During last Monday’s GigaOM Roadmap Conference, which brought together leaders in user experience and connected design, analysts took time out to consider “Capital raising trends” and where IPO markets stood in a post-Facebook, post-JOBS Act world. The lively discussion, which included lawyers, bankers and analysts, also looked at one less frequently addressed issue: Are online investing platforms like AngelList and CapLinked setting the stage for more liquid private markets?
The general trend over the last five years has been to allow shareholders at private companies greater latitude in selling their shares prior to an IPO. In fact, one member of the panel joked that the real Facebook IPO had occurred two years ago because that’s when many shareholders were able to price and begin selling their stock in private transactions. This overall trend got a boost with the JOBS Act, a bill whose support grew from the desire of entrepreneurs to be able to reach a larger investment audience through crowdfunding. While a more liquid private market for the trading of private companies isn’t a direct result of crowdfunding, the cultural trend of making investments in startups easier for everyone necessitates the possibility that those early investors may want new ways of exiting their positions pre-IPO.
The impact of the JOBS Act
In April President Obama signed the Jumpstart Our Business Startups (JOBS) Act, which is a law intended to ease the financing of startups, and essentially further enable internet funding portals for companies seeking capital. The Act does 3 main things:
1) The shareholder count rule changed. Prior to the JOBS Act, if you had 500 or more shareholders, you had to file to go public. Now you can have up to 2000 shareholders and the 2000 number excludes employees who have received stock options.
2) Elimination of the ban on general solicitation. Historically, companies couldn’t advertise that they were raising capital and could only communicate with certain accredited investors that they had relationships with.
3) Crowdfunding. Retail investors, those with less than a million in assets, will now be able to invest a small percentage of those assets through “approved” internet portals.
While enacting the law is going to require a great deal of guidance from the SEC, it will be incrementally easier for startups to go out and solicit capital from a larger audience that will include some retail investors as well as a larger number of accredited investors. And one possibility is that as the number of shareholders increases in private companies, we could see more liquid markets for the trading of those companies.
New investment vehicles for cleantech?
The difficulties that cleantech companies have had in going public are well known as Brightsource pulled its IPO earlier this year and we’re still waiting for a Silver Spring Networks IPO. Additionally, there’s evidence that earlier stage cleantech investments are fewer and farther between as VC firms focus on helping the companies they’ve already invested in.
The one thing cleantech does have going for it is that its investors care deeply about the environment and about seeing green technology innovations reach the market. This is why investors like John Doer got involved in cleantech in the first place. On a public level, we’re even seeing individuals wanting to finance clean energy, evidenced by startups like SolarMosaic, which links investors with solar projects in a peer-to-peer model.
Jeff Thomas, a VP at SecondMarket, a company that is attempting to enable a private market as well as create investment vehicles so that a larger number of people can invest in startups, joined last week’s panel. In terms of generating a pipeline of startups through an online portal, he noted “There’s a lot of these crowdfunding-esqu sites. But we think that each of those are going to have very specific vertical expertise. Nobody’s going to have good deal flow across all industries.”
Web portals like Angellist.com have sprung up to connect investors with startups, and there could be real benefit to a cleantech oriented portal to generate dealflow specific to cleantech. There’s also the real possibility of an emerging asset class of early stage startups, where a company like SecondMarket could form a fund from accredited investors to provide them with exposure to a basket of cleantech startups. A beneficial downstream effect for cleantech would be if greater access to early stage capital combined with a more liquid private market eased some of the pressure to IPO and allowed VCs to recoup some of their capital earlier.
The challenge is to open up startups to a broader range of investors and do so in a way that protects those investors from fraud, while educating them about the risks. This isn’t an easy task, and will require the SEC to be clear about rules for the process. But if investors can be protected, there’s a real opportunity to allow a broader range of both retail and accredited investors the opportunity to invest in startups it believes will improve people’s lives.