For clarity: When I refer to equity crowdfunding, I am referring to equity-based crowdfunding portals that will support non-accredited investors post-JOBS
AngelList, a platform where startups can connect with investors and talent, announced the launch of Docs yesterday, a feature that allows startups to execute seed-round transactions online (techcrunch). The feature currently supports both equity and convertible debt (no word on convertible equity). AngelList points to the considerable legal cost savings generated from a completely standardized process; so much so that one major law firm is offering to close rounds for qualifying startups for free.
“ What is Docs?
Docs lets seed-stage startups close their round online. It consists of a beautiful term sheet, automatically-generated closing documents, and tools to manage the process, including gathering electronic signatures, gathering wire information and generating PDFs.”
This raises an interesting question: where does AngelList fit in the ecosystem of equity crowdfunding? For that matter, where do all networks that currently connect entrepreneurs with accredited investors online fit within this ecosystem? Here are three of the largest online entrepreneur/angel networks, each of which has its own spin:
- AngelList AngelList is a platform for startups to meet investors and talent. With Docs, it now allows transactions to be executed entirely online. My search populated 82,173 startups and ~165,000 “people” (includes investors, entrepreneurs, developers, designers and advisors) registered on AngelList
- GoBigNetwork GoBig connects entrepreneurs to accredited investors; entrepreneurs pay a monthly subscription that ranges from $59/month for Basic to $199/month for Priority. GoBig also offers additional resources to help entrepreneurs along the fundraising process. GoBig has served over 250,000 investors and entrepreneurs
- Gust Formely Angelsoft, Gust enables skilled entrepreneurs to collaborate with the smartest investors by virtually supporting all aspects of the investment relationship, from initial pitch to successful exit. More than 125,000 startups, across 65 countries, have used Gust to collaborate with over 35,000 accredited investors
If I’m a hot startup, post-JOBS, where will I go first?
Route A AngelList et al: (i) privacy & confidentiality; (ii) information control; (iii) more reputable investors?; (iv) “smarter” money?; (v) fewer investors; (vi) other?
Route B Equity-based crowdfunding: (i) greater visibility, more geographically agnostic; (ii) customer validation and acquisition; (iii) crowd “wisdom” & support; (iv) more receptive to certain verticals (i.e. those with high, but not stratospheric, growth-profiles); (v) other?
I’ve heard from many who believe that “hot” startups will, on average, start down Route A, only changing to Route B when the trail runs cold. If this is the case, the pool of startups on equity crowdfunding portals would suffer from a negative selection bias. This surely wouldn’t be sustainable.
I personally believe the two ecosystems will co-exist peacefully, without the above scenario becoming the de-facto standard (which would limit the value proposition of equity crowdfunding for investors). Rather, company specific attributes will determine which route is best, and promising startups will journey down both. For example, a promising product-driven company is likely to find customer acquisition more valuable than confidentiality and information control, thus Route B will be their first choice. Or, a promising startup located outside a tech-hub, let’s say in Wisconsin, may find equity-based crowdfunding a better option – or, the only option.
Ultimately, each scenario will be different. The question in my mind is: will we see enough first choice Route B scenarios to deliver consistent, quality deal flow to crowdfunding investors?