Title III of the JOBS Act will dramatically transform the way startups raise capital and interact with investors. The proposed regulations, as written today, permit non-accredited investors to invest in startups under strict limitations: for individuals earning income below $100,000, one can invest a maximum of $2,000 or 5% of annual income, and for income over $100,000 but less than $200,000, one can invest a maximum of 10% of their annual income in any given twelve month period. Startups will have the ability to appeal to mass investor audiences in ways they could never imagine before. For example, companies with a popular app may choose to solicit their own users – “Like our app? How about you purchase some equity in it?” The implications are yet to be actualized, yet many speculate the new regulations will completely revolutionize the startup and venture capital industries.
With this major shift coming in the startup investing landscape, here are 3 things startups should be prepared for:
Wine and dine investors on a larger scale
A great Kickstarter project usually offers an outstanding product for its funders. This is largely because Kickstarter campaigns are donation-based, not equity-based, and the funder’s return on investment (ROI) is primarily the physical product or service itself offered by the company in a timeframe of 3 - 8 months on average. On the other hand, the ROI on equity-based investments is often much further down the road (often 5-8 years or more), so founders need to make sure their investors feel secure today. This often translates to startups spending a considerable amount of time with their investors engaging them in many one-on-one conversations.
For equity crowdfunding post Title III though, offering to chat over a coffee isn't going to adequately scale. Startups need to insure that individual investors feel comfortable and trust the team and product to deliver their ROI. Therefore, startups may have to turn to measures with a mass appeal like investor conference calls, free prototypes, and company related promotions for their investors. This might play out well for consumer product companies or media and entertainment businesses that interact and cater to the masses as a part of their business, however, B2Bs may need to be a bit more creative.
Your investors are your best advocates and advisors - now you may have a lot more of them
Venture capitalists are often more confident in their own backyard. Investors prefer to be a master in their respective industry to know all the players, tricks, and ins-and-outs of a specific industry whether it be mobile, cloud, healthcare, or hardware devices. The actual investment only marks the beginning of a long-term intimate relationship between the parties with mentorship, feedback and oversight. With equity crowdfunding post Title III, startups will likely have a larger number of investors, and the founders can leverage the benefits of this network. Say for example, a healthcare startup runs a crowdfunding campaign and attracts physicians to invest in the company; the startup then gains access to free – assuming the doctor stands to benefit from the startup’s success – and much needed consultations from both industry experts and end users.
On another front, investors are sure to advocate in any capacity to help out their startup and sage investment. From downloading the company’s app to speaking about them at tech conferences, the startup instantly gains a very strong and influential fanbase who openly praises their efforts. A larger network of investors means more people talking about your company, telling their friends and colleagues, and sharing your company on social media.
The lean startup can put on a few pounds early on
Most businesses and ideas are initially funded from the founders themselves, a bank loan, and/or a network of friends and family. Title III will both help formalize the process of raising a seed round from this network, as well as allow an even broader pool of both accredited and non-accredited investors to participate. According to a 2012 report from the Angel Capital Association, there are roughly 8.7 million individuals that are currently eligible to be accredited angel investors in the United States. With the introduction of non-accredited investors - the remaining 97% of the population - the angel investment market has the potential to quickly dwarf the existing VC market, simply by the sheer mass of investors that will be able to participate.
Founders will have the ability to raise more capital at an earlier stage before the big VC firms are willing to look their way allowing some startups to scale faster earlier without the pressure of running out of money. Obviously, these startups would still need to be “lean” in the sense that their investors wouldn’t want them to go on a shopping spree, but at the same time more startups will be able to weigh the cost of selling equity early on in order to grow rapidly in the fast-paced and ever evolving industries of today.