As a founder I've raised through crowdfunding multiple times. The experience is great on both the startup and the investor side, and I love that crowdfunding lets more startups get off the ground, especially ones that don't have access to SV money.
But this should really be thought of as "gambling" instead of "investing." There's very little ability to do due diligence and the companies are usually so early that it's impossible to know if it's going to work or not. However, if you have money you're willing to lose it's a lot more rewarding than spending it at the blackjack table.
I agree with this premise regarding equity crowdfunding as it currently stands in absence of any professional guidance. We at XX have tried to improve this and mitigate risk by:
1) having a screening committee with deep founder operational experience and industry insight to identify the companies most likely to be successful.
2) attracted exceptional startups to broaden our applicant pipeline by making it open to the global community and guaranteed a $50k pre-seed investment.
3) had three month mentoring period where startups were stress tested and cleared for launch on Wefunder.
It's similar to LPs investing in a VC fund and trusting that the VCs performed the proper diligence.
It's very high-risk. I guess it's a philosophical question of whether you think the public deserves the right to take super high risks and invest in startups (1000x more risky than the public market given there is no secondary market).
On one hand you'd think the people with the least amount of money are the ones that need the options to take risks the MOST. To get out of their situation.
On the other hand, will this help them? Will the companies be good enough? Will they provide returns. Is helping 1% of people escape their situation worth it for the other 99% that will invest in startups that fail.
There are four concepts that we are testing to mitigate risk to the general public:
1) We have a screening committee with deep operational experience (we have 50 founders that ran companies collectively valued close to $4B) to identify the founders most likely to be successful. We have more operational experience and industry insight than your general partner at a venture fund.
2) We attracted exceptional startups to broaden our applicant pipeline by making it open to the global community and guaranteed a $50k pre-seed investment.
3) A three month period where startups were mentored, stress tested, and cleared for launch.
4) Finally, as with all investments on Wefunder, company risk and financials risks are made transparent for the public.
Successful companies often have the greatest value creation at their early stages. It is unfair to only limit this value creation to "accredited" millionaires and billionaires. In a world where payday loans and lottery system prey on the poor, we are trying to create a system of equitable wealth creation, for everyone.
One thing to note is that the SEC does limit the amount non-accredited investors could invest here to:
$2,200 or
5 percent of the lesser of the investor’s annual income or net worth.
So while yeah investing in startups is risky, they can't bet the house.
The idea sounds cool, but I want to have more transparency on how you chose those startups. Do they show a huge potential for future growth? How do their finances look like? Investing in startups is risky in general, but COVID-19 made it even more harsh. + some of those startups have many competitors in the industry and I would like to see more what competitive edge your startup selection has.
Hello! All the companies we selected have large growth opportunity given that their products are intended to assuage the harsh realities of COVID. All finances are published on the startup profiles and for most, this is their first money in. The XX mentor team is a founder community of 50 founders, each w/ several years of experience running our own companies, collectively valued over $4B. As with all early-stage startup investing, it can be risky, but our team's extensive operating experience gives us unique insight in to selecting the founders most likely to be successful. We often have more operating experience than most VCs. Additionally, companies across the world applied and the final cohort included a diverse contingent w/ 31% female and 47% PoC. These numbers are more diverse than you'll see in any venture portfolio and as it has been well established, diverse team outperform those that are homogeneous. Our global pipeline gives us substantial competitive edge. Finally, regarding competition, most companies have pitch decks that outline the market landscape and the founders are happy to answer Q&A on the Wefunder profile to help investors understand competition and other risks.
Yes for sure - you can read the story of all the founders, see their product and even their financials. XX invests in early stage founders and that's inherently risky but our thesis is that when founders are mentored by more experienced founders and are around other motivated founders, they'll have more likelihood of success. We've seen mentors and cohort founders go above and beyond for each other's success.
From my understanding, the SEC requires all companies raising through Reg CF have to provide financials statements that are reviewed by an independent CPA before the investors finalize their investments. I do agree, though, that there should be more overall DD--I personally would be hesitant to invest in a company if there wasn't a reputable lead investor (which not all Reg CF companies have).
Took the words right out of my head. Personally, I'd like to see some initial signs of traction/growth before I make any investments in a startup so unless XX is able to provide me with that kind of assurance (which can be done through a very thorough and transparent DD process), I'm not sure if I'll have the confidence to make an investment, at least not for now.
A $100 investment doesn't seem much and it's more like a kudos, but it is an investment. I agree that more information can help anyone determine better how to choose between startup A or B.
That's a good point, and it reminds me of the saying - don't invest more than you're willing to lose. I'm definitely open to making $100 investments, but I guess my question was more directed towards higher risk/volume investments that might beg for a more structured DD process.
I think the concept of turning to entrepreneurs to solve unseen negative consequences of COVID is awesome. I wonder how to ensure founders actually focus on COVID-related issues rather than taking advantage of the visibility and funding to focus on other issues.
Yeah, that was one of my concerns as well - some of these startups seem to be targeting issues that are tangential at best to COVID, and that was a little confusing to me given the article's title.
