The crowdfunding platform WeFunder began five years ago with a simple premise: everyone, regardless of their net worth, should be able to invest in small businesses that they believe in. The only problem was, securities laws basically prevented all but the wealthiest individuals from investing in private companies. WeFunder’s three founders were among those that lobbied for change, resulting in the JOBS Act that was signed into law in April 2012. To date, WeFunder, a Y Combinator alum, has helped 110 innovative startups raise $16 million from accredited investors.
Starting on May 16, when Title III of the JOBS Act goes into effect, WeFunder and its peers will finally be able to make good on the vision of allowing anyone to invest. We talked to Mike Norman, WeFunder cofounder and president (above, center), about the company’s Title III crowdfunding ambitions.
Amy Cortese: You recently took a whistle-stop train tour across the country to meet and listen to entrepreneurs. Tell me about that.
Mike Norman: We’ve been out in the Bay Area funding high tech companies waiting for the [Title III] rules to go into place. So we’re kind of in the middle of this tech startup bubble. But the majority of entrepreneurs are not web-tech focused businesses, so it was important for us to get out there, meet folks on the ground, hear people’s issues and challenges and what they’re building in places like Fargo and Chicago and Pittsburgh and Providence, Rhode Island. So we got on Amtrak and basically went across the country for two weeks with the whole team, meeting entrepreneurs and hearing their stories and finding some great companies that we’re going to feature come the 16th.
“We’ll be totally ready to go on May 16th. We’ll probably launch with about 20 to 30 companies.”
AC: Were you surprised by the kinds of companies you came across?
MN: I didn’t know what to expect. We stopped in places like Whitefish, Montana and Fargo, North Dakota. But I think it was telling that we had pretty great turnout at the events we had. There are people everywhere starting businesses that are trying to solve problems and doing things that are important for their communities. It’s just such a different environment for Main Street entrepreneurs to raise funding than it is for high tech startups out here (in the Bay Area) that have access to angel networks and all of these resources for how to go about doing this.
AC: We Funder was one of the original JOBS Act advocates and participants. How does it feel to finally be nearing the realization of mainstream crowdfunding?
MN: It’s been a long time for us waiting for this day. It’s been interesting for us to help relatively wealthy people get into deals that they couldn’t otherwise get into, and maybe there’s a good business there, but you’re not changing the world, you’re not transforming the way people think about their ability to support things that they think are important and the way that businesses across the board can get funded without having to go through some gatekeepers.
So now I think we’re going to help a lot of companies that wouldn’t have been able to get off the ground get started. But equally exciting is what becomes possible when you have hundreds of investors, or maybe a thousand investors, that come in for just a little bit of money, but now they’re out there telling your story, trying to get their friends to try out the product and so forth. We’re building a really solid community around each one of the companies that come on WeFunder and I’m just really excited about that aspect of the business.
AC: So you’re ready to go on May 16?
MN: We’ll be totally ready to go on May 16th. We’ll probably launch with about 20 to 30 companies.
AC: Wow. Really?
MN: This is our complete focus. We helped to write the law and we’re finally able to do it—we’re not leaving anything to chance! We’re going to have an amazing cross section of tech companies, local businesses, real estate developers, consumer products, farms—it will run the gamut.
It’s been an all out sprint. The 16th is coming up fast, so we’ve had to find the companies, help them build out the profiles, build out solutions to all the legal challenges that are going to come up for different types of businesses and challenges that the regulators didn’t think about when they wrote the rules. We’ve had to problem solve at a very high pace while we’re recruiting companies and doing the design and build out of profiles.
AC: Lets talk about some of those challenges. What are the big ones and how are you getting around them?
MN: The big one is obviously the fact that you can’t use an SPV [special purpose vehicle] for Title III, which means that companies will technically have to take these investors on directly. There’s also a challenge with the signature piece, and the fact that if you have more than 500 non-accredited investors and you wind up having more than $25 million in assets, which is a low number, then you’re automatically put on the path to go public. Which is ridiculous. If I’m an ambitious local business that wants to have even a few locations—maybe I’ve got four different restaurants and over $25 million in assets—all of a sudden I’m supposed to go public?
Related: JOBS Act Special Report.
