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- Five Predictions for Early-Stage Startups in 2021
- Maren Thomas Bannon
- What this Year’s Seed Funding tells us about the Startup Future
We’re continuing our conversation from last week, looking at the future of seed funding over the next couple of years – one to three years. Continuing that discussion today, I think back to a discussion we had a couple of weeks ago about crowdfunding. Do you have any info on how crowdfunding looks to shape up in the future?
Sure, due to recent changes made by the SEC, I think Reg CF which is often called Regulation Crowdfunding is getting ready to take off, and really play a significant role in seed funding. In fact, Crowdfund Insider interviewed Doug Ellenoff – the managing partner of Ellenoff, Grossman & Schole a top fintech legal firm. He predicts that crowdfunding will eventually challenge venture capital. He does say it may take a decade or so. But he says, the building blocks in the maturity curve of most alternative financing methods are in place. He sees that as crowdfunding really starting to take off. I totally agree.
What are the SEC changes that are going to make Reg CF a vital source of seed funding capital?
I touched on this briefly in a previous podcast, but I’ll elaborate a little here. There were a number of changes, but I think there are three that will have the biggest impact on seed funding. The first is, they raised the limit on how much a company can raise from $1 million to $5 million. That’s a big number. All these companies that previously were using Reg CF could only raise up to $1 million in 12 months. We were getting smaller raises. Now it’s up to $5 million. You’re getting more interest from more companies that can raise more money. Up to $5 million every 12 months. Obviously, if the companies can raise that much capital, a lot more of them will be interested in Reg CF.
You couple that with the second thing. They raised the amount investors can invest. In fact, accredited investors previously were limited under Reg CF. Now, they have no limit on how much they can invest. Non-accredited investors can still invest as well. The limits have been raised on how much they can invest. Obviously, this unleashes more capital to go into the higher limits that these companies can raise. Finally, and most importantly to me. I think previously, all investors on the cap table were equity holders in the company. Think about this, if you had 1000 investors, each invested $100 in a company for 100,000-dollar investments, you actually had 1000 equity holders in the company on the cap table.
This made it very difficult for follow on funding to be interested in a company with 1000 people that only had $100 invested. What they did now to make the change, and I think this is the biggest change and is often overlooked is that, those investors can all go into one SPV – Special Purpose Investment Vehicle. Instead of having 1000 investors at $100 each, you have one investor that’s the SPV and the investment is $100,000. It is composed of 1000 people, but there’s only one investor on the cap table. And one investor that follow on investors have to deal with. That really opens it up for these companies to raise significant amounts of money.
I know you’ve seen these changes, make an impact yet…
Absolutely, across the country. But you look at companies like SeedInvest which is a platform that does crowdfunding, basically Reg CF crowdfunding. They have 500,000 investors on their platform. They’ve raised over $300 million in 235 offerings. Basically, this is a new entity required by the SEC that these entities are investing through. StartEngine is the other one. Similarly, they have $350 million raised in 500 raises. They have 400,000 investors on their platform. There are others, up and coming platforms as well. In fact, SeedFunders Orlando invested in one, coming out of Orlando.
A year ago, I would have totally stayed away from Reg CF crowdfunding, because of the issues that I had mentioned, but now, we’ve actually recommended it to some of our own portfolio companies to check out Regulation Crowdfunding as a source of capital. It’s definitely the wave of the future for seed stage funding.
Very interesting. What else do you have?
MIT published an article in April, 2020. Just at the start of the pandemic. It’s entitled Five Trends in Venture Capital. The first thing they talk about is use of algorithms by venture capitalists to spot winners. They conclude that algorithms can spot patterns and anti-patterns, but there’s still no substitute for the VC’s intuition. That’s the first thing. When they’re looking at deal flow, venture capitalists are using algorithms to narrow the field down. But really, there still is no substitution for their own initiative on whether to invest or not. Speaking about picking winners, they also point out that themes like the sharing economy; Airbnb and Uber. It’s too late once they go mainstream. Basically, it’s too late to invest once those economy themes go mainstream.
They quote David Frankel, the managing partner of Founder Collective which is a seed stage fund in Massachusetts. He says, “Throughout my career, I’m reminded of the fact that the minute a theme has been announced in the press, it is too late.”
So, by that logic then, my idea for a dot.com to be the Uber of Airbnbs for crypto currency is probably stale at this point.
Yes, Joe. Don’t submit that one for funding. The third observation from MIT is that seed investing is now an investment class all of its own. This is really interesting, and really revolutionary. They talk about the fact that now, a lot of investment firms specialize solely on seed stage. I pointed out the statistics last week. Over 1100 seed stage investment firms are out there. They quote David Hornik, general partner in August Capital out of Menlo Park, California. He says, “I do think that the fact that we have all these seed funds is great news, because those folks can focus their attention on getting things started.” Of course, that’s what we do at SeedFunders. That’s our focus, getting companies started.
The final two observations of MIT, from these MIT reports are that Boston is a hotspot for VC, of course. Venture capital is a long game, also of course. That’s what MIT has to say about the future.
You said you had predictions from four, one more source, was it Oracle?
Yes, Justin Biel published an article on March, 15 this year. Very recent, on Oracle’s Brainyard platform. It’s entitled, VC Predictions, 2021: Investors give their outlooks for early-stage funding. First thing they say is that early-stage VC interests remain strong. They quote Phil Boyer, partner at Crosslink Capital on that. It’s an early-stage from out of San Francisco. He says, “The VC landscape has been changing rapidly, but the market is closing deals at a high-velocity.” He concludes that 2021 looks like a pretty healthy market for funding.
Hmm, have you seen that in Florida as well?
Definitely, as you know, we meet via Zoom every Monday to review deals at SeedFunders. Right now, we’re booked through July. That’s about six or more weeks in advance. We’re seeing the same thing in Orlando, which meets every other week. We are seeing very strong deal flow in technology in Florida. Speaking of deal flow, the Oracle article states that technology adoption represents massive opportunities. They cite trends such as cell technology, better video, collaboration tools, AI, 3D printing, virtual reality, and even increased use of e-commerce. As you know, here at SeedFunders, we strictly invest in technology opportunities and the market is very strong.
Can you dig a little more about specific sector opportunities with a strong market?
Yes, last week I mentioned that Crunchbase highlighted four sectors, receiving a lot of attention from investors. Those were robotics, mental health, alternative protein and real estate tech. Oracle also identifies four sectors that will produce opportunities for investors. Three of those are actually the same or highly related to the article that came from Crunchbase. They are finance, real estate, health and manufacturing, including robotics.
How does that compare with you’re seeing in Florida?
I would say those four categories are right on. We are seeing a lot of submittals in all of them particularly, health tech or even Fintech and we see a lot of those deals in Florida.
Dave, I’ve got to say, I’m quite at peace knowing the future. Thank you.
Any final remarks.
The last thing the Oracle article lists as a 2021 prediction is that digital presentations will increasingly replace in-person pitches. This is exactly what the Forbes articles – I said it last week – said. It was entitled, Five Predictions for early-stage Startups in 2021. Covid changed the industry permanently. There’s no longer a need to have face to face meetings to close deals. But Joe, I do enjoy coming to your studio here to do these podcasts. Let’s not start doing them on Zoom, okay.