Last week we had the opportunity to interview David Drake, one of the foremost thought leaders on crowdfunding here in America and an instrumental advocate of the JOBS act. We asked him where crowdfunding for equity in America stands today, who stands to benefit most and what perils we should all be aware of moving forward.
Crowdfund Insider: You’ve been involved in crowdfunding for quite a while now and were instrumental in the creation of some extremely influential groups. What brought you in?
David Drake: LDJ Capital invested in a conference series called The Soho Loft early summer 2011 (from the name of the Loft I had entertained to clients and customers in Soho for the first 10 years of the 21st century). We were hoping to invite our family office clients and limited partners. The Private Company Marketplace focus with Facebook transactions, broker dealers and institutional investors did not match well with the focused events family offices and LPs sought. We quickly adjusted and before I knew it 6 sub-congressional witnesses and today friends spoke 1-3 times per month for us on the 6 bills underlying the JOBS Act. Suddenly I am lobbying congress and the bills pass. The entrepreneurial spirit came together as I created the first crowd funding panels during our events and I got to meet all the crowd funding leaders nationwide. There was no other conference bringing together all the crowd fund platforms monthly in 2011. We were it globally.
CFI: Tell us a bit about The Soho Loft. What is your mission?
DD: We foremost focus on education through media and conferences. The Soho Loft Capital Creation Events (“TSL”) strives to promote and advance strategic and diligent crowd-fund investing for start-up entrepreneurs and SMEs. This will allow them to optimize all their opportunities to grow their business. It will also let them market their products and services, which will create more jobs for others in their communities. These all create a new path to economic prosperity for the local and global communities. Secondary we offer Corporate Strategies to leading corporations entering the JOBS Act / crowd funding world.
Tearing down is easy and a sign of nervousness about territorial hegemony. Nobody wants the ‘crowd’ to challenge your position. Venture Capital is broken.
CFI: Some prominent VCs have denounced the equity crowdfunding movement as fraught with peril and prone to fraudsters. What would you say to them and to potential investors?
DD: Tearing down is easy and a sign of nervousness about territorial hegemony. Nobody wants the ‘crowd’ to challenge your position. Venture Capital is broken. They have under performed all other investments the last 10 years. As far as investors, crowd funding is an emotional decision. Look at the European firms where crowd funding for equity is allowed (not yet legal in the US). They confirm the investors want to live vicariously through the entrepreneurs and it is not about a return. It is about reliving or just living experiences they had or never had through the excitement of a start up team. As investors, we get that.
CFI: Which sector do you predict will be the biggest beneficiary of this nascent movement for funding. Tech startups? SMBs? Other?
DD: I want the OTC and their pink sheets to be the biggest beneficiaries. OTC CEO Cromwell Coulson has 6700 firms in the pink sheets – not reporting fully to the SEC and I see these firms to garner a flinch of hope to new distributions, new financing (presales) and with equity fulfilling non-consumer product offerings. Imagine if you can spend $100 on getting 1 stock on a private leukemia firm that may take 10 years to go through FDA approval. You still would want to get involved if this is an emotional investment. Back to OTC firms, I think they are the one’s to benefit.
CFI: What can the US crowdfunding market learn from experiences overseas?
DD: As mentioned before, investors often are accredited although they don’t need to be, and they enjoy online voting on decisions executives need – they love the vicarious involvement of a company and being part of the energy and growth / challenges. There is a loyalty you are building through crowd funding for equity abroad. There are really only 4 foreign crowd funding for equity of interest abroad. We can tell you when you reach out to us directly.
Crowd funding for equity won’t be legal to be used till summer 2013 at the earliest.
CFI: Do you feel the regulators have sufficient time to meet the January 1st deadline?
DD: Yes and no. Looking at the proposal 8/29 by SEC on Reg 506 removal of the non solicitation ban – not relevant to crowd funding per se – Commissioner Gallagher and others complained that it should have been a ruling and not a proposal that delays ruling another 3 months and also that the ruling should have been done on time July 4, 2012. Yet again, in 1964 when the 500 rule was established (max 500 investors for private companies and if more you would have to have less than $10 million in assets as to not have to file with the SEC) had 3 years of research and studies done. Yet again, the SEC is several thousand employees larger. They won’t make the deadline and we knew that from the get go. Remember, the only SRO (a second one, CFIRA, was one that we tried to create) is FINRA and they have to do their proposal and ruling after SEC is done. Crowd funding for equity won’t be legal to be used till summer 2013 at the earliest.
