In 2012 the world of investing became a whole lot more interesting when the JOBS Act was passed, which finally opened up startup investing to everyday Americans.
There is a reason why wealthy Americans often invest in the startup scene. It’s because the returns can often outpace those of the stock market when made wisely. Now in 2017, we are beginning to see the first class of equity crowdfunding platforms serve all Americans, which makes for a truly powerful alternative investment.
That’s where equity crowdfunding platforms like RedCrow come into play. RedCrow is out to provide access to healthcare related startup investments. Think of it as an opportunity to do well by investing in early stage healthcare companies that can help change the world for the better. To be clear this is no donation. You are investing in the future of Fintech and are a part owner in a potentially game changing company.The more these companies succeed, the more you succeed too. It’s no surprise that the team is as unique as the investment platform they are building. From ex-banker and passionate healthcare advocate Brian Smith to Rock and Roll Hall of Famer and entrepreneur extraordinaire, Jerry Harrison, the founding team is out to drive meaningful change in the world of investing. Check out our discussion below.
CL: It is such a privilege to speak with both of you today. Between the both of you, I think you are forming a formidable team at RedCrow. Can you guys talk a bit about your background leading up to your founding of RedCrow?
Brian: Sure to give you a little background I was working at Morgan Stanley as a financial adviser in Boston when my wife and I had a personal experience when we were expecting our first child in 2003. The baby was born suddenly late in my wife’s pregnancy and needed significant care to survive as a premature baby. Since it happened so suddenly the doctors couldn’t administer the life saving steroids needed, so the baby didn’t survive.
From there I became very involved with the March of Dimes and other organizations especially in Boston focused on making labor and delivery safer. Several doctors became my best clients at Morgan Stanley. One doctor at Tufts Medical told me about a project his colleague was working on. It was a fetal monitor device that went above and beyond to track the mother and baby’s heart rate. I became intrigued by the technology they were working on.
I thought I could help them raise money to make prototypes and get submitted to the FDA. At that time VCs and investment banks weren’t talking to them because the product was too early stage. I thought I have a lot of individuals that would love to invest, however since I worked for a large broker dealer they didn’t want me advising anything that wasn’t from them. So I decided to leave Morgan Stanley and pursue something I was truly passionate about and wanted to do. This was something where I felt I could help the world, which I struggled to feel when I was working at Morgan Stanley in my business development and advisory role.
I helped onboard strategic investors at Mindchild, which with the funding was able to progress and recently achieved FDA approval. It is really a great product and now that they have FDA approval, they are talking to investment banks about next steps and potential acquisition.
Jerry and I hit it off. Beyond being a very successful musician, he is also quite the entrepreneur on both the founding and investing side. He has worked in the field with VCs and investment banks. He has taught me a lot about those early years for a business so I knew he would be a great partner.
Jerry: I have a varied background as an investor and entrepreneur. To speak specifically to the healthcare element of RedCrow, my knowledge of healthcare comes from having been involved with a local physician. He and I basically created a company that is the universal antidote to snake bites, which is the unknown scourge of the world. Snake bites kill more people than all other neglected tropical diseases combined and yet there is no funding going into it.
The physician I was working with had the idea arise from his work in field medicine for The California Academy of Medicine and because of a personal experience during one of his excursions when an individual died on the expedition because of a snake bite. So when Brian approached me about RedCrow, I was familiar with all these processes and thinking about how to market and build out an early stage healthcare company and thought this would be an exciting opportunity to open up investing to the people.
CL: I have been a huge believer in equity crowdfunding since the 2012 JOBS Act ensured that we would one day see platforms like yours arise. Can you guys tell us a bit more about RedCrow and why now is the right time for an investment platform like this?
Brian: Like you Chris, I was watching the Jobs Act in 2012 and seeing how sites like Indiegogo could have success with donation based investments. I was thinking to myself, imagine if some of them were selling equity instead and everyone in the country had access to these deals. In my mind this would be a game changer. Jerry was the first guy I went to and once he seemed interested I said we are doing this as partners.
Jerry: That’s right. One of the things that intrigued me about what Brian was saying was that when he showed me the other crowdfunding sites, the first thing that came to mind was the Yellow Pages. I started asking, how do I know if this is a good company with such little information?
By combining both traditional investors who have the means to investigate further and our own advisors, we can provide a better understanding of is this a viable product, is there a market for this product, how much competition is there, how strong and experienced is the founding team, etc.? On many other sites people pay their money and that’s it. Some of these other sites felt a bit like they never even met the founding teams.
We thought we could provide these basic things that a VC would do to vet a company. We can’t necessarily go to the point that we put someone on the Board of Directors at each company but we can do a lot more than many other equity crowdfunding platforms. We can make a more careful decision about companies.
