Private equity crowdfunding: Is it worth the bother?

frontfundr

Last week, on the recommendation of the CEO of upcoming listing Peekaboo Beans (NOR.V) who raised early financing there, I took a hard look at a private equity funding portal called FrontFundr.

The timing was fortuitous, as I was putting together a piece on investing in local food business opportunities for my Vancouver Is Awesome investing column, and FrontFundr had a raise going down for Persephone Brewing, out of Gibsons BC. It was literally the final hours of the raise, and it would prove to be a good opportunity to sample what private equity investing was like at the pointy end.

Also, I’ve bitched publicly about the lack of craft breweries on the open market, so this was my shot.

With a minimum investment of $250 (far lower than most private equity financings I’ve seen of late), I figured I’d take a run at it. Could I sign up for the site, register myself as an investor, and actually make an investment with a ticking clock at the ready?

I didn’t think I could. I’d seen the InvestX portal’s development up close while working at its sister site Stockhouse and, as many tech pioneers do, it suffered early on from constantly changing regulations, the need to depend on third parties for ID verification, and lawyers needing to verify everything six times.

I couldn’t get signed up for InvestX. It was simply too arduous. And I wasn’t alone.

But I managed to get signed up for FrontFundr this past week.

Admittedly, an element of luck was involved. While rolling through the screens, I had to okay their using credit histories to prove I was who I said I was (hell, what company did I have a credit card for in 2008? Thank god for multiple choice options..), I had to take a photo of my drivers license and trust them enough to upload it to their system, and then had to go through an extensive questionnaire about my investment knowledge, my income, my ability to absorb loss.. and that followed the BCSC barrage of ‘you realize you may lose everything here and that everyone you talk to about it will lie to you and you’ll never be able to sell it and asteroids will wipe out your children’ disclaimers.

But I got through. In about fifteen minutes. Then I had to wait for someone to ‘approve’ me, which is high school all over again.

Once the FrontFundr boffins had gone through my DNA in detail, someone did actually approve me to invest, and that was the easiest part of all. Using Interac by Email, I sent in the cash from my bank account and registered as a new brewery owner.

So that’s the sign-up. Then comes the let down.

I will never, realistically, be able to cash those shares in. I mean, I might if Persephone does great in the crowded beer space and gets bought out by someone, or maybe goes public. But it’s more likely they’ll raise more money next year and my share will shrink and, if I have a crappy month where my rent is overdue, I won’t be able to find someone to take the shares off my hands easily.

This is the problem with private equity crowdsourcing. InvestX just got their hands on some Uber stock, and I’d love to buy in on that, but I may wait five, ten, fifteen years to ever get a return, if at all. In a perfect world, there’d be an exchange of sorts to allow others to bid for my stock.. but that’s called ‘going public’, and it’s a different beast. This is not that.

Now, Persephone may well get smart with this system and not just use it to raise a little dough, but also use it to bring people closer to the brand. If they were to regularly contact investors, invite them to special events, maybe shoot them a sixer once in a while, I could see myself feeling like I was getting value out of what I’ve invested, even if it’s never cashed in. And maybe I’d end up buying a lot of their beer, homering for my team rather than doing my usual ‘whatever Whistler’s got going on in the seasonal tap this month’ routine.

I could see a company fostering that sort of investor base and using that goodwill to add more investors going forward, or increasing my stake as I increase my comfort with them.

But they probably won’t. They’ll probably take the cash, throw folks a coupon, and never talk to us again. Because most companies are run with very short term thinking.

InvestX has had some nice high profile companies on the offer over the last year, but the minimum investment is usually high enough that they’re still clearly focused on getting a handful of investors to buy up the offering, whereas the Perspehone offer was very much aimed at the little guy who just wants to be able to say, “I own a brewery… okay, not the whole thing, but the bottle cap machine, that’s totally mine.”

My thinking is there’s a LOT more of those guys than there are well-to-do grey hairs who’ll put up $40k in an investment that might not return any yield for five years.

To me, the perfect situation for private equity crowdsourcing is closer to Kiva.org than anything I’ve seen to date. Kiva’s a microcredit non-profit that helps people connect to third world entrepreneurs who have no access to credit, but need to borrow $200 to buy a herd of sheep, or $500 to fix their taxi, or $60 to buy a sewing machine. It works because of its variety, and the low entry cost, and the social aspect of it all – and because you hear back from those borrowers about how the cash changed their life. I doled out a LOT of loans to Kiva folks back in the day.

I want to be able to put $500 into the portal, and dole out $50 or $200 or the whole wack on one of many small offerings for businesses that may never get to the NYSE. The dry cleaner down the road who needs $10k to expand, or the inventor in his garage who has the next great shoelace, or a board game company that has hit a viral nerve with millennials and will give me a copy of their latest game AND share certificates if I send them $100.

All too often, regulators and funding portals think in old school ways, that to do business with ten rich guys is a far easier road to success than dealing hundreds for pennies a piece. I think the wealthy guys ares the end of a long tail, and that there are millions of people who want to be involved, even if just for a little bit, even if they’re not going to make a fortune off that bit. To me, that’s the undelivered promise of private equity crowdfunding. And what made Kickstarter and Kiva such an important base to work from.

For now, I’ll keep a side eye on the private equity offerings around town while the portals continue to fine tune and figure out what’s allowed. But they won’t be usurping the public markets any time soon.

— Chris Parry

 

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