CFI: Where do you see crowdfunding for equity in 5 years?
DD: Crowd funding for equity will be a $20 billion market and if Europe can get their marketing and education to the masses going then we should see it at $30 billion. The real money will be in the service sector.
When corporate america embraces this and looks at outsourcing research and developments as well as test groups and testing then we can see this being a $300 billion market just like Fred Wilson predicted. I just think it will continue grow to a $1 trillion market.
CFI: What about other forms of crowdfunding like the rewards-based model or debt crowdfunding?
DD: Reward is the fastest growing aspect of crowd funding today. When corporate america embraces this and looks at outsourcing research and developments as well as test groups and testing then we can see this being a $300 billion market just like Fred Wilson predicted. I just think it will continue grow to a $1 trillion market. You are empowering the crowd and the individual. Branding is moving towards the individual and crowd funding amasses the individuals choice prior to production of products and guessing of colors, sizes, and offerings. It is an inevitability that everyone will pursue this direction of marketing, financing, manufacturing and production guiding from crowd funding.
CFI: There is a rush to create portals and it involves some prominent players. Do you see rapid consolidation to follow? Will portals remain general or will they be niche-focused?
DD: We saw at year beginning that 25% of portals realized that money is not made on the portals and started offering white label and private label services of their technology. I don’t see consolidation to occur until Q4 2013 at the earliest – we have a watch list and M&A division focused on this specifically – acquisitions and mergers and we have requests. We fortunately get a tremendous amount of information from the industry and access which allows us to find the right deals. The portals will continue to grow as niche-oriented portals as the competition is reduced.
CFI: Finally, what do you see being the biggest risk for portals? What should they be paying close attention to?
DD: The biggest challenge for portals is not fraud but the fraught of fraud. The industry has to implement smarter and better accelerator programs which is something we have spent a year developing. 25% of the crowd funding projects funded have yet to deliver a product and this will hurt the industry the most. Investors and donators will scream fraud and we are seeing this already. Expectations are too high right now. 80% of restaurants in this country fail within 6 months of operation. That is a huge default rate but the norm. In crowd funding the norm will be failure and an absolute failure. We need to educate on this expectation while creating accelerator programs so experience, previous exits and management is enhanced in operations of these startups by supporting angel groups, advisers and programs available to firms. Right now portals wants hands off to limit liability yet again the failure of a company will come to bite you. Pebbles watches had a $10.9M raise on Kickstarter. They will have numerous delivery challenges as a first time manufacturer and Kickstarter will tarnish their brand just if one firm like Pebbles fail to deliver in an reasonable period of time or fail to communicate to the 69,000 donators. That is a poison ‘word-of-mouth’ the whole industry faces. So, the accelerator online programs we have developed is working towards risk analysis and risk assessment.
You should be paying attention to entrepreneur credit score solutions on competence, experience, previous exits, management.
David Drake is the founder of The Soho Loft Capital Creation Event Series (“TSL”) which promotes and facilitates capital formation for the Private Company Marketplace (PCM). Mr. Drake is also the Chairman of LDJ Capital in New York City and a thought leader on the JOBS Act (Jumpstart Our Business Start-Ups Act) including, but not limited to, Reg A+, Reg D 506, Crowd Funding Capital and Onramp IPO. He is a founding executive board member of both the Crowdfund Intermediary Regulatory Advocates (CFIRA) and the leading crowdfunding global trade network, the Crowdfunding Professional Association (CfPA). He was chosen to represent the U.S. Commerce department as a JOBS Act expert delegate at the July 10 2012 meeting in Brussels and July 12-13 2012 in Rome for the US and European Transatlantic Economic Council (TEC) forum led by Ambassador Miriam Sapiro, Deputy US Trade Representative, with European Ministers and legislators.