NEW YORK: Armchair venture capitalists will soon have a new place to hunt for intriguing start-ups: Indiegogo, the popular crowdfunding site for developers of creative ventures like movies, games and gadgets.
Starting Tuesday, the site will give entrepreneurs the option of offering backers an equity stake in their projects and creations. Indiegogo is the first major crowdfunding site to use a new securities rule that took effect six months ago, allowing ordinary investors to risk up to a few thousand dollars a year backing private companies.
Previously, only accredited investors — wealthy people with an annual income of more than $200,000 or a net worth of at least $1 million — were allowed to put money into such risky ventures. That created a schism: Companies like Pebble, a smartwatch maker, and Oculus, a virtual reality headset developer, raised millions on crowdfunding sites from eager early customers and used that surge to prove that buyers wanted their fledgling products.
But when those companies subsequently raised money from investors, crowdfunding backers were shut out. When Facebook acquired Oculus for $2 billion, venture capitalists and rich angel investors reaped the rewards.
“In a lot of ways, this levels the playing field,” said David Mandelbrot, Indiegogo’s chief executive. “This was one of the few areas of the law where citizens were treated differently based on the amount of wealth that they have.”
Securities law had long prohibited regular investors from gambling on private companies because they can be risky investments that are likely to go bad. Half of American small businesses with employees shut down within five years, and those that survive often take many years to turn a profit. Things have not been looking so hot for Pebble, for example, which recently laid off a quarter of its staff.
Still, some entrepreneurs are eager to test out the new market. ArtCraft Entertainment, a video game developer in Austin, is considering an Indiegogo campaign to find investors for “Crowfall,” a game it plans to release next year.
“Crowfall” already took in nearly $1.8 million from a Kickstarter campaign last year. For that, the company offered traditional crowdfunding perks like early access to the game’s beta tests and a thank you in the “Crowfall” credits.
Some 33,000 backers have kicked in money for “Crowfall’s” development, and ArtCraft — which has also raised money from traditional early-stage investors — likes the idea of offering them a stake in the game’s financial outcome, said J. Todd Coleman, the company’s creative director.
The company considered an offering in May, when equity crowdfunding became legal, but backed off because of concerns about whether it could draw interest, Coleman said. Selling stakes to small investors is a strictly regulated process, and all offerings must be run through portals registered with the Financial Industry Regulatory Authority.
Indiegogo is partnering with MicroVentures, a registered portal that will handle the back-end investment logistics.
Around 20 portals have become certified and started courting investors, but interest has been scant. Only 55 companies have run successful equity crowdfunding campaigns, raising a total of $12.4 million, according to statistics compiled by the investment portal Wefunder.
Indiegogo could shake up the field by bringing investment opportunities to a much wider audience. Some 8 million people have backed projects on the site, raising more than $1 billion.
“When Indiegogo called us, that flipped the equation,” Coleman said. “It changed the math from ‘this isn’t something we feel comfortable risking,’ to ‘let’s try it!’ We have some very, very passionate fans, and we think it would be cool to let them have the opportunity to invest.”
Most crowdfunding investors gamble tiny sums. About a third of the investments made on Wefunder so far are for $100, the site’s minimum, and 76 per cent are for $500 or less, according to Nick Tommarello, Wefunder’s chief executive.
Unlike shares in public companies, which can be easily sold if an investor wants out, stock in private ventures is largely illiquid. Investors who snap up a stake in a start-up they spot on Indiegogo are most likely stuck with it for many years.
And the process is more complex and expensive than traditional crowdfunding. It costs nothing to start a regular campaign on Indiegogo. The site takes a 5 per cent cut of the funds raised. The people who donate typically get an early version product in question, plus various trinkets or karmic rewards.
But for equity campaigns, creators will need to spend about $7,000 on compliance and regulatory costs, Indiegogo estimates, before a campaign is permitted to go live. The site will then take a cash fee of 7 per cent on any funds raised, plus an additional 2 per cent in stock. Investors will pay a $7 processing fee or 2 per cent of their investment, whichever is higher.
The best-known and most active site for crowdfunding projects, Kickstarter, says it is not interested in the equity market.
“The purpose of creativity is not to become an investment vehicle,” said Justin Kazmark, a Kickstarter spokesman. “When creative projects escape the need to generate profit, the result is a more vibrant and diverse culture. We’re more focused on a richer culture than richer investors.”