This is a problem and I agree. Most of our portfolio companies are concerned that COVID is temporary and are seeking alternative business models in parallel. This is because institutional investors, who will ultimately end up funding the companies down the road due to Reg C funding limited to $1M/yr, continue to tell startups that need to have alternative business models in case a vaccine is approved. To some extent, trying to move away from the deeply entrenched institutional investment model is an ouroboros.
Very cool - I think democratizing VC will help spurn a lot more innovation. But do you think letting retail investors enter VC will produce the same irrationality as what we see in Robinhood and the Stock Market?
Stock market offers liquid financial products, while angel investing is definitely illiquid. Irrationality in VCs will always be involved because we are human-beings but for sure less than in the stock market.
Totally agree with this! There's also the notion of sunk cost when it comes to angel investing, which often arise when a startup goes through a slow steady decline in profitability and eventually, to their ultimate demise. You don't (usually) see this happening in the stock market.
I'm happy to see founders raising large amounts of money. But for some founders, the mean investment seems to be around $1000. I was wondering if there was a way to see the different portions that make up the total money raised. Also, is there a set amount people typically invest? I find this might be important to understand if the platform is truly building “a network of everyday folks” or just have some experienced investors experimenting with a new platform.
I think this is a great idea and improvement, because now I have the opportunity to invest in very interesting startups that where previously hardly analyzed by people that really know about these type of companies, without needing a great amount of money and from any part of the world.
Also, it is a great opportunity for those startups that are working really hard to create new ideas and products to ease the problems that the world is going through due to the Covid-19 pandemic.
Saying these companies "fight COVID" seems kinda untrue? Don't get me wrong, the majority look impactful and useful, but the headline I'm seeing for this everywhere is disingenuous if someone is looking for impact. However, it does look like these companies are COVID-resilient, and will grow with trends the pandemic is forcing. Potentially solid investments, and democratizing access to that is cool. :)
If we're trying to get people to move away from VCs, why are there such few startups accepted. It's almost as if we're bragging about leaving startup founders with the craziness that is venture capital. Other than that, I work at a YC and Wefunder company who doesn't like giving idea of liquidating investors to spend on marketing/investory. I'd love if XX takes off.
Good point :) We didn't expect that many applications; we would've wanted to accept more if we had more in funds. That's why we created a Fellowship program a week after Fight the Virus batch started - there were so many qualified founders we still wanted to support. And half of the startups raising on Demo Day are from the fellowship! If you have ideas for how we can scale this to include more founders in the future, message me!
The idea of democratizing funding is always interesting. On one hand giving power to individuals and communities who may otherwise never have the opportunity to invest in companies in their Aha! moment is what we should strive for.
On the other hand this could lead to outrageous valuations made by founders who have the backing of devoted communities and taking advantage of their social capital. Thoughts?
Interesting take on equity crowdfunding! But I wonder if the heightened risk of equity crowdfunding compare to other asset classes, say stocks/real estate, would dissuade people from investing in these startups, especially during trouble times like this? Have you been seeing a lot of investment activity since the start of Demo Day?
That's a very interesting phenomenon - I can definitely see parallels between that and the stock market, with there being record number of new traders getting into the stock market in the recent months due to COVID (https://www.wsj.com/articles/coronavirus-turmoil-free-trades...). Not sure if the mindset between those new stock traders and the new investors on XX are the same though.
As for the pandemic we are currently undergoing, I believe we should use all means possible to put an end to it. This is why i consider XX should lower minimum investment sum to 50 USD, so college students who are on a tight budget can also invest in these startups.
I can see the logic behind this. But at this point, my main concern is that people who can afford to invest $100 are not investing. Do they know about Wefunder? Can they tell the difference between Wefunder and Kickstarter? Do they understand the jargon even as explained with the website's current definitions?
That's a cool idea, but I wonder how you're controlling how much a person is allowed to invest. Given that the SEC limits the amount for regulation crowdfunding on annual basis, how are you gonna keep track of that?
Super cool idea! Especially considering investing in startups is traditionally reserved for accredited investors. Love the concept & how it opens up investing in startups to non-accredited investors like me :)
Yeah that's what I was thinking as well! Giving the mass public the ability to invest in early-stage starts is like opening up Pandora's Box, imo - it just feels too risky to me.
It's a regulated crowdfunding - so there is a fair amount of reporting startups need to do before they can raise and they're limited with how much they can raise from unaccredited.
Thanks for clarifying! However, when I was looking at the startups participating in Demo Day, say this one for example (https://xx.team/stark.therapeutics), there wasn't much of a financial history - which does make sense, given that they're an early-stage startup. So I guess my question is - what are the metrics that are reported during the DD phase in order for these startups to be approved for crowdfunding?
But this should really be thought of as "gambling" instead of "investing." There's very little ability to do due diligence and the companies are usually so early that it's impossible to know if it's going to work or not. However, if you have money you're willing to lose it's a lot more rewarding than spending it at the blackjack table.