With every great idea, Seed investment can go a long way towards turning it into an actual and great product. While crowdfunding has only been around for close to a decade, it has been the primary proving ground for testing ideas and turning out products that can end up becoming sustaining businesses.
Some may argue that it has never been a better time to be a Maker (in most cases, they are correct). Those who have created proven products have had supporters back their products, but can supporters also back their eventual business too? Currently, the UK has been making strides towards making this virtually legal, but it has languished in the United States. What does this mean for the growing industry of small Design and tech firms who have brought us Oculus Rift, Pebble and Form1 3D Printer?
Right now – as it stands – American companies cannot sell stocks to just any regular Joe, they can only be sold to those that the SEC considers to be ‘accredited’ investors, i.e., with enough money lose a little yet still comfortably sleep on. This means that a large amount of potential ‘investors’ cannot buy equity from private companies…although we can certainly blow all of our life-savings on a single bet at a Vegas casino.
Congress and Obama worked together (???) to pass the JOBS Act in 2012, which included provisions for Equity Crowdfunding. The SEC has been dragging their feet, placed in a difficult position of creating a framework that protects investors (however small) and yet makes sense for business.
The problem is actually very simple: with Kickstarter, supporters receive a product for backing a campaign and the average pledge has been reportedly been around $100. Shares and stocks are different – they are merely stakes with no clear timeline or return, and no absolute promises on either. Considering how difficult it is to really suss out of a product and predict with absolute certainty it’s success, the difficulty of predicting success rate of a business is even harder.
But the upside is tremendous. Had all of those people invested in Oculus Rift rather than just the product, then they may have had a significant return when they were bought by Facebook for $2Bn. The alternative would have been even more interesting, as any Equity Crowdfunding into Oculus Rift would have kept the company private, giving them time to improve their product by leveraging the wallets of gamers. Had no investment gone into Oculus Rift, one wonders if backers would have gotten their product, considering the difficulty of achieving what they wanted to do. Take a look at the struggling company OUYA as a good example (which also picked up $10 M investment last week).
Design is hard. Hardware is hard. Technical achievements that seem magical were really decades of incremental improvements that no one was aware of until the World noticed (like 3D Printing, perhaps?). The risks engendered by making anything new is a fairly well-known theme of anything Crowdfunding. And in a World of Google and Social Media, the difficulty of informing oneself of the risks is lower than say in the 1930s when the SEC was originally formed.
The UK’s equivalent agency, the Financial Conduct Authority, has taken what could be described as a ‘do-what-you-want-with-your-money’ strategy. It required that all investors using any one of UK’s Equity Crowdfunding platforms be warned that “It is very likely that you will lose all your money.” and note that “Most investments are in shares or debt securities in start-up companies and will result in a 100% loss of capital as most start-up businesses fail.” And yet, $60M was invested last year into 105 businesses on Crowdcube, one of the leading platforms in the UK.
But are all of these companies completely centered around hardware design and technology?
On Crowdcube and fellow competitor Seedrs, a vast majority of the success has come from investing into restaurant businesses and software apps. Hardware design and technology companies consist of roughly a quarter, perhaps even less. Englancer, described as “A new way of effectively outsourcing engineering design, modeling and drawing projects.” is in the process of raising $110,000 via Seedrs right here. The Kino-mo is a holographic imaging company, and is currently oversubscribed on Crowdcube, sitting pretty with $575,000 already for only 10% equity.
It’s still too early to tell if the UK is setting itself up for failure, but the fact is, it is now easier for a ‘riskier’ company to pitch its technology and raise capital. For Englancer, how far do you think that would get on Kickstarter with no real ‘app’ to pledge for, but rather a service business to pitch? Sure you can back potato salad, but how about a burrito chain? Not far at all, even though the business has merit.
If Equity Crowdfunding succeeds in the UK and is finally opened up to the USA, gone will be the days where we merely look at the product and look at the business as a whole, including the team and the conditions. I think the future of Design and Technology in the United States will be better for it.