The R.A.B.B.I.T. Report
by Crowd Capital Ventures and Crowdfund Capital Advisors
When people think about Crowdfunding, they usually think of Kickstarter. Kickstarter allows anyone to back good ideas in exchange for a reward. There is no financial return attached to Kickstarter projects. On May 16, 2016 when the 3rd and final part of the JOBS Act, Title III (aka Regulation Crowdfunding), goes into effect this will all change. Regulation Crowdfunding allows (among other things):
- Any entrepreneur to raise up to $1 million (equity or debt) from any American,
- Provided that the raise takes place on a crowdfunding platform that is registered with the Securities and Exchange Commission (SEC),
- That entrepreneurs pass a background check and provide investors with specific disclosures and
- Investors are limited as to how much money they can risk[1].
Summary: This R.A.B.B.I.T.[2] Report covers a new kind of crowdfunding platform, one that is streamlining the process of investing in private companies by bringing the process (that was crafted in 1933) online and to the 21st Century.
Company: SeedInvest [3] (www.seedinvest.com)
Sector: Platforms & Secondary Markets Location: New York, NY Deeper Dive:
1. What problem is SeedInvest solving? Any entrepreneur who has been through the fundraising process knows it can be incredibly strenuous. From preparing offering documents and disclosures, to communicating with potential investors, to collecting subscription agreements and, if lucky, checks, it is a very painful, time-consuming process. In addition, fundraising distracts founders from the very important task of building their business. A lack of capital from operations or investment can lead to failure. (It is the most frequently cited reason).
2.Why is this product necessary? SeedInvest aims to solve this problem by reducing the friction involved in the process of raising money by using its technology platform to organize company information, facilitating communication between entrepreneurs and investors and decreasing the collection time of investor capital. Private company fundraising is based on a policy of investor protection created in 1933 that doesn’t translate well to the 21st century. Today, the collaborative economy leverages technology to match supply and demand from office space (WeWork) to cars (Uber). However, the private capital markets have remained free from advances in technology and the Internet until now. By moving private company fundraising online, SeedInvest streamlines the entire process, creating efficiencies for both entrepreneurs and investors. This allows entrepreneurs to focus on their business and investors to make an informed decision faster. Entrepreneurs selected by SeedInvest gain access to an investor base of 90,000 investors, including 16,000 accredited investors and individual investors have access to pre-vetted, early stage investment opportunities.
3.How does it work? SeedInvest works like Kickstarter but instead of getting a product or a t-shirt in return, investors get actual equity in the companies they support. SeedInvest is not a listing service like AngelList but rather filters the companies and has only 1% acceptance rate. Since many Angels and VCs lead rounds, SeedInvest enables individuals to invest alongside leading venture capital funds and angel groups. Taking advantage of the latest part of the JOBS Act (Regulation Crowdfunding), SeedInvest recently opened its platform to all investors, including 240 million Americans who can now, as of May 16th, legally invest in private companies for the very first time.
4. Who are the founders? Ryan Feit and James Han founded SeedInvest in 2012 while obtaining their MBAs from The Wharton School of the University of Pennsylvania. Feit and Han were involved in the initial passage of the 2012 JOBS Act and have since served as a focal point of the budding Equity Crowdfunding industry. Over the past four years, they have worked closely with members of the SEC, FINRA, the White House, and the Treasury Department on the implementation of the JOBS Act.
Ryan Feit is the CEO and Co-Founder of SeedInvest. Prior to founding SeedInvest, Feit worked in private equity at Wellspring Capital Management and in investment banking at Lehman Brothers in New York City where he invested in, financed, and managed dozens of private and public businesses. Feit frequently serves as a subject matter expert on startup investing and the JOBS Act for the Wall Street Journal, the Washington Post, CNBC, FoxBusiness, the Economist, the New York Times, Fortune and Inc. Magazines. James Han is Co-Founder of SeedInvest. Previously Han was a private equity investor at Francisco Partners, where he focused on equity investment opportunities in deep technology. Prior to that, Han was at Morgan Stanley in their technology investment banking group
5. What about early traction/user experience? SeedInvest has had early and strong traction. While they initially built their platform for Title III, they began transacting business under the first part of the JOBS Act to go into effect, Title II (otherwise known as Accredited Investor Crowdfunding). They have a total of 90,000 investors on the platform, 16,629 of which are accredited investors. According to Feit, SeedInvest has facilitated funding for 60 companies and the average raise per company is $545,000. Their website currently has 149,780 unique visitors per month. SeedInvest has started its own diversified fund which invests $200,000 per company. The company is also pursuing opportunities under Title IV of the JOBS Act (otherwise known as Reg A+ or the mini IPO). SeedInvest seems to be a media darling with CEO Feit appearing in mainstream articles in the New York Times to cable television program Mad Money with Jim Cramer.
6. What are the risks? If any companies that are successful at raising capital on SeedInvest should fail, SeedInvest may face reputational risk. The equity crowdfunding landscape is becoming crowded. SeedInvest must continue to pour capital into marketing and deal acquisition in order to show traction. SeedInvest is venture-backed and if it cannot continue to successfully fund deals, may themselves face fundraising headwinds. An institutional player that wishes to enter the marketplace may be able to compete better due to their size and resources.
7. Our Perspective on SeedInvest and its place in the ecosystem:
- By only allowing one percent of the deals up on their platform SeedInvest may be missing out on bigger opportunities. They need to take their experience to date at vetting deals to come up with a more efficient way to list companies which could increase deal flow for their investors, capital for entrepreneurs and revenue for SeedInvest.
- The company was smart to begin transacting business with the initial parts of the JOBS Act and while Regulation Crowdfunding offers much promise, SeedInvest may risk losing potential revenue if it continues to list only one percent of deals in its pipeline.
- Its foray into a platform specific fund may allow it to list more companies, provide investors with a diversified investment opportunity and exit potential where SeedInvest owns equity in any of the deals it backs.
- As an early player in the ecosystem, they have a strong reputation and a track record that is longer than many of their competitors. They have a team that seems to be focused on conserving capital and delivering results. Provided they can keep this momentum and focus the future looks bright for them.
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