Traditionally, the world of startup investing was not for “the main street.” Investing was the private preserve of venture capitalists, venture debt lenders, private equity and angel investors (accredited investors), high network individuals, family offices and business angels.
The process of meeting your investor was largely dependent on in-person meetings, over a hundred cups of coffee. Only the 1% had the ability to invest in private companies.
Since the adoption and implementation of the JOBS Act a decade ago, there has been a paradigm shift in the source of funding for startup investments, with crowdfunding platforms sprouting.
A Critical Look at Equity Crowdfunding
Combined with incubators and accelerators, a whole new definition and creative means of high-resolution fundraising for startups have evolved. The timing could not be better – with a global pandemic and geopolitical instabilities preventing travel or even face-to-face meetings.
As always, entrepreneurs were forced to think more creatively about raising funds for their startups and navigating financial uncertainties. Investors had to open up their laptop cameras and calendars to attend video meetings.
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Changes in Startup Investing
Startup investing has grown from niche venture capital firms, where only a few players formed the market. We now have highly segmented, deep and broad-based pools of capital. These types of capital can accelerate technology innovation better, depending on specific industry vertical, stage of growth and geography.
While the startup world is not for the faint of heart, over time, entrepreneurs and investors have been weaving themselves into the fabric of the global Silicon Valley, layer by layer. In the frothy markets of H1 2021, some say it is easier for startups to raise money than it is to find engineers.
Help from policy and regulations
With the help of policy and regulation, even more avenues of investing in startups are being created every day. Governments are handing out cash via stimulus programs, often funneled through local municipalities or academic institutions. Retail investors are sitting at home behind a screen have discovered equity crowdfunding. But what is equity crowdfunding exactly and what does it do?
Traditional crowdfunding players
Traditional crowdfunding platforms, such as Kickstarter, Indiegogo, and Patreon, were constructed on a rewards-based system. Retail investors contributed cash in exchange for gifts, products or discounts.
Equity crowdfunding, however, is a neat method of investing in private companies in exchange for equity. Equity crowdfunding allows startups to raise funds from and pitch to a crowd of small, individual investors through internet-based platforms that design regulatory and legal compliance.
While these smaller retail investors may not be able to make a significant impact on a stand-alone basis — when pooled with other like-minded retail investors, their financial contribution is magnified.
Investing in one mission together with other like-minded investors, the community aspect is designed to generate media and profile and raise capital at a sufficient scale to accelerate growth.
An added benefit is that these platforms open doors for startups to connect virtually with investors all across the globe.
With COVID-19, lockdowns, limited travel options, entrepreneurs and investors turned to equity crowdfunding to seek funding and invest, respectively, while staying safe.
Larger institutions are reinvesting resources, energy and time into the startup ecosystem. When large companies and institutions invest, it helps promote all aspects of the startup world and encourages entrepreneurship. Cross-pollination between different industries and demographics also helps pave the way for a higher resolution startup market.
Investors are important players in this space, always have been and always will be, as their funds help sustain entrepreneurship.
With regards to equity crowdfunding, these investors can invest in startups they are passionate about. The investors have the ability to explore different offerings while learning about the companies and their founders and products on a more intimate level through a few simple clicks.
These investors are not required to possess accredited investor status, as traditional avenues still require.
The company receives the working capital it needs, and the investors get an equity stake in the company. This is often viewed as a less expensive and less time-consuming way to raise funds.
The following summarizes the advantages and disadvantages to consider before embarking on an equity crowdfunding campaign.
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The Benefits and Risks of the Crowd
Opening your company to invest on a crowdfunding platform should attract investors who have passion and personal interest in your idea, service or product.
While still considered an investment, with the expectations of return of capital and gain, investors in equity crowdfunding typically possess a noticeably different mentality and energy than professional, financial or strategic investors.
Investors in equity crowdfunding
Investors in equity crowdfunding like what you have to offer enough to put their personal funds behind it.
