. At least for the present, many small investors may be more likely to use the equity crowdfunding platform to signal support for companies they believe in or are passionate about, rather than in pursuit of big returns.
If you’re curious about how equity crowdfunding might work, and how it may be a promising alternative avenue for start-ups to acquire the capital they need to expand, it’s worth keeping an eye on how Indiegogo and other crowdfunding platforms perform in the years to come. These platforms represent an innovative approach to business financing that may hold promise for boosting entrepreneurship and creating jobs, particularly for small businesses typically challenged to secure traditional funding sources designed for larger ventures.