In a world where the IPO has become a painstaking exercise that companies avoid like the plague, one begins to ask themselves whether or not the capital markets are still working for all people. Believe me when I say the deeper you dig the quicker you will realize that the balance of powers in the world of investing are no longer in equilibrium.
Over time, VCs and PE firms have grown at an astounding clip, pumping vast quantities of capital into private companies while capturing the type of growth most would salivate for in the public markets. As the rich have become richer, the everyday people have been left with fewer public options that offer any alpha. That is where equity crowdfunding and firms like Netcapital come into play.
Thanks to the ingenuity of teams like Netcapital and regulatory adaptations, we are now living in a world where we can all gain access to high growth startup investments with low minimums so we can all share in the upside of the private capital markets. Put simply, Netcapital is rebalancing the equation and giving us all an opportunity to build strong investment return profiles. Check out my discussion with Jason Frishman, Founder & CEO of Netcapital below as we chat about a new age of investing.
CL: Jason, despite there only being a handful of equity crowdfunding portals out there, you are the second founder with a Neuroscience background in the space with the other being Ken Nguyen of Republic. Though anecdotal, do you have any thoughts as to why that may be?
JF: I do not know him personally, but in many ways it doesn’t surprise me that he and I are from Neuroscience backgrounds. We are coming into this investment world from a unique angle, which allows us to think about problems differently. If you look at what Title III and the JOBS Act are and what Netcapital is doing, we are taking a space that has orchestrated itself in the same way for decades and decades, and completely rethinking the model of how the capital markets work with early stage private stock.
CL: For those that don’t know, how do you define Netcapital, as a business?
JF: Netcapital is a website that lets anyone buy and sell stock in private companies and startups.
CL: Can you talk about your journey from being an undergrad Neuroscience Major to founder of an equity crowdfunding portal?
JF: My journey into the startup world started at Dana Farber Cancer Institute where I was assisting with medical oncology research, here in Boston. During that time, I became very disillusioned with the process of scientific research, and the way that the work I was doing on the bench would ever affect any real people who needed help. A friend of mine eventually convinced me to join his startup and somehow it became my job to raise money. Coming from the world of scientific experiments, I was immediately shocked at how chaotic the capital raising process was.
I was also dumbfounded by the inefficient structure of angel investing that I felt prevented the building of well structured, diversified portfolios. After we raised our seed round I decided that I could bring a better way to market for startups and investors to connect, so I founded Netcapital.
CL: What are some of the inefficiencies and misalignments you saw in the world of venture capital that you felt needed to be fixed?
JF: What I saw was the inefficiency of the way investors build diversified portfolios in this asset class. This asset class is treated astronomically differently than every other asset in the capital markets. It’s totally outside of every structure. It’s just a dog and pony show with investors throwing around massive checks, with very limited structure.
When we would close an investor for our startup, it was great for a moment, but then the questions started flooding - did we really earn that? Was that the right decision for the investor? Did he evaluate the hundreds of deals that would want him as an investor and choose the best one? Did he diversify his portfolio properly, or did he just write a $50K to $150K check because he could, and because two young white males from Cambridge Mass networked into his office with other recognizable investors names on our deck and checked all the stereotypical boxes?
These questions plagued me and I felt compelled to believe that this wasn’t the best approach. Netcapital and the JOBS Act are built to serve the entrepreneur, that is true but it just as importantly serves the investor.
CL: If there is a pushback I hear from entrepreneurs about why they wouldn’t go the equity crowdfunding route is because they feel there are more cost and frictions involved with the process. How would you counter that notion?
JF: It’s certainly the opposite, though I empathize with this sentiment from entrepreneurs. I mean, I've raised money from VCs, angels, strategics and angel groups, so I understand. At Netcapital, what we’ve done is, we’ve taken all of those pain points, frictions, drudgery, and paperwork involved with an equity raise and we've put it on us, and our technology.
What remains on you, still, is you need to be able to create excitement for your own business. Nobody can pitch your business better than you. If you're the founder of Company X, you get Company X better than me. You get Company X better than anybody on my team. If you're expecting us to go and sell your business, it might not be a good fit. You need to create excitement.
You need to have an offering page that’s compelling. You need to convert those eyeballs into activity. Everything else, we like to put that on us. We like to free up the entrepreneur from all of those burdens with our TurboTax-like product, that has four intuitive modules.
This system manages everything once you input basic information such as the legal formation of your business, your cap table and securities you have authorized and issued, your financial statements, your business plan, your offering page materials and your fundraising plan.
With all that data we auto-generate all of the statements that need to be filed with the SEC. We basically take that process, which could cost you, probably, $20 to $25K for a lawyer to do it, and we do it all for free. There's no upfront costs for any of it, so I think the entrepreneurs who reference this cost may have been looking at a different platform.
