How Equity Crowdfunding is Different Than Buying Stocks

Equity crowdfunding has taken off as an investment option in the last years following the passage of the JOBS Act, allowing average investors to get a stake in early-stage startups.

In this clip from Industry Focus: Tech, Motley Fool analyst Dylan Lewis interviews Indiegogo founder Slava Rubin and MicroVentures founder Bill Clark -- about how investing in equity crowdfunding deals is different than investing in the stock market, and how companies like MicroVentures and Indiegogo perform due diligence on the projects and companies for which they enable funding.

A full transcript follows the video.

This podcast was recorded on March 17, 2017.

Dylan Lewis: You mentioned the Jobs Act, and the passage, and we go from having these accredited investors to having everyone be able to participate. You want to talk a little bit about how some of these placements are different than investing in traditional stocks and some things that people that aren't as familiar with the history might want to know about?

Bill Clark: Yeah. The main difference is the liquidity of investment in a private company. When you invest in Apple, a day later, you could sell your stock on the same day and get liquidity. But in these companies, you can't get liquidity for a while. It could be seven to 10 years, sometimes. We're also doing revenue share opportunities where you can get your money back sooner, assuming that the company is successful. And then, in the private market, early stage start-ups are risky. Seven out of 10 are going to fail, and you need to diversify. Which is why we like the minimum at $100. While it's a lot of money, it's not as much as, for our MicroVentures main business, $5,000 is the minimum. So, we try to give people the opportunity to diversify. And in VC, it's not necessarily spray and pray, but it's, diversify so the winners will make up for the losers. That's what we try to do with our investment opportunities.

Lewis: Yeah, I think the idea of diversifying is something that most investors are familiar with, but I think it's probably even more important with these types of investments, because of the risk profile with some of them. I'm guessing that, in some ways, maybe it's the right way to think about it. Bill, you're kind of a gatekeeper for the platform. And there's the due diligence element before any of these companies can come and be available as investments. Do you want to talk a little bit about what that process looks like?

Clark: Sure. I also think, for the business that we've been in for the last six years, we were even more of a gatekeeper. We were building a portfolio of companies, similar to a VC, we have assets under management, and we were very selective of the companies. With Title III, we don't have to only focus on tech companies, we can look at restaurants if we want, we can look at distilleries, we can look at movies. That is something that we never looked at before. So, we're able to actually provide more diversification to investors. But really, from a gatekeeper standpoint, what we like to do is filter the companies for investors, say, "These are companies we feel are a good potential opportunity, and it's your job to do due diligence on them yourself." We will look at the team, and we'll run background checks on them. We'll look at financials and projections, and we'll look at valuation, and we'll put all that together in a summary, and then we'll allow the investors to do their own due diligence, and they can ask questions of the company, and the founders will answer. So, the crowd does have the ability to ask questions. If the crowd doesn't like something, it won't get funded, because when you see those questions coming, and maybe it's negativity in the discussion board, people will do their research, and they'll check it out.

Slava Rubin: And on the Indiegogo platform, it's always going to open, no application, no human curation. We try to have it as scalable as possible. Obviously, as we move into equity, we're both being regulated to make sure we're filtering, but we also need to make sure we're creating a high-integrity product early. So, it's really great to use the scalable techniques of Indiegogo, as well as the curation capabilities of MicroVentures to bring this all to bear and to First Democracy VC, which is a constant balancing act because we only want to present the deals that we think have been filtered well to be presented, but we also want it to be as scalable as possible, and to have as many deals as possible, because the goal is to democratize the opportunities. So, it's a constant balancing act.