Crowdfunding Is Going Viral

Scott Jordan, S. Jordan Associates

26 August 2014
With the rise of social media, the emergence of crowdfunding, and unprecedented legislation,
there has never been a better time for leveraging direct investing platforms to reach investors.
Online investing in private equity is truly going viral.
What if emerging growth companies could easily reach 20 million investors? Sounds impossible. But wait a
minute; last time I checked my LinkedIn account, it suggested I am connected to 20,882,416 contacts via 1
st
connections, 2
nd
connections (aggregate 1
st
Degree networks), and LinkedIn groups. Given I am a top 1%
member of LinkedIn (connected to 2,700 members), this reach may be unrealistic for most. However, even
executives with 500-700 LinkedIn members may have access to upwards of 5 million to 10 million contacts.
What does this really mean in the context of private equity investing? It means that, under the new 506(c)
general solicitation rules (ability to solicit people with no existing relationship), companies can virally spread
their message (via social networks) to those who otherwise may not become aware of the opportunity to invest
in the next private Google. Couple this awareness with the ability to invest at lower investment thresholds
(more readily diversify within private equity allocation), and this is a cocktail for adoption by Accredited
Investors.
Online investing in private equity is truly going viral! With the advent of advancements in technology (social
media), emergence of crowdfunding (donation, reward, peer-to-peer, equity), and unprecedented legislation
(JOBS Act approved in 2013), there has never been a better time for leveraging direct investing platforms
(crowdfunding portals) to reach investors!
Empowering Networks
Crowdfunding portals empower company and investor networks (rolodexes) via the same technologies
utilized by successful social media companies LinkedIn, Twitter, and Facebook. Crowdfunding engines
leverage text analytic (XML) technologies to collect data (from member/company profiles/profiles), tag data
(investor preferences/deal terms), and present data (match crowdfunding members with company offerings) via
advertising and notifications (emails, workflows).
The most obvious networks to empower via crowdfunding are Friends and Family. Empowering personal
networks (friends, family, co-workers, former co-workers, and prospective/current investors) is essential when
seeking capital at earlier stages (seed), given many traditional capital providers (venture capitalists) have
moved to later-stage opportunities. For example, HealthiosXchange, an equity crowdfunding portal serving the
healthcare industry, empowers member friends and family networks by:
Providing tools for tracking referrals (personal ref codes sent to networks in an effort to join
crowdfunding portals/follow company pages/invest), event participation (webinars, road
shows), and company page visitors/activity.
Keeping personal networks informed of key catalysts (achievement of key milestones);
encourage them to become investors (Follow companies and receive updates in real-time).
Encouraging page Followers to conduct due diligence by interacting with management and
each other (friend, follow, message, share), and by reviewing online documents, scoring, etc.
(due diligence).
Encouraging page Followers to share portals joined and deal activity with personal
networks via social media platforms (LinkedIn, Twitter, Facebook).
Incentivize page Followers to persuade networks to Follow and Invest in private equity
offerings (i.e., if a broker-dealer, ability to receive commission; if not, eligible to receive
carry).
Investor Matching
Select crowdfunding portals also facilitate engagement between investors and companies via matching
investment criteria (from member profiles) with deal offerings (from company pages). Dating sites such as
Match.com leverage this technology (and make large sums of money doing so), efficiently matching people
based on user-generated criteria. Similarly, in private equity, there is demand by companies seeking capital for
increasing efficiencies associated with identifying, communicating, and closing investors. For Investors, it
means the ability to easily identify, evaluate and have access to premium deal flow.
Matching investors and companies is only the start. Once a match is identified via text analytics, investors
must be qualified by internal/external call teams to gauge levels of interest, encouraged to view company
pages/deal terms online (if users comply, tracking reports are provided to companies of page visitors), and join
events such as road shows and webinars where they can interact one-on-one with company management.
Advanced Marketing Tools
Crowdfunding portals also provide advanced tools for company offerings to go viral, including leveraging
inbound marketing (emails, social media, referrals, SEO) to reach members/non-members. For the first time in
70+ years under 506(c) of the JOBS Act, companies can proactively share deal terms with Accredited
investors via social media platforms.
[Related: Crowdfunding: New Asset Class, New I nvestor Class]
Innovative platforms such as Hubspot equip portals with the tools to create workflows (series of automated
emails) based on member activities, including opens/clicks, signing up for newsletters, requesting updates on
specific market sectors (i.e., medical devices), and questions posed to management online via Q&A Forums.
These workflows are essential for cultivating continued engagement wherein data flows shared with users are
personalized.
Programming
Going viral with Investors can also be heightened through advanced online functionality incorporated in many
of the leading portals. Most Viewed tabs in company directories, elevating companies with most page views
