How Equity Crowdfunding is Different Than Buying Stocks

By Motley Fool Staff Markets Fool.com

Equity crowdfunding has taken off as an investment option in the last years following the passage of the JOBS Act, allowing average investors to get a stake in early-stage startups.

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In this clip from Industry Focus: Tech, Motley Fool analyst Dylan Lewis interviews Indiegogo founder Slava Rubin and MicroVentures founder Bill Clark -- about how investing in equity crowdfunding deals is different than investing in the stock market, and how companies like MicroVentures and Indiegogo perform due diligence on the projects and companies for which they enable funding.

A full transcript follows the video.

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This podcast was recorded on March 17, 2017.

Dylan Lewis: You mentioned the Jobs Act, and the passage, and we go fromhaving these accredited investors to having everyone be able to participate. Youwant to talk a little bit about how some of these placements are different than investing in traditional stocks and some things that people that aren't as familiar with the history might want to know about?

Bill Clark: Yeah. The main difference is theliquidity of investmentin a private company. When you invest inApple, a day later, you could sell your stock on the same day and getliquidity.But in these companies,you can't get liquidity for a while. It could be seven to 10 years, sometimes. We're also doing revenue shareopportunities where you can get your money back sooner,assuming that the company is successful. And then, in the private market,early stage start-ups are risky. Seven out of 10 aregoing to fail, and you need to diversify. Which is why we like theminimum at $100. While it's a lot of money,it's not as much as, for our MicroVentures main business, $5,000is the minimum. So, we try to give people the opportunity to diversify. And in VC, it'snot necessarily spray and pray,but it's, diversify so the winners will make up for the losers. That'swhat we try to do with ourinvestment opportunities.

Lewis: Yeah,I think the idea of diversifying issomething that most investors are familiar with,but I think it's probably even more important with these types of investments,because of the risk profile with some of them. I'm guessing that,in some ways,maybe it's the right way to think about it. Bill, you'rekind of a gatekeeperfor the platform. And there's the due diligence elementbefore any of these companies cancome and be available as investments. Do you want to talk a little bit aboutwhat that process looks like?

Clark: Sure.I also think, for the business that we've been in for the last six years,we were even more of a gatekeeper. We werebuilding a portfolio of companies, similar to a VC, we haveassets under management,and we were very selective of the companies. With Title III, we don't have to onlyfocus on tech companies, we canlook at restaurants if we want,we can look at distilleries,we can look at movies. That is something that we never looked at before. So, we'reable to actually provide morediversification to investors. But really, from agatekeeper standpoint, what we like to do isfilter the companies for investors, say, "These are companies we feel are a goodpotential opportunity, and it's your job to dodue diligence on them yourself." We will look at the team, and we'll runbackground checks on them. We'll look at financials and projections, and we'lllook at valuation, and we'll put all that together in a summary, and then we'll allow the investors to do their own duediligence, and they can ask questions of the company,and the founders will answer. So,the crowd does have the ability to ask questions. If the crowd doesn't like something,it won't get funded,because when you see those questions coming, and maybe it'snegativity in the discussion board,people will do their research, and they'll check it out.

Slava Rubin: And on theIndiegogo platform, it's always going to open, no application, no human curation. Wetry to have it as scalable as possible. Obviously, as we move into equity, we're both being regulated to make sure we're filtering,but we also need to make sure we're creating a high-integrity product early. So,it's really great to use the scalabletechniques of Indiegogo, as well as the curationcapabilities of MicroVentures tobring this all to bear and to First Democracy VC, which is aconstant balancing act because we only want to present the dealsthat we think have beenfiltered well to be presented, but we also want it to be asscalable as possible, and to have as many deals as possible,because the goal is to democratize the opportunities. So,it's a constant balancing act.

Dylan Lewis owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.