So we put together a few different securities that basically solve some of the more challenging issues for companies that wouldn’t want to deal with lots of small shareholders. At the end of the day, we’re educating [issuers] to say you probably don’t want to take more than 500 unaccredited shareholders because you don’t want to accidentally trip yourself into going public a few years down the line. We’ve got some workarounds. But it’s non-ideal mechanisms that we’re having to put in place to make it happen.
The good thing is there is proposed legislation already in the House to fix some of these issues and we’ve been working very closely with some of the Senators and Congressman to get some of these addressed as soon as possible.
AC: What’s your sense of whether that bill will make through the Senate and will come together?
MN: That’s a black box at this point. I think we’ll get there but the timing is always tough to nail down for any legislative process.
AC: So how are you structuring these workarounds, or is that part of your secret sauce?
MN: It’s pretty secret sauce, but basically we have a security that converts into a class of shares that proxy all of their votes to one person. Instead of having 300 small shareholders that need to individually sign agreements when it becomes necessary, those are all proxied to one individual. So that’s solved.
And then we’ll have to find ways to get around [the issue] for companies that have more than 500 individuals that are interested in investing. It may be that we’re going to have to say, you can take 500 non-accredited people as equity investors, but above and beyond that, non-accredited investors will have to come in as debt investors or lenders—which kind of takes away all the upside potential, but it’s a fix that will work.
AC: But debt is an easier step for many investors…
MN: For a lot of businesses, debt is going to be what makes sense. We have companies that are only doing debt offerings. An equity position in something that may not cash out and is much more complex. But there are a lot of businesses for whom equity does make sense and that’s what they should be using. And for them, there shouldn’t be a cap that says we’re only going to be able to accept investors who invest more than a couple thousand dollars.
WEFUNDER AT A GLANCE
Based: San Francisco
Type: Regulation Crowdfunding (also Reg D)
Offering types: Equity, debt, SAFEs
Fees: Wefunder charges 7.5% of the total fundraise, only if successful. Investors pay a 3.5% service fee for all investments, with a minimum $8 fee.
AC: Now that we have Title III coming online, as well as Reg A, Title II and intrastate crowdfunding, how do you look at this whole new range of options and steer entrepreneurs into one path over the others?
MN: We can support all of the federal exemptions: Reg A+, Reg D and Title III. The intrastate stuff is interesting. Ultimately, we’ll find ways to work with the different intrastate offerings, but I think in the majority of cases it’s going to make sense for entrepreneurs to go with the federal exemptions.
AC: What’s the biggest challenge with Title III, finding the good deals or finding the investors and getting them comfortable with this new way of investing?
MN: For a platform like ours, supply should be the main problem you need to solve. You need to have a process that makes it very easy and intuitive for entrepreneurs to take advantage of [the exemption], otherwise entrepreneurs that have other financing options, whether a bank loan or a regular angel investor, will just do that, because they don’t want to deal with the pain.
Much like the Indiegogo and Kickstarter world, many of these companies will already have their own audience of investors and customers and users that they’re going to bring to the table that are familiar with what they’re doing and willing to invest. So our biggest challenge, and what makes us uniquely suited to be effective in this space, is the great software we’ve built to make a relatively complex process very simple for entrepreneurs. The platform that wins will be the platform that does that most effectively for these businesses.
AC: What’s the ideal company for WeFunder?
MN: The ideal company for us is a company that is doing something that people find important, that people want to support and be a part of, that has a great story around it and also has a business that can be successful.
AC: I’d like to hear more about what you learned on your cross-country train tour. What are the challenges entrepreneurs are facing out there and how are they looking at Title III?
MN: One statistic that the Fed put out is that, even for businesses that are approved for loans, only 50% get the full amount they asked for. And the banks are asking for 120% collateral coverage for the loans they issue. So there’s very clearly a large universe of customers that do get approved for bank loans that still need more capital than they’re able to get. That’s definitely something that we heard.
Marketing is also a challenge for these guys—getting the word out, helping communicate their story, their vision, how good the product is, and so on. The financing is obviously very valuable, but the idea that you’re able to bring in all these investors that can then tell their friends and help you with getting the word out and with marketing is super valuable. Because there’s almost no better experience than when a company gives someone who already loves their product the ability to invest—then you feel like you really bought in, you’re along for the ride with the founder. It was great to see how much that really resonated with folks, from Whitefish all the way to New York and Boston.