A long-anticipated regulatory change is expected in May that will allow retail investors to join in start-up funding alongside millionaires and venture capitalists.
Unaccredited investors will be allowed to put money into start-ups, letting the average investor compete alongside the Marc Andreessens of the world to back up-and-coming companies, and potentially to make enormous profits in the process.
Rohan Shah, a student at University of Pennsylvania who founded Slice Capital, is one of the entrepreneurs leading the charge. His online portal that connects companies raising early-stage capital with investors of all sizes has the potential to disrupt venture capital, he said.
"We're concentrated on unaccredited investors," he said. "We're targeting the unaccredited community, but we also have angel investors and VCs on our platform."
For years, unaccredited investors — or, the smallest investors in terms of their net worth — were allowed to participate in crowdfunding, but only for a product and not for any stock. The crowdfunding campaign that helped launch Oculus Rift in 2012 was driven not by seasoned venture capitalists but by consumers, who plowed $2.4 million into the company that year. By 2014, it had sold to Facebook for a staggering $2 billion sum — and all its earliest backers had to show for it was a virtual reality headset, instead of a massive profit.
But in a couple of weeks, that designation won't matter as much, especially for those looking to put money into early-stage start-ups. A regulatory change — formally known as Title III of the Jobs Act — long-awaited by small investors looking to back start-ups, will take effect May 16.
Shah said he's not letting any start-ups into Slice without some serious vetting. They're required to provide to him and the Securities and Exchange Commission information on monthly burn rate (the amount a company spends beyond its income), revenue, profits and tax data. Slice Capital will help start-ups determine their valuation, and if the funding platform and the entrepreneur raising capital see eye-to-eye, Shah will help them raise funds from investors.
"You're not pulling a number out of thin air," he said.
Beyond these factors, investors should have an eye open for how the funds being raised are spent, said Lise Buyer, partner with Class V Group, an initial public offering consultant. Buyer — who worked on Alphabet's IPO when it was still Google — said investors also have to approach equity crowdfunding with the right mindset and temper their expectations.
"The odds are absolutely not in your favor," Buyer said. "For every 800 companies [raising seed funding], probably two succeed. There will be some huge successes, but there is no magic formula."
To be sure, there are plenty of competitors for Shah. Existing competitors, who have for years worked with accredited investors, include Wefunder, SeedUps and EquityNet. And, on the other side of the business, companies like Kickstarter and Indiegogo have helped entrepreneurs raise money, but with the promise of a product instead of a profit. Soon, these businesses will find themselves at a point of convergence, Buyer said.
"There are so many people in the space," said Bill Clark, CEO of MicroVentures. "It's so crowded."
Some already have designs on crowdfunding-for-equity as their next business model. Nick Tommarello, founder of Wefunder, said his start-up will have "over 20 companies launching May 16" when the new regulation takes effect. Shah said he'll be able to fill demand for six companies' investment rounds.
The potential for disruption of the disrupters is clear, Buyer acknowledged: Crowdfunding for equity cuts down a huge barrier that venture capital firms have worked to their advantage for decades. Peter Thiel's reputation helped him land the earliest funding round for Facebook, but beginning May 16, the barriers to entry in the start-up funding business will be changed forever.
Still, some venture capital investors say start-ups will continue to rely on the institutionalized process.
"While crowdfunding has allowed more people to participate in the world of innovation, it does not provide the face-to-face smart money investor that entrepreneurs, especially in the tech market, require to win," said Diane Fraiman, a partner with early-stage investor Voyager Capital.