When a recent startup announces a multi-billion-dollar buyout, its backers normally open the champagne. But Oculus VR, which makes the Rift virtual-reality headset and was acquired by Facebook for $2bn (£1.3bn) last March, found its investors decidedly unhappy. “I feel cheated. I backed a vision of what I wanted gaming to be in the future. Now all I want is my money back,” commented one on the company’s web page. The reason for their bile, beyond suspicions about Facebook’s suitability, was simple. The backers had raised $2.4m for Oculus through the crowdfunding platform Kickstarter. Although at the time they’d received T-shirts, posters and developer kits in return, they wouldn’t see a penny from the sale.

If the investors had asked for equity to the value of the £190 headsets that some received, they could have made as much as £25,000. Those numbers caused no little anxiety in the Kickstarter community and this, in turn, helped spur interest in another form of crowdfunding, known as crowd equity (or “hyper funding” in Valley speak). In return for capital, backers are given a slice of the company. If the company does well, they might get a dividend or, as is more likely, profit from an acquisition.

Last year, crowd equity was the most marginal type of crowdfunding, but it’s about to surge. Plus, when the US government puts Title III of the Jumpstart Our Business Startups (JOBS) Act into effect this year, non-investor-accredited Americans will legally be able to take part.

In the UK, crowd equity is already legal and there are a handful of platforms now available — Crowdcube.com, say, or BankToTheFuture.com, which is about to move out of beta. Seedrs.com is the most well-established, launched by Jeff Lynn and Carlos Silva in 2012. Their inspiration? Charles E Merrill, who founded Merrill Lynch, and was convinced the stock market should be accessible to ordinary investors, not just the super rich. Seedrs allows investors to put as little as £10 into a diverse range of startups, and so far over 6,000 people have done just that in return for an agreed amount of equity. The platform has financed 125 companies at time of writing; 80 of those in 2014. 

For investors, one of the main selling points of crowd equity is that it strips out the legal work. Traditionally, investing less than around £10,000 was not worthwhile because the lawyers’ fees could be as much as £2,000. As a result, however, it was assumed bigger investors would not have much incentive to get involved in this new approach. But crowd-equity services such as Seedrs are finding quite the opposite. This type of platform helps good VCs pick good business, and the bad VCs — who were never adept at picking businesses, but did well because they were, once upon a time, the only source of funding — should start to fall by the wayside. Here’s hoping.

Source: 
This article was taken from the March 2015 issue of WIRED magazine.
http://www.wired.co.uk/magazine/archive/2015/03/ideas-bank/crowdfunding

Author:
Charlie Burton
auther

Image credit:
Geoff Grandfield