When that crowd gets big enough, it can become evidence of validation and viability. The emotional boost from seeing dozens or even hundreds of micro-investments in a company for founders cannot be quantified. That large crowd can also be a powerful marketing tool, spreading the word quickly about your company’s product to friends, family and the wider community.
The closer you are to recognizing revenue or shipping a workable prototype, the greater the chance of success.
Proof of concept and valuation
Retail investors look for a product with an audience, a proof of concept and a tested market. Additionally, startups incorporated and undergone a 409A valuation provide investors with greater confidence and thus increase the chances that an investor will take a further look into the company and invest.
That is not to say a startup without having been audited or filed with regulatory agencies cannot succeed on funding portals — it just makes for more productive discussions when all the ducks are in a row.
Equity crowdfunding platforms are not an automatic assurance for investment.
Investors still have to conduct due diligence, and startup founders still need to ensure foundational aspects are in place before seeking investments. These portals are designed to provide startups with additional platforms to engage a wider audience. The portals protect retail investors by requiring startups to have undergone a light form of business diligence at their own expense before the first issuance of equity is permitted.
Another advantage of equity crowdfunding platforms is that they can provide opportunities to sponsor conferences, arrange webinars and facilitate introductions between investors and entrepreneurs.
How to accomplish your platform in a virtual format
Your crowdfunding platform can be accomplished wi
th high resolution and speed over digital media in the current virtual format. Additionally, crowdfunding platforms provide a variety of forums for discussions and dissemination of marketing literature and content.
The world is getting smaller, and word spreads fast. Entrepreneurs should still consider self-promotional tools as their best source of networking.
Leverage social awareness and media platforms
Properly leveraging social awareness and media platforms associated with crowdfunding in tandem with self-promotion can yield exponential social points and tangible benefits. Some successful companies were born in the equity crowdfunding space. A few examples are: Zenefits, Ginko Bioworks, Rappi and Ironclad.
There are also downsides. With a population of retail investors who invested in your company and who cannot necessarily afford to lose, you are at a greater risk of negative publicity if your business disappoints in any way.
Apart from personalized and often strongly worded letters, emails, texts and posts — thousands of angry investors could mean a tidal wave of negativity, media, and even a potential class-action lawsuit.
Do you really want that many investors?
Entrepreneurs must carefully consider whether or not they really want that many investors involved at the early stage of their company.
At the early stages, when money is tight or non-existent, the lure of any funds may seem appealing. Startup founders should strongly consider whether all funding sources should be accepted.
Money is not always good money. While the responsibility of due diligence largely lies with the investors, ultimate accountability always falls at the feet of the management team.
What about entrepreneurs at the ideation stage, before minimum viable product?
Each crowdfunding platform has its own requirements for admission to its platform. That is one of the benefits of equity crowdfunding. Each platform is tailored to procure projects of a specific vertical, stage of growth or geography, and to those with funds to support them.
However, startup founders should closely read the requirements of each equity crowdfunding platform and understand its implications, both on the financial and on the legal side.
Equity crowdfunding is a breathing model, subject to change with regulatory updates, global shifts in consumerism, and sudden shocks to the status quo.
Over time, equity crowdfunding platforms and those startups and ideas nestled on the platforms will respond to the market demands and evolve naturally.
Even since the start of COVID-19, a surge of medical-based, emergency response-oriented startups, and campaigns have emerged to respond to the pandemic.
Does Crowdfunding Really Save Time and Money?
It depends. The “JOBS Act” was passed by the Obama administration in 2012, and stands for “Jumpstart Our Business Startups,” with the stated mission of changing the framework for investing into private companies.
Private companies and entrepreneurs were no longer required to restrict themselves to accredited investors. The gates of opportunity to obtain funds from retail investors and crowdfunding platforms were thrown open.
Four years after the JOBS Act was signed, Regulation CF of the JOBS Act was promulgated by the Securities and Exchange Commission. Another benefit of the JOBS Act is that it allows entrepreneurs to bypass lengthy public filing requirements that normally come with a registered initial public offering.
Companies still have compliance requirements.