In doing that we feel, we are more likely to raise the money the startups need because investors will have more confidence that they are making a strong investment.
CL: Obviously equity crowdfunding is very new and we are all still trying to figure out how it works. What are some of the challenges you face as one of the handful of true pioneers in the space?
Brian: The challenge at RedCrow is that we have taken on more than other competitors because we don’t just connect companies and investors. We have gone a step further by establishing the broker-dealer relation so investors can come onto the RedCrow portal and make an investment with just a couple clicks. This action automatically triggers a background check, an escrow account for the invested funds, and sets in motion all regulatory checks.
These automated processes are what make us a Fintech company rather than a marketing portal. We are taking every step to be in compliance with FINRA and the SEC. That’s why we started with Title II, because we wanted to get our footing with the broker-dealer formation before Title III and we are now working with FINRA to have approval set for 2017 to enable all investors, not just accredited to be able to invest on the portal.
It’s really our passion to have this set up where we protect both investors and the startups raising money from investors. We are creating a portal that is focused on building strong relationships and doing right by all parties with quality deals and trusted diligence. One of the statistics you will read out there is that many of the current crowdfunding portals that are just connecting people and taking pledges see 90% of those investments fall through. That is the last thing we want for our investors and startups.
CL: There are other platforms out there like WeFunder, StartEngine and SeedInvest, none of which have decided to focus in on a vertical. Why focus on only healthcare related companies?
Jerry: Investing in only healthcare provides a few benefits. One, we felt healthcare innately provides positive social impact, which is key to connecting with the new generations of millennial investors that want their investments to have as much social impact as the money they give to charity. We also don’t have to market to the entire internet, which is what you have to do if you have startups across multiple sectors.
So we came up with the idea of invest in what you know. To us this means if you are a new investor that works in the operating room and you are aware of a certain problem, invest in a company that you see is solving that problem.
For instance, we have a company called MiRTLE Medical that allows sick patients that are under constant cardiac monitoring to get an MRI that is currently impossible. This could be a game changer and a lifesaving invention. We think people working in MRI facilities are the perfect group to market to. They are running into this issue every day and they understand the potential impact of an invention like this. They don’t even need to ask a broker if it’s a good company to invest in because they know what an invention like this can mean.
Brian: One of the other reasons we chose to focus in on this vertical is that we have amazing advisors in place as well. One of our advisors “Dr. Stephen Shaya”, grew up in healthcare since his family owns J&B Medical. This is the largest private medical supplier distributor in the country and they have their finger on the pulse of the industry. We are fully confident our advisory team is out there asking the right questions, kicking around the tires on different companies and ideas. Those are the type of people we want in our first vertical and we want the same type when entering other verticals.
CL: Are there any concerns you have seen from startups in raising funds from an equity platform. One anecdote I have heard is that founders worry about how much information that have to disclose when raising a Title II or III raise. What has your experience been?
Brian: I think one of the great parts about equity crowdfunding is the transparency. I am all for that. Startups need to know that they aren’t disclosing anything that competitors can take away.
What it comes down to is whether or not you are ready and have the right documents to disclose to investors. For us, whether you are on the discover side or on the invest side, you have to disclose the required documents, but we really haven’t had any pushback. That’s the world of dealing with private and institutional investors. You have to disclose certain items.
In fact there was an article out there written a while ago that talked about how equity crowdfunding is one of the most transparent investments you can make out there today and that’s saying something.
Jerry: When Title II and III became legal, FINRA expressed concern that things wouldn’t be transparent enough. The real concern should be with large PE companies that thrive on little to no transparency. The Internet by its nature creates transparency.
CL: What does the current sourcing and vetting process look like for firms seeking to raise capital on your platform?
Jerry: The first step is to just perform a quick gut reaction amongst the team at RedCrow. If we are intrigued by the investment, we then reach out to our advisors that are likely to have knowledge on the space and have them review all company materials and perform interviews with the founders of the company to build up a comprehensive viewpoint of whether or not they think the company can succeed.
For instance, we have a company on the platform called Stretch Technologies. It is a family database and communication platform for healthcare records, financial records and appointments information amongst family members. What makes Stretch unique and even life saving is because HIPPA requirements create a lot of privacy rules that can impede hospitals or doctors getting access to a patient’s health care records if the patient is incapacitated and can’t sign for a release. Families that have centralized records on the Stretch Platform can provide the doctors and hospitals the needed information immediately. Stretch is a powerful tool to help families communicate and manage highly sensitive files amongst one another. So it fulfills the requirement of being really innovative.
Our advisors also felt the founder of Stretch Technologies, Darren is well equipped to succeed in building such a risky business due to the need for high compliance and security measures. Darren has extensive past experience in building databases for major companies like Walt Disney and other startups, which had to withstand hundreds of thousands of users and the threat of major security attacks or complications. Our advisors could see that he is well equipped to succeed and not just someone building his or her first app.
