Q&A with Rosemarie Truman of Ignite Social Impact

Equity crowdfunding is not to be confused with reward-based crowdfunding, which was made popular by the Kickstarter and Indiegogo platforms. Crowdfunding allowed the public to encourage startups by making donations in exchange for a future product or one-time perk.
Since 2015, equity crowdfunding allows the public to buy shares of private companies online. Title III (or Regulation CF) was added in 2016 to the JOBS Act of 2012 to allow US organizations to raise funds up to $1,070,000 through “funding portals”, which do not require licensed brokers to operate and allow non-accredited investors to invest.
Why is that important? The current investment model favors populated metro areas and is riddled with gender and race inequities; overall, first time investments are declining. The number of businesses raising venture capital funds is extremely low. Only 2500 companies raised a first round of venture capital in 2017, decreasing from 2700 in 2016 and 3200 in 2015 (1). To put that in perspective, 400,000 new businesses are created in the US every year (2), including about 60,000 tech startups. Furthermore, close to 80% of VC funds go to populated metro areas (3) while about 8% of VC funds go to women-led companies and only 1% go to Black founders (4). With the COVID-19 pandemic, many are moving out of urban areas given riots and high cost of living, which means that even more startups will be geographically dispersed (5).

By leveraging the power of the broader public and online investing, equity crowdfunding can eliminate geographical funding disparities and open up a previously untapped reserve of funds from the broader public of non-accredited investors. With Regulation CF, anyone can invest, not just rich people.
In five years, companies raised hundreds of millions through Regulation CF. This number is small in comparison to the $25bn invested every year by US angels or $50bn+ from US VCs (6). Yet, figures from the leaders of reward-based crowdfunding, Indiegogo and Kickstarter, demonstrate the potential of investments from the public. Close to $5bn was raised by Indiegogo and Kickstarter in 12 years, with 40% going to female founders and 18% to minorities (7).

Equity crowdfunding is easier than other methods of raising capital and as they raise money, startups gain traction and get in front of thousands of investors. Investors gain access to vetted, high-quality deal flow, and don’t have to sift through thousands of companies.

Equity crowdfunding could become even more popular soon given key regulatory changes. The SEC announced in March 2020 updates to Regulation CF that would allow startups to raise up to $5M, with the possibility to set up special purpose vehicles to avoid the fragmentation of cap tables due to having thousands of investors.

(1) Center for American Entrepreneurship
(2) US Census Bureau
(3) https://www.bloomberg.com/news/articles/2016-02-23/the-geography-of-venture-capital-in-the-u-s
(4) https://www.cbinsights.com/research/team-blog/venture-capital-diversity-data/
(5) https://www.forbes.com/sites/jackkelly/2020/06/02/cities-will-see-citizens-flee-fearing-continued-riots-and-the-reemergence-of-covid-19/#2f7bcbd7d30d
(6) https://www.statista.com/chart/11443/venture-capital-activity-in-the-us/
(7) https://go.indiegogo.com/blog/2017/03/diversity-matters-always-update.html

The initial capital required to develop a minimum viable product is considerable in the tech sector. Seed funds needed to generate sufficient data to warrant venture seed funding are generally in the million dollar range, a hurdle that prevents many life-saving and life-changing inventions from reaching the market.
~400,000 startups are created yearly (1). About 60,000 of those startups are tech companies. Up to 90% of them die within the first year. Indeed, pre-seed funding typically comes from family and friends and cannot sustain tech startups. Founders have to focus on fundraising and grant applications at the expense of team expansion and project advancement. If we want to have impact, it is crucial to help tech startups that innovate to address the United Nations Sustainable Development Goals in health, food and water, environment, education and social equality, wildlife and more.
More often than not, tech companies that rely on R&D and intellectual property are eligible for non-dilutive government grants. Tech companies also show the highest probability of becoming unicorns. Investing is risky. Yet, tech companies offer the highest potential return on investment, even more so if we consider the double bottom line: financial returns and social impact.

(1) US Census Bureau

Our first lever for impact is to help advance tech companies that address the United Nations Sustainable Development Goals (1). These are seventeen objectives put forward by the United Nations to reduce inequalities worldwide, representing a “blueprint to achieve a better and more sustainable future for all” and must be reached before the year 2030:
1. No poverty
2. Zero Hunger
3. Good Health and Well-Being
4. Quality Education
5. Gender Equality
6. Clean Water and Sanitation
7. Affordable and Clean Energy
8. Decent Work and Economic growth
9. Industry, Innovation and Infrastructure
10. Reduced Inequalities
11. Sustainable Cities and Communities
12. Responsible Consumption and Production
13. Climate Action
14. Life Below Water
15. Life On Land
16. Peace, Justice and Strong Institutions
17. (Global) Partnerships
Ignite Social Impact aims to advance innovation to reach these objectives. Furthermore, selecting US companies with women and minorities in the leadership also addresses goals 5 and 10 within the USA.

(1) https://www.un.org/sustainabledevelopment/sustainable-development-goals/