While indisputably less expensive and quicker to prepare, there are abbreviated and streamlined compliance requirements to observe.
Companies are limited to raising an aggregate amount of $5 million in a 12-month period through equity crowdfunding offerings. The $5 million cap was recently raised from the $1,070,000 annual cap on Regulation CF. This would not apply if a company chose to go with venture capital or angel investment options.
Companies can still seek out other forms of financing, so there is an option to raise additional funding if needed from other more traditional avenues of funding. Additionally, Regulation CF requires all transactions online through a Securities and Exchange Commission registered intermediary, either a registered broker-dealer or a qualified funding portal.
There is also a limit to the amount of individual non-accredited investors who can invest across all crowdfunding offerings in a 12-month period.
An additional note on the JOBS Act: given that equity crowdfunding is still a developing and evolving industry, the full impact of the JOBS Act and implications of state and federal regulations are still being assessed.
With COVID-19 impacts felt across the globe, businesses all over have sought assistance in debt relief and financial support.
In the United States, the SEC has announced various temporary, conditional reprieves for businesses who want to seek expedited crowdfunding offerings. Crowdfunding platforms have waived certain fees, or provided additional credits to users of their platforms, all in an effort to gain additional traction, and help those impacted by recent global events.
These are just a few examples that illustrate the evolving nature of equity crowdfunding, and a glimpse of what is to come. Equity crowdfunding will likely change to be more accessible, adaptive, and “smart” in a post-COVID-19 world.
One-size-does not fit all — consider
Ultimately, there are multiple factors to consider before choosing equity crowdfunding.
The fit between entrepreneurial business and method of capital raising will be unique and specific for each venture, its short-term status, requirements and long-term goals.
As with all big decisions, carefully consider the pros and cons, and consult with your broader advisor team and legal counsel before pressing go.
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Fintech Kennek raises $12.5M seed round to digitize lending
London-based fintech startup Kennek has raised $12.5 million in seed funding to expand its lending operating system.
According to an Oct. 10 tech.eu report, the round was led by HV Capital and included participation from Dutch Founders Fund, AlbionVC, FFVC, Plug & Play Ventures, and Syndicate One. Kennek offers software-as-a-service tools to help non-bank lenders streamline their operations using open banking, open finance, and payments.
The platform aims to automate time-consuming manual tasks and consolidate fragmented data to simplify lending. Xavier De Pauw, founder of Kennek said:
“Until kennek, lenders had to devote countless hours to menial operational tasks and deal with jumbled and hard-coded data – which makes every other part of lending a headache. As former lenders ourselves, we lived and breathed these frustrations, and built kennek to make them a thing of the past.”
The company said the latest funding round was oversubscribed and closed quickly despite the challenging fundraising environment. The new capital will be used to expand Kennek’s engineering team and strengthen its market position in the UK while exploring expansion into other European markets. Barbod Namini, Partner at lead investor HV Capital, commented on the investment:
“Kennek has developed an ambitious and genuinely unique proposition which we think can be the foundation of the entire alternative lending space. […] It is a complicated market and a solution that brings together all information and stakeholders onto a single platform is highly compelling for both lenders & the ecosystem as a whole.”
The fintech lending space has grown rapidly in recent years, but many lenders still rely on legacy systems and manual processes that limit efficiency and scalability. Kennek aims to leverage open banking and data integration to provide lenders with a more streamlined, automated lending experience.
The seed funding will allow the London-based startup to continue developing its platform and expanding its team to meet demand from non-bank lenders looking to digitize operations. Kennek’s focus on the UK and Europe also comes amid rising adoption of open banking and open finance in the regions.
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Fortune 500’s race for generative AI breakthroughs
As excitement around generative AI grows, Fortune 500 companies, including Goldman Sachs, are carefully examining the possible applications of this technology. A recent survey of U.S. executives indicated that 60% believe generative AI will substantially impact their businesses in the long term. However, they anticipate a one to two-year timeframe before implementing their initial solutions. This optimism stems from the potential of generative AI to revolutionize various aspects of businesses, from enhancing customer experiences to optimizing internal processes. In the short term, companies will likely focus on pilot projects and experimentation, gradually integrating generative AI into their operations as they witness its positive influence on efficiency and profitability.