Brian: You take what Jerry is saying about vetting these companies and then the real challenge is how do you take that and package it online to present it to the world of investors in a way that makes you feel comfortable. We need to make an impression.
Part of that is getting that story right. Right now the video is king. It’s like a modern day prospectus. It has to tell you about the meat and potatoes of what the investment is, but it also needs to be an emotional video. In healthcare it’s about making an impact. We want to convey here is why you are investing to make the world a better place. The early feedback we have received is excellent and the companies themselves are pleased. We are happy to say that all of our companies in the first four weeks have raised over $100K.
CL: That is fantastic to hear. So what does your current investor base look like?
Brian: It’s a handful of people to date, largely driven by only being registered in eight states currently to accredited investors. However, as of January, we will be registered in all 50 states making it that much easier.
We have also realized that accredited investors that are looking to put in larger dollar figures want to talk to the companies and we encourage that. All the companies that put themselves up on the platform need to know how to run an effective crowdfunding campaign regardless of how good the produce is.
It’s about sharing great articles, and links, and telling a great story. Our companies get that and even if they don’t, by the time they go through discovery and end up on our investor portal they will and all three of our companies right now get it and are sharing it.
CL: One of the techniques that I have seen utilized to prevent feeling the pressure to expand the quantity of deals on an equity platform is to not only charge fees on funds raised but to also have carried interest in the firm. How is RedCrow approaching monetization?
Brian: That will evolve over time, because of broker dealer relations we are able to participate in a fee for success. Part of this is that we come from a world where every dollar counts. Over the years, there would be a finder fee of 30K to go find investments because investors can’t or don’t want to participate if the company doesn’t succeed. We feel it makes more sense to make the investment, share in revenue and have a small onboarding fee to get on the discover page. Early 2017, the entire community of accredited and non-accredited investors can add comments and make pledges. It is $500 to get on there and based on feedback, they can get on the invest page, that with a fee covers escrow agents, video and marketing etc.
CL: As we think about the future of equity crowdfunding how do we approach this very powerful tool responsibly? How do you inform investors without inundating them with information they don’t understand?
Brian: We provide plenty of informational materials, and require your acknowledgment along the way that you are aware of the risks of this type of alternative investment. You cannot educate investors enough in this field. Even with accredited investors, someone with five million dollars in the bank that has only mutual funds and ETFs that has never done startups needs to understand what this high risk investment is.
This is not a liquid investment and there are no guarantees of dividends or success. That’s what makes it more powerful. It’s everyone’s job to educate investors regardless of non-accredited or accredited status. From design to our tech-enabled approach, to going to the street and working the field, we ingrain education and awareness into everything.
We are always working to go above and beyond the necessary compliance and regulation piece. The other important piece of this is we have several team members with extensive financial backgrounds that helps with the Fintech piece of RedCrow. We see a lot of companies putting in the tech before the finance and are more Techfin than Fintech. And that can be dangerous especially when it comes to regulation.
You have to realize that the millennial generation is going to see $30 trillion transferred from the baby boomers. If we want those dollars flowing to this space we need to earn millennials trust. Once you have it, you will have it and we recognize that we don’t need to be all things to all people. Instead, we need to focus on the quality of people registering on RedCrow and serve them well.
Jerry: Our whole approach is about quality rather than quantity. Other people are taking the quantity shotgun approach but we don’t think that is fundamentally correct.
Everyone has heard about how much money people made in Facebook or Google or Airbnb or Uber, but if you haven’t been around that world you don’t know how many have lost money. Even seasoned VCs success rates aren’t that high. So we are focused on doing a better job of providing a deeper look at the startups for potential investors so that they know what they are investing in.
CL: So you are an equity crowdfunding platform, as you try and build this business are you yourself looking for investment from VCs? And if so, would you consider raising funds from your very own platform?
Jerry: I have been against putting ourselves on our own platform, it seems like it could create a conflict of interest. You don’t want to be steering people to invest in your company instead of other investments on the platform. It feels like it can create as many problems as it may solve for us.
Brian: You know you are the first person to ask that question. It’s a bit of a Catch-22. Here is why. For everything Jerry just said I agree with him and we really are here for our companies and investors and we are focused on our companies. On the flip side it’s about providing opportunities for our investors. If we think RedCrow will be really successful and we don’t offer an opportunity to the crowd they may say hey they didn’t let us invest in them.
We may say if the timing is right if you want in on RedCrow we will do that. We don’t want them to feel excluded from the investment. We just have to find the right time to make that happen.