above the fold (similar to Tumblr), customizing news flows based on Like and Following activities, and
online scoring (Ratings and Reviews) are just a few of the tools in use today highlighting user activity (most
active users) and trending companies/offerings.
506(c) General Solicitation
Reaching investors via general solicitation is one of the cornerstones for going viral. Select portals manage the
entire process for generally soliciting under Title II of the JOBS Act, including verifying accredited status
(most common practice is third-party verification given reluctance of Accredited investors to provide tax
returns), filings with the SEC/approval of marketing documents (submit marketing documents 15 days prior to
a public solicitation and 30 days after close), and preventing bad actors (verify issuers have not previously
violated SEC regulations).
Self-Directed IRAs/Custodians
The number of investors with self-directed IRAs and respective capital in these vehicles ($6.5 trillion) is
enormous. One active custodian in the alternative investment space (~private equity), PENSCO, manages more
than 50,000 accounts ($10 billion in assets) and recently partnered with leading crowdfunding/direct investing
portals (CircleUp, Fundrise, and HealthiosXchange, among others), connecting investors (via retirement
accounts) with private equity company offerings. PENSCO is integrating its website with crowdfunding
portals to facilitate the investment of retirement assets into private equity.
Broker-Dealers/Registered Investment Advisers (RIAs)
The influence of broker-dealers and RIAs on investor behavior cannot be underestimated. In the United States
alone, there are 4,300 broker-dealers and 30,100 RIAs. These advisers play an integral role in guiding the
investment decisions of respective clients, including setting asset allocation strategies (% stocks, bonds,
alternatives) within taxable and non-taxable accounts (including self-directed IRAs). As part of their fiduciary
duties, broker-dealers and RIAs are required to emphasize with clients the importance of diversifying
portfolios to smooth returns across various market cycles. This often includes directing clients to place capital
into funds managed by established General Partners; public (mutual funds) and alternative assets (venture
funds). Familiarity and ease of use of existing fund structures is offset by high fees (from broker-dealers and
the issuers including 2 and 20) and 10-year lockups.
The emergence of innovative vehicles emulating existing fund constructs (mutual/venture), but at lower costs
and without restrictive lockups, are on the rise, including investors syndicates launched by leading
crowdfunding portals AngelList, CircleUp, and HealthiosXchange. The viral tools mentioned above fueling
the rise of direct investing are also projected to significantly expand market adoption of investor syndicates.
Syndicates are inherently social. Investors backing syndicates are profiled on syndicate pages, share buttons
are present throughout to encourage viral sharing via social media platforms, and members are encouraged to
use social virtual town squares (webinars, road shows, Q&A Forums) to stay informed and conduct due
diligence leveraging the expertise of the syndicates.
[Related: Supercharging Alternative I nvesting: Direct I nvesting via I nvestor Syndicates]
The Killer Viral App
Market pundits are increasingly recognizing that investors are seeking access to premium deal flow, lower
costs, and the ability to easily diversify (avoid the risks associated with private equity investing). The
breakthroughs empowered by crowdfunding that meet investor expectations include:
Engagement with Broker-Dealers/RIAs Educating the very constituents who are widely employed by
investors to select and manage investment portfolios is underway. Peer-to-Peer lending and equity
crowdfunding portals are spending large amounts of marketing capital to educate the incumbents on the
advantages of investing capital in crowdfunding platforms vs. packaged products (funds), including low fees,
access to premium deal flow, and capital immediately being employed (shorter liquidity cycles).
Directing Self-Directed IRA Capital into Private Equity Given most private equity investments are illiquid
and have moderate-to-long time periods for the realization of returns (sale, IPO), retirement accounts are ideal
vehicles for funding private companies on crowdfunding portals since capital cannot be accessed prior to
retirement without adverse tax consequences. For industries where investments Yield, such as real estate and
energy, the benefits of utilizing self-directed IRA accounts are even higher to shield investors from ordinary
income taxes.
Investor Syndicates Foster Diversification and Ease of Investing Syndicates such as HealthiosXchanges
MicroVCs, give investors access to premium deal flow selected by distinguished lead investors (analogous to
having access to premium venture capital funds such as Kleiner Perkins). Syndicate investors can easily
diversify across market sectors and across lead syndicate investors in an effort to avoid risks associated with
investing in early-stage private companies. Investor syndicates are congruent with the advice of leading market
pundits such as David Rose with New York Angel suggesting market research empirically confirms
diversifying across 25 early-stage companies professionally selected and managed leads to outsized returns.
Investor syndicates facilitate the ability for investors to place $15k-$25K into five companies a year for five
years, given low investment thresholds with capital consolidated in special purpose vehicles to ensure
companies retain consolidated cap structures and investors receive investment protections.
The era of Crowdfunding + Crowdsourcing = Going Viral is here!

2009-2014 by The TABB Group, LLC and contributors | info@tabbgroup.com | +1-646-722-7800