In The Crowdfunding Gold Rush, This Company Has A Rare Edge

Crowdfunding Broker-Dealer

“Here’s where MicroVentures has an edge: It’s the only player with a broker-dealer license.”

Playing armchair venture capitalist has never been easier. For investors registered with Microventures, an eight-person crowdfunding outfit based in San Francisco, opportunities to invest in young tech startups arrive via e-mail. A link takes you to an eight-page summary of each company, laying out management bios, market size, competition and financials. You can also sign up for a webinar with the startup’s CEO. Or call up a MicroVentures broker who can speak for the company and relay questions to the founders. If you’re ready to commit, type in the amount you want to invest–usual minimum: $5,000–and click. The money sits in escrow until the deal closes.

This may well be the future for helping accredited investors–with $200,000-plus in annual income or a net worth exceeding $1 million–get an equity stake in up-and-comers. This sort of crowdfunding is getting ever more crowded. RockThePost (a contributor), AngelList, WeFunder and others offer platforms to attract small grubstakes in prevetted opportunities. You no longer need to rely on a savvy angel network to learn of deals–or to wait for the SEC finally to settle the rules for equity crowdfunding.

Founder Bill Clark navigated Finra’s application process almost single-handedly in 2010 before the crowdfunding gold rush. Photo Source: microventures

Founder Bill Clark navigated Finra’s application process almost single-handedly in 2010 before the crowdfunding gold rush. Photo Source: microventures

Here’s where MicroVentures has an edge: It’s the only player with a broker-dealer license. (*Note:CircleUp, a platform for equity investing in consumer-packaged goods startups, also received a broker-dealer license in May. It is not yet a direct competitor to MicroVentures.) Founder Bill Clark navigated Finra’s application process almost single-handedly in 2010, before the crowdfunding gold rush. Rivals have to bring in a middleman–a broker-dealer partner who can legally distribute shares–to take a cut of revenues or forgo commissions altogether.

That’s helped MicroVentures funnel more money into startup equity investments than anyone–$16 million to date, spread among 34 companies. The 10,000 investors registered with the site can sink as little as $3,000 into each startup. The targets, 6- to 18-months old, typically offer around 8% of their equity in exchange for $300,000.

MicroVentures now takes a 10% cut of every deal, 5% from both parties. With $12 million in funding last year, it eked out a small profit on only $600,000 in sales. When investors cash out of a company–via IPO, acquisition or investment round–MicroVentures gets 10% of the gains. In August Clark hired Tim Sullivan, then president of SharesPost, an online marketplace for trading shares of private companies, to replace him as CEO. Clark, now president, and Sullivan hope to help 35 companies raise a total of $40 million this year, translating into company revenue of $4 million.

A 6-foot-5, soft-spoken Michigander, Clark, 35, grew up in the Detroit suburb of Grosse Pointe. He majored in finance at Michigan State, then joined GMAC, General Motors ‘ financial arm, as a credit analyst. “A glorified title for a collections agent,” he cautions. “I was literally repo-ing cars.” After a stint at Comeric he moved to Austin to join Dell in 2001, lending to small businesses. After Dell squeezed credit for those customers at the end of 2007, “I said there’s got to be a way to help these guys,” he recalls.

He spent nearly two years researching how to create an online platform for making equity investments in young, private companies. All routes led to the impossible: a broker-dealer license–required for any company that trades securities on behalf of customers–from the SEC, which demanded at least three years of experience in the securities (not lending) business. Worse, his model, which would enable private placements over the Internet, was largely unprecedented–a red flag for regulators. Still, Clark incorporated, spending $100,000 on consulting fees and a website. He submitted his application to the SEC in February 2010.

To jump-start the paperwork, he cooked up an excuse to visit Finra, the self-regulatory agency tasked by the SEC with approving broker-dealers, to make his case in person. Such a meeting was also unprecedented but went well. He was approved four months later.

One hurdle down. He still had to convince investors and startups to join, a chicken-and-egg bind: No backers would sign without companies, and no businesses wanted to be first. So four months before Finra approved his license in August 2010, Clark took his story to the digital press. By the time he was credentialed, he had 600 investors on an e-mail list; 250 had signed up by year-end.

Now to find a company. Reading about Clark online, the founders of Republic Project, then a tiny ad-tech company in Phoenix, reached out. While it had no revenue or customers, it did have nifty software to help advertisers manage digital-media campaigns. Clark pitched the company to his investors, found interest, then ran background checks on the founders, researched the competition, gathered Republic’s financials and evaluated the market. With a 60-page private-placement memorandum for investors, the deal opened on the site in January 2011. It took Clark three months and hundreds of phone calls with cautious investors to round up 19 commitments worth $100,000. “That deal was 100% handholding,” says Clark. “But it’s only gotten easier from there.”

He met Sullivan, 46, that April while visiting the SharesPost offices in San Bruno, Calif., looking for a partnership. “Our CEO said no after about 30 seconds,” recalls Sullivan. “But I thought Bill was on to something.”

When Micro?Ventures faced an SEC audit last year, Sullivan was the first person a startled Clark called. Sullivan guided him through the process, reassuring Clark that the agency was just interested in learning more about crowdfunding. Photo Source: microventures

Photo Source: microventures

Sullivan stayed in touch. A former salesman at IBM and Oracle, he had moved into financial services, managing private placements for a Philadelphia investment firm, before opening his own boutique in 2008. When Micro?Ventures faced an SEC audit last year, Sullivan was the first person a startled Clark called. Sullivan guided him through the process, reassuring Clark that the agency was just interested in learning more about crowdfunding.

Since joining MicroVentures, he’s been streamlining the process with the idea of scaling. Instead of gauging investor interest just through phone calls and e-mails, deals now goes through two phases. First, MicroVentures displays a company summary on investors’ home pages; if you’re hooked, you record what you’re willing to invest. If the company attracts more than $200,000 in pledges, MicroVentures completes due diligence and reposts the opportunity for actual investment. “We’ve got to automate this as much as possible,” says Sullivan. “But you can’t build rapport with a computer. Every investor has to have a verbal conversation with us.”

How does MicroVentures know it’s done enough due diligence on companies? “Entrepreneurs are optimistic,” says Clark. “If they’re fraudulently presenting information, there could be some risk, but if we researched it and it was intentional misrepresentation–and there was nothing we could do about it–our liability should be minimal.”

For each deal, MicroVentures creates a limited-liability corporation to pool investor money. This simplifies companies’ capitalization tables–the spreadsheets that document ownership stakes. It also creates a buffer between investors and the startups they fund, which keeps founders sane. “With other platforms I’d have to deal with every single investor,” says Micah Baldwin, the CEO of Graphicly, a maker of e-book conversion software that’s raised $1 million in two rounds.

One thing MicroVentures hasn’t been able to change: the fact that early-stage companies are still a dicey, illiquid investment. Though the company is working on ways to free up investments sooner, it tells backers to expect a 5- to 7-year lag for liquidity. As much transparency as they’ve built into the system, concedes Clark, “It’s very risky, and there’s a very high likelihood that you will lose your money.”

[Source: J.J. Colao @ Forbes – This article will appear in Forbes magazine on June 24,2013]


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