05: How Crowdfunding Fits with Traditional Strategies
Fitting with Family, Friends & Founders Investment
Many entrepreneurs and small companies first turn to their family, friends and founders (FFF) for donations and support when launching a business. It is also a great starting point to get feedback from people you trust before approaching investors on a larger scale. The JOBS Act has changed things so that once a startup approaches accredited investors (based on $200,000 annual income or more or $1 million net worth, excluding a personal residence) the family-and-friend funding source is then limited to only $2,000 or 5% of annual income for each non-accredited investor.
The entrepreneur can still approach family and friends, it just needs to be at a much earlier stage. Once emails or online posts sound like fundraising campaigns, it becomes general solicitation. The two can’t occur concurrently.
Another uncomfortable position is qualifying if your friends and family are actually “accredited investors.” This requires 3rd party verification from a combination of IRS forms, bank statements, consumer reports and written confirmation from brokers, attorneys or CPAs. Investors at a friend and family level may be unwilling to supply such personal information.
Fitting with Angel Investment
Angel investors are specifically utilizing equity crowdfunding platforms to source new deals and investment opportunities. They are also using these platforms to form Angel syndicated or groups. Essentially, an Angel or collection of Angels can form a group that other individual investors can join. Individuals select how much they are willing to contribute and the leaders of the group will determine which individuals to accept or not. From here, these groups can collectively select startups to invest in based on their crowdfunding campaign.
As the equity based crowdfunding funding vehicle develops, experts anticipate that many of the best crowdfunding rounds of investment will be led by angel groups or seed stage funds. First and foremost, the screening and due diligence needed to decide which startups warrant investment is best suited for the professionals (i.e. Angels). Meanwhile, Angel groups can benefit from gathering additional partners and co-investors, recruiting and engaging new Angels, spotting new deals and giving the first look to a broader network of accredited investors to help close out portfolio deals.