Equity crowdfunding can help bridge the funding gap for underrepresented founders.
It’s no secret that starting and investing in businesses has long been reserved for wealthy white men. In 2017, the funding given to female founders in the United States was higher than in years past, but accounted for only 2.2 percent of total funding given. All-male teams, on the other hand, received 79 percent of the total. When women and minority founders do get investments, they receive less money than their white male counterparts.
The vast majority of pitches heard by investors come from wealthy white men, and the investors themselves are wealthy white men. Investors say they simply invest in the best ideas, but those numbers don’t leave much room for interpretation. Nontechnical, female, or minority entrepreneurs need to have more of a chance to successfully receive investments in order to penetrate the market.
It’s clear the venture capital system isn’t working for them.
Setting up for startup success
Access to capital and the opportunity to use it all begin with who you grow up with and what educational resources were available to you. Let’s take the all-important tech-based startups as an example. If you’re raised without an emphasis on science, technology, engineering, and math (STEM) education, you’ll have a much harder journey learning the material and competing in the space. Mentorship is also a struggle. My wife, for example, teaches high school chemistry, but she was one of only a handful of women who graduated from college with a chemistry degree as recent as 2007.
If you’re raised in an area without a strong school system and have limited access to mentors in tech-enabled paths, what is the likelihood that you will pursue a career in engineering or finance? And if you do try to raise fund for a startup or project, it’s likely you won’t have access to people who are interested in those opportunities or have the means to invest.
Incubators have emerged across the country to help these underrepresented populations take on the system that holds their ideas back. For example, 1871 has dedicated time and resources to develop organizations such as WiSTEM, Ms. Tech, and Women Tech Founders, while Blue1647 and Latinx Incubator strive to help minority founders grow their businesses.
Local communities are already making great strides in boosting their business leaders’ chances of success. Founders such as Pearachute Kids founder Desiree Vargas Wrigley, WeSolv’s Stella Ashaolu, and Carrie Shaw of Embodied Labs are just a few examples of exceptional female and minority founders who have relied on community organizations to gain access to the necessary resources to start their businesses.
Equity crowdfunding is the future friends and family round
Even when an entrepreneur has a flawless idea and knows how to execute it, he or she won’t succeed without a startup capital. And it’s clear women and minority founders aren’t getting the money they need through traditional fundraising efforts. That’s where equity crowdfunding comes in.
Equity crowdfunding takes power from investors and puts it into the hands of the founders. This system allows startups to raise funds by offering equity in their companies, as opposed to crowdfunding that might pre-sell the product or offer other incentives. This method is protected, too, as Title III of the JOBS Act enables founders to raise up to $1 million per year by offering equity to non-accredited investors for as little as $10 per investment.
If you’re a founder without easy access to family wealth or a community of investors, raising the necessary funds is almost impossible. Equity crowdfunding allows you to take to Facebook or platforms like MicroVentures to raise funds directly from the community while getting plenty of customer feedback in the process. The current average fundraising effort for Technori’s featured startups is $160,000, which is higher than many first-time founders can raise through traditional friends and family round.
Another upside of bringing the community into the funding scene is that not only do founders benefit, but would-be investors do, too. Accredited investors must have a net worth of more than $1 million. If you’re not a millionaire, but you see a great opportunity to invest in a high-growth startup, it can be difficult to participate. But going through a crowdfunding platform offers the opportunity to invest directly in local companies with low personal risk.
How equity crowdfunding works
If you’re an entrepreneur, equity crowdfunding lets you avoid taking a bad deal for less money with terms that could cripple your idea before it can get off the ground. It also allows you to use your network to gain valuable customer feedback and raise seed funding before you spend your entire life savings on a half-baked idea. Founders could even work their regular jobs, save a few thousand dollars, file the required paperwork (including Form C), and offer up a crowd note to the community to equity crowdfund.
Founders and crowdfunding contributors issue a crowd note, an investment contract, that stipulates the contributors have a chance to earn equity if the company has an initial public offering or is acquired. This contract is essentially the equity crowdfunding version of a convertible note, which is commonly used by angels and venture capitalists who invest in startups.
Rather than sinking an entire seed round into an unproven product, equity crowdfunding allows founders to build a minimum viable product, gain valuable market feedback, and turn initial customers into investors. Founders can use the equity to grow a strong team, build traction by onboarding a few beta clients, and shape pitches to would-be investors and partners that showcase exactly what investors care about: return on investment. A successful campaign can prove your concept, demonstrate market demand, and, most importantly, generate fear of missing out for investors.
Above all, investors care about returns. Because underrepresented founders have historically lacked the resources needed to get their businesses off the ground, many investors have formed a bias, resulting in rounds well below market value, usually filled with crippling negative covenants. But using alternative methods such as equity crowdfunding can help build a foundation that greatly improves your chances of raising later-stage growth capital at far higher valuations. Equity crowdfunding isn’t for everyone, but for first-time founders and those struggling to raise seed capital, the advantages far outweigh the risks.