With new investing rules, you can be part of the crowd that’s funding startups
The subject of the e-mail was “Hoping to help,” and it was one of those messages in which the sender is working a bit too quickly to include your name — or anything specific about your situation, really.
“We help startups like yours generate capital to expand their business,” it said. “It’d be cool to talk about if there’s an opportunity for us to work together.”
The e-mail went out to local entrepreneurs, sent by a summer intern at a Boston startup called NetCapital. It got forwarded to me because, well, it sounded a bit sketchy. I had not previously heard of NetCapital, which purports to give average people the opportunity to invest in up-and-coming startups before they hit the public markets.
One slogan on the company’s website is “Be an angel investor. No private jet required.”
CEO Jason Frishman started NetCapital in 2014, right after graduating from college with a degree in neuroscience. His previous startup experience, he says, was working as a consultant to a friend’s video game company, helping it raise an initial $250,000 in 2013. (Its first game hasn’t yet been released.)
This is the Wild West of what’s called equity crowdfunding, with sites like NetCapital seeking both startups that need to raise money and investors (like you!) who want to put money into startups that could turn into the next Facebook or Airbnb. (And, yes, they could also turn into the next Juicero or Theranos, which raised millions but weren’t able to build sustainable businesses.)
Investing in startups was once the domain of venture capital firms and so-called “accredited investors” or “angel investors” with a certain level of income or assets. But rules the Securities and Exchange Commission rolled out in 2016 made it possible for NetCapital, OurCrowd, Wefunder, StartEngine, and others to promote startup investment opportunities to anyone. (Wefunder began life in Cambridge but is now based in San Francisco.)
OurCrowd, of Israel, said earlier this year that it had helped companies raise more than $1 billion — and some of them have been acquired by companies like Samsung and Uber, bringing investors a return on capital. Wefunder says it has helped startups raise $100 million. NetCapital says that 60 startups have sold shares through its site, raising just over $10 million.
The challenges are the same ones that any exchange or marketplace faces: attracting enough buyers and sellers and generating a high enough transaction volume.
Why? NetCapital makes money only when startups raise money on its site, taking 4.9 percent of the total raised. Such sites also need some of their startups to succeed over time, by going public or getting acquired, so that at least some investors see a return on capital.
(Another way for investors to earn a return is if they can find another investor on the site who is willing to pay more for shares they own in a given startup, perhaps when that company unveils a successful product, or announces a big customer deal.)
“We might already have the next Uber” raising money on NetCapital, Frishman says, noting that the company started raising money a decade ago and didn’t go public until May.
With a $99 minimum on some investments on the site, individuals can put together a portfolio of 20 or more startup investments for a few thousand dollars, Frishman says. “This is a risky asset class,” he acknowledges, so diversification makes sense.
Companies currently raising money on NetCapital are doing things like developing facial wrinkle-fillers that dermatologists would inject; creating sports reality shows; selling spicy tequila; and building apps to teach kids smart money habits.
The Cambridge startup VirZoom used NetCapital in 2017 to raise nearly $550,000. VirZoom makes virtual reality games that you play while you pedal a stationary bike — a hybrid of exercise and entertainment. While much of the capital the startup has raised has come from established angel investors, CEO Eric Janzsen says the “hidden benefit” of selling shares on Wefunder or NetCapital “is that your customers can be your investors, and vice versa.”
Raising money this way, Janzsen says, “is generally becoming more mainstream. Part of the issue is just perception — it’s still a relatively new thing.” (Since 2016, Janzsen has used three equity crowdfunding platforms to raise money for his company.)
For some perspective on NetCapital, I contacted Alan Phillips, a Newburyport serial entrepreneur and investor. In 2018, he built a website called Crowditz to track the growth of the industry. Turns out that Phillips also invested in NetCapital, which has so far attracted $2.5 million for its own business.
“There’s no question there will be plenty of failures” among startups that raise money on these sites, Phillips says. “But I remain optimistic.” He cites a brewery that can now raise money from its customers to expand production, or perhaps even a fledgling biotech startup with an unorthodox approach to a disease that finds backing from people who understand the science of that disease.
Frishman is “a young guy, but he’s really done a great job surrounding himself with people who have SEC regulation and compliance backgrounds,” Phillips says.
Interestingly, one of the startups using NetCapital is a Boston business called KingsCrowd, started last year. Its goal, founder Chris Lustrino says, is to research the startups that are trying to raise money through equity crowdfunding and become “the Morningstar ratings and analytics provider for crowdfunding platforms,” helping investors identify “the best deals and cut out all the noise.”
KingsCrowd will charge a subscription fee for access to its data. It has three full-time employees, and has raised roughly $225,000 so far — more than half of it on NetCapital.
Equity crowdfunding will always sound risky to some. Why invest in a business that could fail for any number of reasons?
But to me, it’s always looked like a better bet — for lots of societal and economic reasons — than heading to the casiono and plunking $1,000 on the roulette table.