As we recently launched a crowdfunding campaign through StartEngine, a leading funding portal for Reg A and Reg CF fundraising, I’ve been asked why we chose to launch a crowdfunding raise - so I thought I’d share my thoughts and rationale.
I’m a big believer in the power of the internet to democratize industries and reduce barriers to entry, resulting in more competition, better products, and lower prices.
Whether it’s buying and selling goods on eBay and Amazon, finding or publishing information and content with Google, Wikipedia, or YouTube, or matching buyers and sellers of services like on Uber, Airbnb, and uShip, each of these platforms is a level playing field where anyone can compete and the best product or service at the best price wins.
uShip, which I founded in 2004, allows anyone with a truck to compete with FedEx and has allowed tens of thousands of small operators to earn billions of dollars hauling freight over the last 17 years. All of the $50M+ of capital we raised for uShip came from a small group of venture capital investors. At the time there was no way to allow individual, non-accredited investors to take part.
After the Enron and WorldCom scandals of the early 2000’s, the SEC implemented sweeping and strict regulations (especially the Sarbanes Oxley act) that were well-intentioned, but also made it much harder and more expensive for early-stage growth companies to raise capital from individual investors in public offerings. The increased and costly compliance burdens of being a public company, combined with the larger pools of institutional investment dollars flowing into professional venture capital funds resulted in fewer IPOs, and technology startups generally staying private until a later stage of maturity and larger valuation.
Credit Suisse estimates that between 1996 and 2016, the number of publicly listed companies in the US fell by half, and IPOs declined from 700 in 1996 to only 100 in 2017.
All of this meant that individual investors had fewer opportunities to invest in rapidly-growing startups during the steepest part of their growth curves. At the same time, the opportunities for creating new ventures around disruptive technologies multiplied, but the value creation accrued to founders, professional venture capital firms, and individual investors wealthy enough to be accredited.
On the heels of the global financial crisis and Great Recession in 2009, the need to overhaul and modernize securities laws was recognized and resulted in the signing of the JOBS Act with bipartisan support in 2012. Key provisions of the bill included exemptions from SEC registration that increased the viability of crowdfunding, a more useful version of Regulation A that gave emerging startups the ability to raise capital from non-accredited investors with some but not all of the costly compliance requirements of a traditional IPO and reduced traditional IPO requirements for emerging growth companies.
I was so excited by the potential for this to allow the internet to democratize startup investing in the same way it has other industries that I even attended the signing ceremony in the Rose Garden on April 5th, 2012.
Signing of the JOBS Act at the White House Rose Garden, 2012
Due to its success, the Reg CF crowdfunding cap has since been raised from $1M per year to $5M - and the Reg A cap from $50M to $75M - making these funding sources more attractive as alternatives to traditional venture capital.
Now it’s possible to raise significant funding from a wide audience of people leveraging the reach and power of the internet, but each company needs to decide if it’s the right course for their business.
Here are a few of the questions that I considered for LIFT...
Is it the right time and stage for us to pursue crowdfunding?
Because of the inherent risks, offering investment opportunities in LIFT broadly to include non-accredited investors is not something I took lightly. I didn’t even think about crowdfunding at the beginning because I felt our very first capital was too speculative to offer to non accredited investors - so our first $10M+ in seed investment came from angels and early stage venture capital investors in my network. However, after about 4 years of progressing through design, prototype, test, and now starting production and with FAA approval of our first vertiport location, I felt that we had reduced a lot of the risks to a point where crowdfunding might be a good fit for our next raise. With others in our industry also raising capital through public offerings via SPACs and traditional IPOs, it seems like public investors have a good appetite for investing in eVTOL.
Do we have a lot of inbound investor interest and/or a large list of customers or fans that might want to invest?
When we launched our website, we included an investor inquiry form and soon that list had grown to over 500. Plus, we had a rapidly growing list of tens of thousands of subscribers, advance flight reservation holders, wait-listers, and hundreds of thousands of followers on social media. We suspected that many of these same fans and eager customers would be interested in investing in the company - and, now that we’ve launched, it turns out we were right. However, crowdfunding may not be a good fit for start-ups that may have valuable technology, but that don’t have broad consumer interest and a good following.
Can we find the right partner and marketing strategy for the capital raise?
We evaluated several online funding portals, and even looked at marketing an offering directly ourselves. After getting referrals from some trusted entrepreneurs that have had very successful Reg CF and even $10M+ Reg A+ raises, we chose StartEngine as the leading Reg CF and Reg A+ investing platform.
Will the marketing for our funding campaign also gain us customers?
Getting a funding campaign out there entails significant marketing costs. If your product is not broadly available to buy, rent, or use by general consumers, the marketing costs you incur will only generate investment returns and not future customers. Because anyone can pilot our HEXA aircraft (not just licensed pilots), as we’re marketing our crowdfunding campaign we’re also marketing our product for future sales. We’re essentially creating “super fan” customers who have an interest in seeing us succeed.
How will this compare to traditional venture capital?
We’ve already raised over $10M of venture capital from a number of the top early stage funds as we progressed through our early development - and we may raise more from VCs as we grow (I’ve raised $60M+ across 3 start-ups to date). VCs can be great partners, but they typically negotiate a lot of special rights and protections with Preferred Stock (liquidation preference, interest, anti-dilution protection, board rights, etc.), and it’s often advantageous for the company and existing shareholders to avoid raising from VCs if other sources of capital are available at better terms. The ultimate goal is often to IPO and offer your stock directly to the public - and crowdfunding can be a significant step toward that goal. We’ve noticed that some people consider crowdfunding as somehow less prestigious than venture capital - however, that’s because it’s so new and we think that in the future most startups will prefer crowdfunding to venture capital, or will at least decide to complement their venture rounds with crowdfunding. I think you’ll see many start-ups replace the typical investor inquiry forms on their websites with links directly to crowdfunding portal campaigns that make the whole process of investing dramatically easier, safer, and more secure.
Can crowdfunding meet our financing needs?
Prior to recent changes, Reg CF was limited to $1M per year, which was not enough for many startups to bother with, especially those with the option of raising venture capital - the juice was just not worth the squeeze. But now that it’s $5M, that makes it possible to raise a nice seed round or as a great complement to a VC-led Series A. The limit for Reg A+ crowdfunding has increased from $50M to $75M, which makes it a viable option even for large Series A and B rounds. For us at LIFT, we have a relatively capital-efficient business plan - as an ultralight, HEXA does not require costly FAA certification and we have been able to leverage SBIR grants to help cover some of our development costs - so the increased crowdfunding limits can go a long way toward meeting our needs.
The most important reason we decided on crowdfund as part of our financing strategy, however, is that it fits perfectly with our mission. We don't think personal flight should be limited only to the wealthy, and we don't think start-up investing should be either. While not the right fit for every start-up or every stage, we’ve been delighted with the success of the campaign so far.
This is just the beginning of the democratization of startup fundraising.
We’re super grateful for all of our new and existing investors that share our vision for a future where anyone can fly. We could not be more excited about the journey ahead. Onward and upward!
Matt Chasen at the signing of the JOBS Act in the White House Rose Garden, 2012
Interesting. Thank you