Why Crowdfunding?

Being an entrepreneur is not an easy task, and raising capital for your project can be particularly difficult. According to Younkin and Kuppuswamy (2016), a significant hurdle to launching your world changing idea is access to seed capital or early-stage funding. Many will find it quite difficult to raise funds from traditional channels, such as banks and angel investors. The solution? More and more individuals have turned towards crowdfunding platforms for early-stage capital. And it seems the industry is growing stronger than ever before with an annual growth rate of 17% (Business Wire, 2018). In 2016, transactions on reward-based crowdfunding platforms alone were valued at three billion USD and is expected to hit 8.4 billion USD in 2020 (Statista, n.d.).

It should be noted that there are 4 types of crowdfunding (Nibusinessinfo, n.d.):

• Reward crowdfunding; involves the return of non-financial benefits
• Debt crowdfunding; involves receiving financial interest on one’s investment
• Equity crowdfunding; involves receiving shares
• Donation crowdfunding; involves donating to a project

While equity-based crowdfunding presents a far more accessible alternative for entrepreneurs compared to angel investors or venture capital funds, the same cannot be said for regular investors. As equity-based crowdfunding involves the distribution of securities, it is subject to many regulatory constraints which prevent most individuals from investing on these platforms. Fortunately, in May 2016, the U.S. Securities and Exchange Commission (SEC) enforced Title III of the JOBS Act, which essentially permitted the 97% of US residents to invest in startups (Republic, n.d.). However, the convoluting legal requirements are not approachable to most founders and new investors.

About Republic

So what is Republic? According to its website, Republic (n.d.) is an equity-based and SEC licensed crowdfunding platform that aims “to democratise investing and level out the fundraising landscape for founders and investors alike”. It was founded in 2016 shortly after the JOBS Act was enacted. Furthermore, it is part of a group of startup platforms, which includes two household names from the online startup ecosystem: AngelList and Product Hunt. In fact, the former played an essential role in legislating the JOBS Act and several Republic founders are its alumni.

One of the platform’s main objective is to facilitate accessibility to early-stage investment for ordinary folks such as you and me. However, Republic also focuses on another vital issue in the startup community that I have not yet mentioned: minority founder discrimination. According to Younkin and Kuppuswamy (2016), there’s an underrepresentation of minorities among funded ventures. The researchers initially explain this observation with biases towards minority founders from resource providers. By examining thousands of Kickstarter projects and carrying out several experimental tests, they eventually discover that unconscious bias is the main form discrimination driving this outcome.

It is particularly important to mention that while crowdfunding does not eliminate discrimination towards minority founders, the platform does indeed allow for means to address this issue. Republic (n.d.) has recognised this potential and are consequently using their crowdfunding platform to promote minority founders. However, they are not only focusing on minorities, but on other marginalised groups in the startup world. For instance, this includes women, veterans, the LGBT community and immigrants as well.

Their Success

So how exactly does Republic promote these marginalised groups on their platform? As you can see in Image 1 below, projects may be labelled with tags, informing investors about the nature of the project as well as the type of founders running it, ranging from “Minority Founders” and “Immigrant Founders” to “Female Founders”. Similarly, investors can filter through projects based on these tags. However, apart from these features, you won’t encounter any particular differences compared to alternative crowdfunding platforms.

Given these simple measure and the platform’s overt support for marginalised founders, one might nonetheless be skeptical about the effectiveness of their actions. However, a report by Republic (2018) revealed otherwise. Image 2 and 3 below illustrates some of their achievements. For instance, 25% of all investments on the Republic platform have gone towards companies with founders of colour, which is far above the national average for traditional VCs. Similarly, the same can be observed for women where 44% of funded projects on Republic included female founders as compared to 13% with traditional VCs.

However, they not only managed to close these gaps of underrepresentation for founders, but for investors alike. As they allow anyone to invest with as little as 10$ on their platform, Republic managed to gather funds for projects from women 30% of the time. This is a significant improvement compared to regular VC firms and even Angel Investors (Republic, 2018).

It might not come as a surprise to you that such a success has attracted a lot of attention from startups. Nonetheless, according to Christopher (2018), companies need to go through a thorough vetting process to comply with US regulations that aim to protect these newfound investors. Out of 3000 companies that had applied to the platform by October 2018, only a handful managed to get onto the platform. However, once on it, founders are able to enjoy a slew of benefits, such as ongoing support, advice and mentorship, including access to Republic’s extensive network of traditional VC.

The Future Ahead

However, according to Greenberg (2018), there is still much room for improvement. At the time of this writing, current US regulations limit crowdfunding to $1 million. More often than not, this is not sufficient to entirely fund a startup. As a result, founders are required to raise money from several other sources, not only from Republic. Consequently, this may pose a problem to marginalised founders who will undoubtedly re-encounter the same problems they tried to avoid in the first place. Caroline Hofmann, the COO of Republic, mentions that if this limit could be raised to 5$ million, crowdfunding platforms such as Republic could potentially act as a sole source of funding, thus allowing founders to completely pivot away from traditional fundraising institutions.

References

Business Wire (2018). Global Crowdfunding Market 2018-2022 | Social Media as a Source of Cost-free Promotion to Boost Demand | Technavio. Retrieved from: https://www.businesswire.com/news/home/20181203005889/en/Global-Crowdfunding-Market-2018-2022-Social-Media-Source

Christopher, E. (2018). Survey Shows Founders Ignored by VCs Are Succeeding With Equity Crowdfunding. Entrepreneur Europe. Retrieved from: https://www.entrepreneur.com/article/321438

Greenberg, A. (2018). Equity Crowdfunding Is Changing The Landscape For Underrepresented Founders. Forbes. Retrieved from: https://www.forbes.com/sites/amandagreenberg/2018/05/18/equity-crowdfunding-is-changing-the-funding-landscape-for-underrepresented-founders/#e4428b77fbaf

Nibusinessinfo (n.d.). Crowdfunding: Types of Crowdfunding. Retrieved from: https://www.nibusinessinfo.co.uk/content/types-crowdfunding

Republic (n.d.). About. Retrieved from: https://republic.co/about

Republic (2018). Republic Report – The business of diversity. Retrieved from: https://republic.co/blog/the-business-of-diversity

Statista (n.d.). Crowdfunding. Retrieved from: https://www.statista.com/outlook/335/100/crowdfunding/worldwide#market-revenue

Younkin, P., & Kuppuswamy, V. (2016). Is the Crowd Colorblind? Founder race and performance in crowdfunding. Academy of Management Proceedings, 2016(1), 11665. doi:10.5465/ambpp.2016.11665abstract