CL: Are there any other benefits for an entrepreneur that come from working with Netcapital on a raise?
JF: When you raise money from the traditional, archaic channels you tend to do things as they come up. Whereas, when you’re on Netcapital, you have to have all the administrative work prepared initially, which is a better way of doing business. Prepping your pro-formas ahead of a capital raise and prepping a pitch deck are really important things to do. If you aren’t doing those things upfront you shouldn’t be raising, but a lot of people take that approach because they they have a million other things to do.
Even if you end up not going on Netcapital if you utilize our platform, you will be prepared when you go and talk to a VC or an Angel Investor, because we will have supported you completing those tasks with our tools. And that, for many, takes a huge weight off of having to figure all that out on your own when its already too late, and then you’re left scrambling. We try to make it seamless for the entrepreneur.
CL: One of the other issues, on the other side of the table, that I hear from investors is that platforms like Netcapital can’t offer premier startups. I would tend to disagree, but what’s your response?
JF: The adverse selection problem is a question I have answered more times than I can count, and I don’t believe this notion at all. Just looking at our currently live offerings, Home61 which you tweeted about is a nice example.
It’s a company backed by premier funds such FoundersFund and FJ Labs. That types of social proof are important driving factors in decision making for investors. We like to work with companies that have been vetted by funds or accelerators we know and trust.
But, even if you don’t have FJ Labs or FoundersFund as backers, you can still generate that social proof in different ways, be it with testimonials, or by locating affinity networks that you think your message, and value proposition will resonate with.
For instance, Core Innovations, which was a big success on our platform were able identify with truck drivers in a way that made them feel their product could solve all their problems.
However, the real answer to this question was that we partnered with Techstars, which is the leading global accelerator. They have over 30 programs internationally, with 20,000 businesses applying yearly, with only 300 selected. These companies are the best of the best. Techstars has invested in Netcapital. The CEO of Techstars is on our board.
We are just in the infancy of our relationship but we already have a few TechStars businesses that are listed on Netcapital. Stay tuned, throughout the rest of 2018, to see what Netcapital and Techstars do together, but we're really excited about that. So if you believe you can’t get access to the best startups through a platform like Netcapital, think again!
CL: Outside of Techstars, what other strategies are you implementing to build strong deal flow?
JF: TechStars is a big one. We have other partnerships as well, with organizations like BDC Capital. They’re more like a bank. The companies that BDC Capital works with are more main street companies, as opposed to tech companies. That’s also just kicking off, and they are also investors in us.
The other way that we get deals is through our network. We have a wide network of investors and advisors, ranging from the folks that I mentioned earlier to individuals such as the former President of Fidelity, the former Chairman of Verizon, the founder of DraftKings, etc. The referrals on our end just keep coming.
CL: How do you differentiate from other platforms such as Republic, SeedInvest, StartEngine, and WeFunder?
JF: At this point, there's so much white space, and opportunity. I actually think of all of us as on the same team. It might sound funny to say, but imagine our space is the NBA. We're the Celtics, and StartEngine is the Lakers, and Republic is the Blazers. In the end, not that many people are even watching the NBA yet, so we're all on the same team. We're trying to make this the sport everyone watches.
Once this is the sport, and everyone is covering it, and everybody is talking about it, and every company is raising money in this way, then I think it becomes important to know who's winning individual games between the Celtics and the Rockets.
At the moment, I really view all of us on the same team. If there is a huge deal on another platform , I view that as a win for the space. I hope that they would view it that same way where there is a big deal on Netcapital. We need to start returning capital to investors and making this the way of the future.
CL: For people considering investing in startups via Netcapital or other equity crowdfunding platforms, what advice would you provide upfront?
JF: You should invest, but don’t invest more than 5% of your investment portfolio into alternatives, as a whole. And Netcapital should only be a portion of that 5%. I always stress that you need to diversify your portfolio. So if your 5% is $3,000, that doesn't mean put $3,000 in one deal. You should put $300 in 10 deals. Be smart, but getting exposure to this asset class could have a positive impact on overall investment growth over time.
Jason and the Netcapital team are an example of how we can reshape our financial markets to reflect an age where technology is creating affordable and efficient access for all people to partake in the types of opportunities previously reserved for the wealthiest 1%.
Netcapital, is bringing a human approach to investing in the world of private investments by wrapping technology around all of the points of friction that used to exist. With friction reduced, investors can gain access to an asset class they never could be a part of before, and entrepreneurs can access investors and brand ambassadors in a way they could have never imagined even 5 years ago,.
Equity crowdfunding is the future of raising capital in the private markets and it’s here to stay. Thank you Jason and the entire team for investing in truly Simple.Innovative.Change