The funding landscape for small businesses in the United States is about to change significantly. Next month, the Jobs Act Title III – the regulation that will give non-accredited investors (people making under $200,000 a year or with a net worth of under $1m excluding their primary residence) the opportunity to invest in startup companies for the first time in eight decades.
While equity crowdfunding has seen remarkable growth in the UK and Europe in the past few years, this will be the first time that equivalent investment activities are legal across the pond.
Alejandro Cremades is a former attorney and co-founder of angel platform Onevest, which launched its 1,000 Angels vehicle last year. The latter is an invitation-only investor network, giving invitees access to startups looking to raise money in return for equity.
Next week, Cremades’s new book, The Art of Startup Fundraising, will be released. His hope, he tells me, is to provide a clear understanding of what it means to be a founder raising capital not just offline, but online. Onevest speaks to 360-500 companies every week and, having raised money for his own firm via his platform, Cremades wants the book to be a “guide, a roadmap” for others. I spoke to him to find out more.
Is the Jobs Act Title III good news for startups?
From what I’ve seen here in the US, it doesn’t provide sufficient adjustment to the reality that startups are facing. The regulation caps what startups can raise to $1m, but the average seed round here is now over $2m. Startups will fail because of that.
There are also significant hurdles in terms of reporting. If a company is raising over $500,000, it has to do a financial audit. This will cost around $50,000 – an unbelievable upfront risk for a young firm before it even starts raising finance.
It will be interesting to see whether there’s an adjustment as the framework beds in. It might lead to adverse selection on platforms, as some entrepreneurs with good businesses are going to be turned off because of the regulatory hurdles and will turn to traditional finance routes.
There will be lots of hype and people talking about equity crowdfunding. But it’s not about how much a company raises, it’s about the return it can deliver. Lots will be desperate to raise money, but if and when they go out of business, it’ll be the investors facing the music. This is certainly the case in the tech sector.
1,000 Angels has an unusual charging structure. How does it work and why is it of value?
We charge a subscription fee to angels and investors. We don’t charge founders anything. Crowdfunding platforms can charge upfront, mamagement and performance fees. Our subscription model enables us to scale fast and find the best founders.
Moreover, we work worldwide so, because we’re not charging a commission on transactions, we aren’t tied to the regulatory landscape in the same way as other platforms.
What other changes to the market do you see that are making fundraising harder?
We’re coming out of a period where it was all about hyper growth. People weren’t looking at how revenues were progressing month on month. But we’ve passed from unicorns to cockroaches now. This next stage is about which companies can survive in a less amenable economic environment.
A lot of startups have been growing quickly and acquiring customers. They’re also spending very quickly, with burn rates off the roof. That is not sustainable, and investors are beginning to realise that and are looking for companies that can monetise more quickly and on a little budget.
Presumably, that also means investors are going to have to pare back their expectations?
Yes. Institutional investors have been going for returns of 10x or more. There are some great companies which can give returns of 5x, and that’s still reasonable.
What messages would you want to impart to non-accredited investors entering the crowdfunding world in May?
Although regulation will mean higher barriers to entry for firms, we’re also falling into an era where it’s going to be easier to accelerate funding efforts, and easier to fail. Historically, it’s taken three years for a startup to go under. Now fundraising is firmly online, it’ll be much faster. An institutional round used to take between seven and 12 months. Crowdfunding platforms can see a round done in a matter of weeks.
So for the retail investor, the most important thing to understand is who is already backing that startup. We require every single firm to have a round of funding already secured with a VC firm. Coming in alongside professionals can considerably reduce your downside.
If you haven’t done it before, you can go with others who have. Then, once you feel familiar and educated, you can do it on your own.
What changes do you think we’ll see within the crowdfunding industry imminently?
I think we’ll see significant consolidation over coming months. There are a couple of platforms not operating as they should. That always happens, but it makes it even more important, as far as I’m concerned, to be a platform that does operate in the correct way.