Jerry: That is a fair point. I would say, if we see in three years that we have an opportunity for RedCrow to expand to something new and different we wouldn’t want to entirely fund growth from revenue because that puts pressure on how good a job we can do with our current business model. At that time I can see opening up RedCrow to our portal for investment because people will have already had success with the site and we don’t want to be too exclusive about who can invest in us, but at the beginning of this journey it feels like it can muddy the message.
CL: The VC model, at least the one individuals like Peter Theil would say is to throw money at many companies and hope one or two are outstandingly successful. With a more democratized approach is it more about the small wins, or is every investment on the platform supposed to have home run capability?
Jerry: It would be nice if everything had home run capability. Having raised money from VCs I have had the experience of people saying I know a good company. Money is not a problem to fund 10 or 20 times as many companies as we do, but we can’t because we put a partner in each company. In this case the limiting factor is time. Therefore, we are only looking for home runs.
Since we are going to have a broader and larger portfolio of companies than VCs, single, double and triples are just fine for us and a few home runs would be nice. But we are not looking for all or nothing. The VC world is very much all or nothing.
Often times you will see VCs stop a company from accepting an acquisition that the founders would be very happy with. The founders may be happy with a 10X return and feel that it’s a strategically good partnership. However, the VC investor may tell the company to hold because they think it can be a 100X company and we want to go for it. Then suddenly the economy changes or something happens and that window closes and the company goes for 3X.
We are not in the business of making those decisions for our founders. Making doubles or triples shows we developed successful companies and did what was right for the companies. And we still are providing companies that are making quite a bit more than investing your dollars in the stock market that may go up just a few percents.
The Minute Rundown with Co-Founders Brian Smith and Jerry Harrison of RedCrow
CL: If you could provide one tip to someone considering starting up what would it be and why?
Brian: The word of advice I have is more of a mental piece of advice. I would say do as the Vikings did. They burned all their ships in battle, their only way home to win. Investors want to see that you are all in and that it’s not a hobby. They want to see that you made sacrifices to do this and are mentally committed to have success. They don’t want to see that you have one foot in and one foot out. They want to see that through the good, bad and ugly you have the mental focus and drive every day to get up and keep going.
That’s how I look at it especially for us because we don’t have a lot of financials to look at so we are looking at the leadership team. The team says a lot and is a big part of our review of the company. We only want to work with hardworking, driven entrepreneurs that are all in.
Jerry: The biggest piece of advice I would give to someone considering starting up is don’t run out of money and don’t waste it. Really take the time before getting things like a bigger office. Find ways to be a lean startup, particularly in medicine. And when you are raising money, raise more than you need.
Raising money can be so time consuming and distracting from building a company. If you think you will need a million dollars shoot for one and a half million, that way you won’t have to come back to that process and can instead focus on building your business.
CL: What is your favorite part about working in San Francisco?
Jerry: One thing I tell my kids about why I like San Francisco is I found on the East Coast where I lived in New York and Boston for 20 and 10 years respectively, that there are an awful lot of people that make money through financial manipulation often at the sacrifice of workers, and towns.
Most people that come to San Francisco think they can get rich by coming up with an idea that solves a real problem and builds something new. Think about Polaroid that started here. When they started here many years ago they came up with a completely new idea of photography entirely and became a hugely successful company as a result. That is something that I am morally more at peace with.
CL: Since RedCrow is about social impact what other causes do you care about outside of healthcare?
Jerry: I care quite a bit about sustainable agriculture and about climate mitigation and climate change. I think that it is a moving disaster and there is inadequate regulation in the US. If you look at the difference between what the FDA looks at as safe in a new drug and what’s considered safe in agriculture products it is terrifying.
The concentration of power in food product companies is also worrisome. Companies like Cargill are putting products in the food that are getting in our bloodstream and causing epigenetic changes in people that are connected to systemic diseases and issues like ADD. I’ve been actively involved with funding research in London around these issues and it’s a cause I care deeply about.
From the day I learned about the 2012 Jobs Act I have anxiously awaited the arrival of equity crowdfunding platforms. Reason being, most of the world’s most wealthy individuals, largest sovereign wealth funds, and biggest pension funds back billions of dollars into venture capital firms every year.
Reason being, the returns are fantastic and the mission equally so. Building the future of the American economy starts with seed stage investments that get companies off the ground. Now we all have the opportunity to partake in this powerful investment vehicle.
Having passionate individuals with an immensely positive, but realistic view on the future of startup investing at the helm of a firm focused on revolutionizing healthcare startup funding is truly invigorating to watch. Opportunities like speaking with Brian and Jerry is why I love running this blog, because when you get off the phone with them you leave with more hope and more excitement about life. They have a great energy about them and it is carried in both their mission and their drive to build an amazing company.
Thank you Brian and Jerry and I look forward to what comes next in equity crowdfunding.
Be sure to check out RedCrow and learn more here.