Equity Crowdfunding’s Potential (Part 1)
New rules on crowdfunding will allow anyone to make equity investments and own stakes in startups, but why does that matter?
With Title III of the Jobs Act in effect, how will crowdfunding affect the cleantech community?
(This is the second installment in a two part series. Part 1 looked at the potential for equity crowdfunding. Part 2 examines what it might mean for the cleantech space.)
Why should the cleantech community care about new equity crowdfunding rules? Simply because the equity crowdfunding market will lead to financial innovations well suited for cleantech businesses, and open the doors for mission-focused investors.
Equity crowdfunding opens opportunities to match investors with appetite for longer term or higher risk seed stage deals with companies who need more patient capital, such as those commercializing new technologies out of labs.
Financial innovation in the private investment market could follow that of the public markets over the last several decades. The emergence of index funds and ETFs in public markets helped make it easier to develop diversified portfolios of investments. Similarly, new tools and platforms will enable investors to make aggregate investment opportunities and invest in portfolios of start-ups: Crowdfunder recently announced a VC index fund that allows accredited investors to invest in the deals top venture capitalists are putting money into – similar tools can be developed for non-accredited investors as well.
Fundamentally, high-risk technology commercialization startups like those in cleantech are exactly the sort of investment where you might not want to have all your eggs in one basket – rather than picking one or two promising battery chemistry companies in which to invest tens of thousands in seed rounds, investors could choose to invest thousands in tens of seed rounds.
Decades of research in finance have demonstrated that diversified portfolios of public market companies earn the highest returns, yet seed stage capital is still a bespoke market. There are some good reasons for this, but one reason this remains the case is because it is currently difficult to engage in numerous small deals because the transactions costs are too high. The equity crowdfunding market should help drive down these costs.
People care about cleantech. Intentional investors, impact investors, or those worried about the impacts of climate change may all have different financial requirements for investing in a deal, but they are all particularly interested in innovation in this space.
In addition to increasing liquidity in the marketplace, equity crowdfunding allows for mission driven investments by individuals who may not care about specific rates of return. For example, I personally have purchased a product offering from the company Solar Mosaic by investing in solar panels for developing countries. Because of the historic limitations on non-accredited investment, Solar Mosaic can’t offer me a financial return, but gets around this issue by giving me credits to reinvest in the future. I am very excited to see that the loans taken out for these investments are getting repaid and that solar is being deployed in developing countries. However, I didn’t really put that money in as a pure investment – I saw it partly as a charitable contribution.
While we need to be careful to not paint cleantech as charity or suggest that these companies should not be driven by fundamental business principles, the fact of the matter is there is a large and passionate community who is excited about the future of clean energy. Unlike traditional intentional investors in the space, many of these people may be willing to accept below market returns for investing in cleantech startups because the value they place on technological innovation, clean energy and things that are “cool.”
One final reason why equity crowdfunding may be a match for cleantech is the support ecosystem which has been developed over the last half decade. With support from organizations like Clean Energy Trust, cleantech startups are able to access many of the resources they might otherwise look to early investors for, so forgoing the traditional fundraising pathway may be more appealing.
At the end of the day, to the extent venture capital is investing in cleantech, it is unlikely to disappear, but we may see more startups opting for early equity crowdfunding rounds to advance their businesses, looking to the venture community for later stage investment rounds. Cleantech startups are likely to have more tools and pathways to launch, fund and grow their business, and that’s something we can all get excited about.