So we’ve seen a drop in crowdfunding raises recently. According to the SEC, between 2023 and 2024, Reg A raises are down 52% in numbers, Reg CF raises are down 25% and Regulation D raises are down 7%, and between 2021 and 2024 the figures are down 63% for Reg A, 5% for Reg CF, and 30% for Reg D.[1] People may speculate as to why this may be. Maybe the novelty has worn off, maybe people are busy (the peak of crowdfunding was during the pandemic) or maybe they’ve just run out of money, or are worried about the price of groceries.
But the need for funding for startups is still there, especially outside the tech hubs.
And there is still money out there. Remember Fred Wilson back in the day? In 2012 he speculated that if only 1% of the money tucked away in money market funds was deployed into crowdfunding, that’d be a $300 billion injection into small businesses.[2]
Obviously, that didn’t happen. Why not?
Let’s start with an important principle. It’s the rich people that have the money. It’s absolutely marvelous when regular folks invest a modest amount of money in local or affinity businesses that they know and believe in. But it’s not enough. We need big chunks of money to back up that everyday money. And the rich have that money. How do we get it from them?
We’re not talking about regular accredited investors here. Some 18.3% of households are accredited, according to the Federal Reserve’s 2022 survey.[3] Meemaw in Illinois worked for a rural electric cooperative for years, contributed to her 401(k) and by dint of hard work and a modest lifestyle, now has a lake house and money in her brokerage account. We are not going to pursue her funds and ask her to invest large sums in risky startups.
We are talking about Buffy and Chad here. Members of the 1%.[4] Buffy is divorced from a Captain of Industry. Added to her own family wealth, her income from her interior design business and the capital gains from her divorce settlement, she is sitting on a comfortable $25 million. She spends a lot of the income thrown off by this on competitive dressage, but still has at least a million sitting in money market funds at any given time. Her brokers at Stanley Morgan (dual registered broker-dealers and RIAs) call her every month to see if she wants to adjust her portfolio, but: “Honestly, darling, I don’t understand any of that and I’m leaving it to you to handle.” Let’s convince Stanley Morgan to persuade her to allocate 1% of her net worth to a diversified range of vetted crowdfunding opportunities.
Chad is an M&A partner in VichyLaw LLP. He is extremely sophisticated in all investment matters but has very limited time. He has to juggle visitation with the children from his previous marriages, and to be honest, researching resource allocation in his own portfolio seems beneath him somehow when he has people for that. His net worth is probably $32 million; he’s not clear on the exact amount, but suspects he knows which of his partners has more than he does. Let’s convince his “people” to invest 1% of Chad’s net worth in a diversified range of vetted startup companies.
How do we do that? We have to address two issues: convenience and confidence. RIAs working for the people with large portfolios are not going to spend large amounts of time researching where to find compliant and interesting investments in early-stage companies. What they will need is a platform where they can effectively, in accordance with their clients’ preferences, send orders like “Invest $50k over at least 10 investments in common shares issued by corporations in clean energy/organic petfood/early education. No SAFEs, no crypto.” The platform could use algorithms to send back suggestions (thinking that the platform may want to be an RIA itself, maybe) and the RIA could accept or reject the package and transmit the money. And the confidence? Well, I don’t want to talk my own book (untrue) but obviously the CrowdCheck diligence and fact-checking package would provide that (and protect the RIA from liability).
Let’s build this and get talking to the RIAs for the Buffys of this world!
[1] https://www.sec.gov/files/dera-reg-2505.pdf; https://www.sec.gov/files/dera-reg-cf-2505.pdf
[2] https://www.economist.com/business/2012/06/16/the-new-thundering-herd
[3] https://www.sec.gov/files/review-definition-accredited-investor-2023.pdf
[4] The 1% club starts at $13.7m net worth. https://finance.yahoo.com/news/rich-enough-top-1