Funding via the crowd is now a reality for businesses
Lee Cooper figured he’d done just about everything right. Only two years after it was founded, Cooper’s microbrew company, Hopsters, had surpassed $1 million in annual sales at its small Newton storefront.
That had Cooper thinking about an expansion. But bankers, he said, wouldn’t loan Hopsters money without a longer track record. And angel investors, the rich folks who typically bankroll early stage enterprises, were nowhere to be found.
“Everyone’s happy getting 3 to 4 percent from the stock market,” Cooper said. “It’s a serious issue for small companies that need to raise capital, to just give them that extra bit of kick to expand and grow.”
So he turned to the crowd.
Through a new system known as equity crowdfunding, which lets average people buy shares in private companies, Hopsters raised about $1.2 million in two months. Authorized under a 2012 federal jobs bill, equity crowdfunding finally got underway in 2016, and Hopsters was one of four startups — two from the Boston area — that were able to raise $1 million or more in the inaugural year on Wefunder, the largest of the fund-raising platforms.
Those four businesses, which include another microbrewer, an independent Hollywood studio, and an experimental medical device maker, share a common thread: They were able to tap into a community of people who wanted to have some skin in the game, even without realistic hopes of striking it rich.
“There’s nothing better than bellying up to the bar and saying, ‘Yeah, I own a bit of this,’ ” Cooper said of his new investors.
Most of the investments in Hopsters came in increments of $500 to $2,000. The proceeds will help finance a second location for Hopsters, a 5,000-square-foot brewpub in Boston’s booming Seaport District that is scheduled to open this summer. There, Cooper hopes, the company’s make-your-own-beer business and corporate event hosting will help the concept take off.
Equity crowdfunding took effect last May, part of a post-recession family of federal laws meant to spur startup investments and company creation. Previously, the Securities and Exchange Commission allowed people to buy shares in risky, privately held companies only if they were considered wealthy enough that they could afford to lose their investments.
The new system comes with risks, and the SEC has warned that some companies could turn out to be “money-losing fraudulent schemes.”
To guard against that, companies raising money from the crowd must publish extensive disclosures about their business plans and finances, in some cases audited by an independent public accountant.
There are checks on investors, too. People who make less than $100,000 per year can’t invest more than $2,000 or 5 percent of their income or net worth, whichever is smaller, while those with more money are limited to investments of $100,000 per year.
Wefunder chief executive Nick Tommarello had likened buying crowdfunding shares to “a socially good lottery ticket,” and the company downplays it as a way to strike it rich.
Wefunder said companies have raised more than $20.5 million in the United States across all equity crowdfunding sites since the May launch — $13 million of which was on its own platform. Of its companies, Wefunder said at least 64 percent reached their fund-raising goals. Wefunder charges companies 4 percent and investors 2 percent of the money raised through successful campaigns.
One thing uniting successful crowdfunding campaigns, he said, was a passionate group of backers.
“We do companies that people care about,” Tommarello said. “If there’s a group of people out there that really cares about this company, it does well on Wefunder.”
That passionate investor base was evident in another of Wefunder’s $1 million campaigns: an experimental medical device for Type 1 diabetes produced by Beta Bionics, a startup headed by Boston University professor Ed Damiano.
Damiano and his partners are working on a device, known as a “bionic pancreas,” to help treat diabetes by adjusting the body’s levels of insulin and glucagon, which help regulate blood-glucose levels.
The company has also raised a combined $10 million from the large drug makers Eli Lilly and Novo Nordisk, and trials of its technology are being supported by a $12 million grant from the National Institutes of Health.
With that kind of backing, it’s easy to wonder why Beta Bionics would go through the hassle of managing a few hundred smaller investors and the long list of financial disclosures mandated by the SEC, just to raise $1 million.
Damiano, who has a son with Type 1 diabetes, has an easy answer: Beta Bionics, incorporated as a public benefit company under Massachusetts law, is prioritizing the success of its device over financial gain.
“It’s not worth the headache for the sake of the $1 million. That is not the reason we did it,” he said. “I wanted it to be a company that was essentially owned by the Type 1 diabetes community and empowers the community to have a stake in it.”