Understanding the Five Phases of Crowdfunding

My daughter Rachel was in D.C. this past weekend attending a conference. So my wife Cecily and I hoofed it down from Baltimore and grabbed dinner with her and our son Nick.

They started reminiscing about how back in the day you had just three TV channels. When the WB became available, they were ecstatic.

They laughed. It seems so long ago, they said. “Three channels. How did we stand it?!”

I kept quiet. Let them appreciate the perspective that comes with “old” age. (Both are in their early 30s.) I even refrained from bringing up the prehistoric days of black and white TV, wavy pictures and no remotes.

You don’t miss what you don’t have, of course. Three channels were the norm for so long.

Nobody noticed how limited the choice was.

Now it seems rather pathetic, doesn’t it?

The “Pathetic” Phase of Stock Investing

A similar dynamic is going on right now in another realm.

And as limited choice gives way to a much larger array of choices, it will be just as impactful as TV’s blossoming of choice and channels.

Maybe even more impactful because it offers everyday Americans a new way to increase their financial well-being.

I’m referring to equity investing.

The equity portfolios of everyday Americans are undergoing a metamorphosis. And it’s just as radical – and liberating – as cable was for TV.

For decades, it was about the “big three” stock exchanges: the Dow, S&P 500 and Nasdaq.

This period was characterized by the walling off of 98% of Americans from investing in private companies – a market that made dozens of well-connected investors very rich during this time.

Those walls are now coming down.

We’re in Phase 3. We have two more phases to go until private-share investing turns into a global, liquid and commonplace practice. Let’s review each phase.

Phase 1: Reward Crowdfunding (20 Million People)

Reward crowdfunding preceded equity crowdfunding (ECF). It gave people the opportunity to give money to companies that offered highly inventive (and sometimes goofy) products.

This is not investing. Shares are not for sale. People who contribute get discounts (or freebies like T-shirts).

The websites Indiegogo and Kickstarter became wildly popular and favorite destinations for millions of people. The more successful companies raised more than $1 million.

It revealed that people were hungry to financially contribute to the next generation of tech companies. It also taught people how to search online for young companies.

And when some of these companies – like Oculus Rift – went on to sell their private shares at multibillion-dollar valuations, it showed people the potential for huge profits when investing in the earliest stages of a company’s development.

In other words, it laid the groundwork for the next phases of equity crowdfunding.

Phase 2: Online Early-Stage Investing for the Wealthy (20,000 People)

In early 2011, MicroVentures launched its first online deal.

FundersClub (17,689 investors) followed in 2012. AngelList (3,379 investors in 2015) came along in 2013. These three were the trailblazers. Professional and semi-professional angel and accredited investors used their sites to invest in startups.

AngelList went on to offer “syndicate” deals led by well-connected full-time angel investors.

This phase introduced venture-capital-type investing to a new but small class of investors. By law, you still had to be wealthy. But for the first time, millions of people became eligible to invest this way.

Though only thousands actually picked up the gauntlet, it cracked open a formerly closed door.

There was no turning back now.

Phase 3: Equity Crowdfunding (10 Million People)

This is the phase we’re in right now. Equity crowdfunding is very new. And these are early days.

About two dozen portals are making private shares of young companies available TO EVERYBODY. There are no income or wealth restrictions.

The new rules that paved the way for ECF still have to be tweaked. For example, if a company gets more than 500 unaccredited shareholders and over $25 million in assets, it is forced to go public.

Disincentives such as this one have to be removed. Congress is considering legislation to do just that.

In the meantime, ECF, less than a year old, has already attracted thousands of investors. Our own new crowdfunding service, First Stage Investor, has gotten sign-ups from nearly 13,000 individuals eager to invest this way.

We’re in the first out of the first inning. ECF will eventually scale and become a commonplace form of investing for everybody.

Before it does, though, it will go through two more phases.

Phase 4: One-Stop-Shop Early Investing (100 Million People)

Currently, if you want to invest in mini-IPOs (raises of up to $50 million), you go to a particular site. If you want to invest in the smaller Regulation Crowdfunding (Reg. CF) deals (raises of up to $1 million), you go to another site. If you want to invest in deals available to accredited investors, you go to yet another site.

And deals where you can buy secondary private shares (shares sold by employees of startups, for example)? Yup, that’s another site.

There is not a single site that lists all of these kinds of deals… yet. But there are sites showing early signs of going in this direction.

SeedInvest offers both mini-IPO funding and Reg. CF funding. AngelList is the premier site for accredited early investors. It recently spun off a new ECF portal called Republic. (Go here for my partner Adam’s article about it.)

And MicroVentures offers deals to accredited investors, including secondary shares of growth startups. It recently expanded its offerings to non-accredited investors under Reg. CF.

“Diversification by development stage,” MicroVentures Founder and CEO Bill Clark told me, “is key to investing in startups. We give investors the ability to invest in early-, mid- and late-stage tech companies.”

(By the way, Adam and I are working with Bill to offer our third pre-IPO fund to members of our Startup Investor premium service. The first two are performing very well. We expect the third one to do just as well, if not better. Keep an eye on your inbox for more details. Our launch date is about two to three weeks away.)

Phase 5: Liquidity for All (1 Billion People)

This is the holy grail… a liquid market of private startup companies where billions of people around the world buy and sell shares.

The technology backbone is practically here: See my explanation of how stock exchange startup OneChronos would like to employ such technology.

Exchanges will soon be faster… as well as better at moving large amounts of money and matching sellers with buyers. Instant information about a company – even a small far-off one, in Nepal, say – won’t be a problem. Instant access will be available to everybody on the cloud.

And the fact that preferred shares come with different terms at different prices? Nothing a sophisticated algorithm couldn’t handle.

It won’t always be smooth sailing. Access to this sometimes confidential information is the challenge, not the technology itself. Globally, sovereign rules need to sync up and capital flow restrictions need to be lifted.

By 2025, we should be knocking on the door…

And laughing about the Stone Age days of 2017? You bet.

Invest early and well,

Andy Gordon
Founder, Early Investing