A Quick Example of Equity Crowdfunding Done Right
Maven's recent raise highlights the upside potential for investors in the space
A few readers have asked whether the equity crowdfunding space can really yield returns, or if it’s more a social action of showing support for people and causes you like by throwing some money around.
The shortest, most honest answer is that it’s a little bit of both. Many of the campaigns aren’t destined for big buyouts or splashy IPOs, but that shouldn’t undermine the asset class’ potential.
Today, an education tech startup, Maven, announced a $20 million Series A raise led by one of the best venture capital firms in the world, Andreessen Horowitz (a16z). This wouldn’t be particularly notable, especially in today’s frothy VC market, except for the fact that Maven raised $750,000 via an equity crowdfunding campaign just a few months ago. The campaign’s deal structure was a SAFE with a $30 million cap. a16z’s terms aren’t yet disclosed, but it’s north of the SAFE’s cap, which means those who participated in the crowdfunding campaign already have a positive return, albeit on paper. Those investors are also part of a startup that has now been anointed by Silicon Valley deities.
Takeaways
This is an outlier event, but here are 2 lessons to draw:
1) Equity crowdfunding campaigns are not limited to startups that can’t raise money the old-fashioned way. Maven’s first backers were Naval Ravikant and First Round Capital, both legendary names in the startup world. The company probably did the crowdfunding campaign to raise awareness and engage with its users. There are two ways to look at this: if you hadn’t yet used Maven but invested in the campaign, you’re definitely going to check it out now and maybe take a class or two. If you had previously used Maven as an instructor or student and liked it, you’re thrilled to invest and now feel like a partner in the company.
Some people call this creating “investomers,” which is a super-lazy mashup of investors and customers. Someone please think of a better word.
2) Startup investing doesn’t have to be like throwing a fistful of darts at a board. Yes, there is definitely more risk in startup investing than more liquid, mature assets like stocks and bonds. But, if you were looking through Republic’s campaigns and found Maven, here is what you would have seen:
A massive market opportunity. Global online education is estimated to be a $250 billion industry within a few years.
Great team. Both founders have built big startups before with similar products and nice exits. Maven wasn’t their first rodeo.
All-star backers. Naval Ravikant is the Clive Davis of the tech world. If Maven passed his due diligence, it’ll probably pass yours.
Traction. The company had $1 million-worth of cohort-based courses on the platform at the time and people were buying them. They also signed up well-known figures to craft custom courses.
Crystal-clear plan. Gagan and Wes told investors exactly what they planned to do with the money and what the operational objectives are.
Bottom line: Equity crowdfunding isn’t supposed to replace stock portfolios, but it can be used as a complement. A small exposure to startups has limited downside risk (worst case is a 100% loss representing a small fraction of your net worth) and unbelievable upside potential. Come up with a process to separate the big opportunities from the small (or use our’s), and hopefully you find a Maven or two.
That’s it for now. Back to our regularly-scheduled programming tomorrow.