MicroVentures, an online venture capital platform, has lit a fire under the equity crowdfunding community — and it might be precisely what the industry needs.
In January, MicroVentures broke ranks with other crowdfunding platforms to offer a fee-free investing experience for startups. Considering that investment platforms typically take anywhere from 2 to 5 percent from each investor — plus an additional fee from the company receiving the investment — this approach represents a significant departure from tradition.
If MicroVentures’ plan succeeds and other platforms follow suit, investing in and funding startups is about to get a whole lot easier.
Equity crowdfunding is for the people
Since its 2016 debut, equity crowdfunding has perplexed audiences. Marketed as “Kickstarter for startups” but offering stock instead of T-shirts, this new investment vehicle opened the door for a new class of investors to participate in the startup boom.
Stock distributed during equity crowdfunding rounds often comes in the form of convertible notes or safe notes — not strictly “stock” in the traditional sense. For most unaccredited investors who do not have years of experience in the business, these details are important but often get lost in the noise.
Unaccredited investors usually participate in Regulation Crowdfunding, or Reg CF, which sees minimum investments range from $10 to $100. This low threshold allows anyone who has an interest in the market to put a financial stake in a new company. Regulation D and Regulation A, which are open only to accredited investors, typically start at about $10,000.
Different platforms focus on various stages of funding. MicroVentures does a lot of Reg CF, but the platform also is involved in Reg D and Reg A — meaning its no-fee structure appeals to more than unaccredited investors. Republic has been the leading Reg CF and token-offering platform for a few years, but MicroVentures’ recent moves mean Republic and other platforms will need to consider whether small-time investors and fledgling startups will be willing to pay fees for much longer.
Why cut the fees now?
With so much dry powder in the investment world, why would MicroVentures cut itself out of a lucrative revenue stream by eliminating fees?
Early stage companies need every edge they can get. Five percent off the top might not matter to a unicorn in its latest funding round, but that same 5 percent can buy a lot of time for a company attempting to break through. Eliminating fees is better for startups, better for investors (especially novice investors), and better for the industry at large.
MicroVentures didn’t cut fees to be nice, of course. Businesses will profit from the value MicroVentures provides, and MicroVentures will benefit by becoming the investment platform of choice for a broader audience.
Though cutting fees won’t move the needle too far for any individual startup, the optics are great for the platform. Paying it forward is more popular than ever, and consumers love companies that reject greedy practices. Startups that appreciate the lack of fees will likely return to MicroVentures for future funding rounds, which will force other platforms to either follow suit or face dwindling popularity.
Moving into a world of smarter funding options
These changes benefit all founders, but early stage Reg CF founders will see the most significant benefits. Anyone looking to raise between $100,000 and $1 million will enjoy lower barriers to entry and more diverse funding sources.
It’s not just equity crowdfunding — it’s also a new kind of marketing. The more that founders and unaccredited investors cooperate in the early stages, the likelier founders are to lean on equity crowdfunding for future rounds.
Increased activity in the equity crowdfunding arena is good for everyone. Equity crowdfunding propels growth and adoption, which increases the amount of money raised at each stage. More widespread adoption of this fundraising approach will enable companies to more creatively use equity crowdfunding to market their businesses, grow user bases, validate product ideas, and build case studies for institutional investors.
These changes won’t happen if the market for this funding style remains small, though moves like MicroVentures’ indicate that won’t happen. Kickstarter has handled billions of dollars in transactions. If startup platforms experience similar success, they will become similarly difficult to ignore. The potential is apparent; it’s just a matter of unlocking that potential for everyone.
To crowdfund or not to crowdfund
Fees or no fees, not every equity crowdfunding platform is the best fit for every startup. Some companies may not be suited to crowdfunding at all. Product-specific campaigns, for instance, will likely stick to platforms like Kickstarter. Whether an organization could benefit from crowdfunding depends on that company’s unique goals, position, and strategy.
For the right company with the right use case, equity crowdfunding platforms offer tremendous value. MicroVentures already is an excellent option for Reg CF and unaccredited investors, but the platform also works well for Reg D and Reg A. Accredited investors who cannot afford the $250,000 ticket in larger rounds can participate with as little as $10,000, as seen in recent campaigns by Robinhood, SpaceX, and 23andMe.
For companies with marketing on the mind, Republic remains the best option. By marketing to both customers and investors, companies that use Republic can gain a quick foothold during early growth stages.
Finally, regional needs may dictate which platform a company uses. All platforms operate globally, but the home base of a platform can be a differentiator in certain scenarios. Republic, for example, is connected to AngelList and investing groups in New York City and San Francisco; these geographic connections mean a larger pool of sophisticated investors is available to participate. StartEngine, on the other hand, is more highly connected on the West Coast and could be ideal for startups seeking more exposure in that region.
Startups should weigh every option and consider the best value for their unique situations. Fortunately, MicroVentures’ move to eliminate fees is about to make every opportunity look a bit more appealing. As more platforms cut fees to win the hearts of investors and startups, the world of small-business investment will become a more welcoming place for all.
(Featured image by DepositPhotos)
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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