Goldman Sachs’ Cautious Approach to Implementing Generative AI
In a recent interview, Goldman Sachs CIO Marco Argenti revealed that the firm has not yet implemented any generative AI use cases. Instead, the company focuses on experimentation and setting high standards before adopting the technology. Argenti recognized the desire for outcomes in areas like developer and operational efficiency but emphasized ensuring precision before putting experimental AI use cases into production.
According to Argenti, striking the right balance between driving innovation and maintaining accuracy is crucial for successfully integrating generative AI within the firm. Goldman Sachs intends to continue exploring this emerging technology’s potential benefits and applications while diligently assessing risks to ensure it meets the company’s stringent quality standards.
One possible application for Goldman Sachs is in software development, where the company has observed a 20-40% productivity increase during its trials. The goal is for 1,000 developers to utilize generative AI tools by year’s end. However, Argenti emphasized that a well-defined expectation of return on investment is necessary before fully integrating generative AI into production.
To achieve this, the company plans to implement a systematic and strategic approach to adopting generative AI, ensuring that it complements and enhances the skills of its developers. Additionally, Goldman Sachs intends to evaluate the long-term impact of generative AI on their software development processes and the overall quality of the applications being developed.
Goldman Sachs’ approach to AI implementation goes beyond merely executing models. The firm has created a platform encompassing technical, legal, and compliance assessments to filter out improper content and keep track of all interactions. This comprehensive system ensures seamless integration of artificial intelligence in operations while adhering to regulatory standards and maintaining client confidentiality. Moreover, the platform continuously improves and adapts its algorithms, allowing Goldman Sachs to stay at the forefront of technology and offer its clients the most efficient and secure services.
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UK seizes web3 opportunity simplifying crypto regulations
As Web3 companies increasingly consider leaving the United States due to regulatory ambiguity, the United Kingdom must simplify its cryptocurrency regulations to attract these businesses. The conservative think tank Policy Exchange recently released a report detailing ten suggestions for improving Web3 regulation in the country. Among the recommendations are reducing liability for token holders in decentralized autonomous organizations (DAOs) and encouraging the Financial Conduct Authority (FCA) to adopt alternative Know Your Customer (KYC) methodologies, such as digital identities and blockchain analytics tools. These suggestions aim to position the UK as a hub for Web3 innovation and attract blockchain-based businesses looking for a more conducive regulatory environment.
Streamlining Cryptocurrency Regulations for Innovation
To make it easier for emerging Web3 companies to navigate existing legal frameworks and contribute to the UK’s digital economy growth, the government must streamline cryptocurrency regulations and adopt forward-looking approaches. By making the regulatory landscape clear and straightforward, the UK can create an environment that fosters innovation, growth, and competitiveness in the global fintech industry.
The Policy Exchange report also recommends not weakening self-hosted wallets or treating proof-of-stake (PoS) services as financial services. This approach aims to protect the fundamental principles of decentralization and user autonomy while strongly emphasizing security and regulatory compliance. By doing so, the UK can nurture an environment that encourages innovation and the continued growth of blockchain technology.
Despite recent strict measures by UK authorities, such as His Majesty’s Treasury and the FCA, toward the digital assets sector, the proposed changes in the Policy Exchange report strive to make the UK a more attractive location for Web3 enterprises. By adopting these suggestions, the UK can demonstrate its commitment to fostering innovation in the rapidly evolving blockchain and cryptocurrency industries while ensuring a robust and transparent regulatory environment.
The ongoing uncertainty surrounding cryptocurrency regulations in various countries has prompted Web3 companies to explore alternative jurisdictions with more precise legal frameworks. As the United States grapples with regulatory ambiguity, the United Kingdom can position itself as a hub for Web3 innovation by simplifying and streamlining its cryptocurrency regulations.
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