Digital investing tools seen luring startup capital

Tear
Tear

Leading technology hubs like Silicon Valley and Boston often appear to have a stranglehold on venture capital.
So in secondary markets like Providence, the growth of new digital investing tools is being welcomed as an opportunity to democratize investing and make more capital available across the country.
“I think they are going to widen the pipeline of investment quite a bit and make it accessible to a much larger number of people by standardizing it and making it transparent,” said Allan Tear, managing partner of Providence startup accelerator Betaspring and lead partner of the Founders League entrepreneurial incubator, about new online investment platforms. “I think it is going to be a little like the early emergence of online trading, which meant you didn’t have to always buy stock through a broker.”
From software designers to taco shops, fundraising campaigns on sites like Kickstarter and Indiegogo are now commonplace and growing in scale each year.
This past fall, Plust Design, a startup founded out of Rhode Island School of Design, completed what was believed to be the most successful Kickstarter campaign in Providence history, raising more than $206,000 for their Linkmount mobile-phone attachment.
But the revolution Tear describes goes beyond those sites and can be seen on platforms like AngelList, which facilitates equity investments formerly reserved for traditional professional investors.
Most Kickstarter campaigns essentially seek donations, offering rewards like T-shirts, early access to a startup’s products or personal time with founders, but not stock in the company itself.
Federal rules prohibit companies from selling stock to the general public without a formal and expensive Initial Public Offering, so AngelList only accepts accredited investors who meet an asset and income threshold. In 2012, Congress passed a law intended to open up equity crowdfunding to everyone, including nonaccredited investors on Kickstarter-like sites, but actual regulations have become bogged down in Securities and Exchange Commission rulemaking and concerns about fraud.
As a result, in Providence only a few companies, if that, have landed equity-funding rounds online.
“It is still the exception rather than rule,” said Tear, who declined to discuss specific details about which local companies or how many were raising capital online to protect them. “Within Betaspring maybe a handful have seriously used AngelList. There’s a difference between just creating a profile and actually getting traction with investors.”
But even without new, looser rules on equity crowdfunding, the investment community is becoming increasingly interested in putting deals together digitally.
Initially connecting startups with individual angels, AngelList now supports the formation of syndicates, essentially allowing users to create online venture-capital funds pooling money from other investors and charging management fees.
“We will see creativity,” Tear said. “We will see blended funds, opening it up to a larger syndicate of online funders who may be retail investors. We are already seeing where well-known investors are extending their picking skills to other people.”
For the Providence startup community, Tear said it’s important to make sure seed-stage companies and new entrepreneurs master using these new platforms, which can reward different skills and strategies from in-person fundraising. He said he intends to make Founders League a local clearinghouse of crowdfunding knowledge this winter, sharing best practices on how to present companies digitally, build mentor networks and quantify growth using the best national and international metrics.
“We have a small window to master this as a community, but are lagging [instead of leading] in adoption,” Tear said. “I think that can change quickly. There is an untapped window and the will to figure out how.”
Traditional investment groups in the area appear to be watching these new online platforms, unsure how they may be affected by them.
“We haven’t seen too many take the equity crowdfunding route,” said Jennifer Schwall, executive director of Cherrystone Angel Group in Providence. “We have seen it for young companies who may be too early for Cherrystone use it on a donation or reward basis to ramp up or validate concept before going for a later round.”
Looking to the future, Tear said he expects the growth of online fundraising will help spread capital not just to secondary markets, but to people who wouldn’t have normally invested in individual companies and to companies who would not have normally sought equity investments.
On the startup side, that means not just seed-stage technology companies, but growing local or regional manufacturers, retailers, service providers or food businesses. While the popularity of a local brand may not mean a lot to banks or Silicon Valley investors, it could to wealthy individuals online who have a personal connection to it.
“This isn’t just a deepening of the channel for fast-growth tech companies, it is a widening of capital that may be tech driven, but may have other aspirations,” Tear said. •

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