How’s this for apropos: A local startup that’s creating a website for startups is among the first in the U.S. using a new funding mechanism that gives everyday investors a chance to make early investments in private companies.
Even more apropos: The name of Newport Beach-based Youngry LLC—a combination of “young” and “hungry.”
Youngry’s vehicle for financing is equity crowdfunding for unaccredited investors, a process that’s known as Title III—after a federal regulatory designation—which became legal in May.
Equity crowdfunding differs from the simple crowdfunding that’s gotten a lot of attention thanks to Kickstarter and Indiegogo, which match donors to startups, with the latter typically providing a product or some other reward in exchange for cash.
Equity crowdfunding exchanges stakes in startups for capital—and had been legal only for accredited investors until May.
The newly legal equity crowdfunding for non-accredited investors allows individuals with net worths of less than $1 million to buy stakes in startups.
Such early-stage investments traditionally had been the sole province of folks with $1 million or more in net worth or annual income of more than $200,000—levels generally taken as an indicator that they have sufficient financial acumen to fend for themselves.
Now friends, family and neighbors can invest as little as $10 in private early-stage companies. The companies themselves can raise a maximum of $1 million within a 12-month period.
Only about 70 companies across the U.S. have signed up to raise capital through Title III, according to Beachwood, Ohio-based market tracker Crowdfund Insider.
Garg & Kumra
Two of those startups are in Orange County. One is Irvine-based Pipeline Sports Network Inc. Its founders could not be reached for comment by the time the Business Journal went to press.
The other is Youngry, which was founded in June by Ankur Garg and Ash Kumra.
Garg is a fitness entrepreneur who’s currently chief strategy officer of Jersey City-based supplement marketer Shredz.
Kumra is a serial entrepreneur who’s twice been recognized by the White House as an entrepreneur who’s making an impact. He’s also an author and speaker.
Kumra recently co-founded TradeKraft, a Newport Beach-based media startup aiming to help “millennials achieve their entrepreneurial dreams” through original video content and digital courses focusing on education.
Youngry was incorporated in Delaware and has affiliate offices in the New York City area and in Santa Monica for its entrepreneur contributors.
The duo’s plan is to provide news reports on early-stage startup activity, aggregating content from various sources, in addition to offering original articles and videos by entrepreneurs that will be disseminated through Youngry.com, Kumra said. Their target market includes millennials; the following generation, known as Gen Z; women; and minority entrepreneurs.
They intend to make money from their website in multiple ways, including an e-commerce store that will sell motivational Youngry-inspired clothing; audio and e-books based on popular articles and themes from the website; and more traditional means, such as ads and sponsorships.
The entrepreneur contributors will share in whatever revenue their content yields, Kumra said.
The founders chose to do the initial raise via a Title III campaign because Youngry is “all about entrepreneurs, and we want entrepreneurs to be part of our journey,” Kumra said.
It did its Title III campaign on the Republic platform. Republic, which launched July 18, is an offshoot of San Francisco-based AngelList, a well-known equity crowdfunding platform for accredited investors that’s owned and operated by New York City-based OpenDeal Inc.
Benefits
Title III gives startups accessibility to investments from the general public earlier than with IPOs, which are few and far between these days, as companies are delaying that option longer than in the past, said David Gosselin, a principal at Newport Beach-based accounting firm DBBMcKennon.
“The general public [has not been] able to invest in the earlier stages of a company’s life cycle where significant value appreciation can still be realized,” he said. “Therefore, only the wealthiest investors—VCs and accredited investors—[have been] generating huge returns, while the average investors [have been] left out.”
Title III also empowers startup founders, as they now get to dictate the terms of an offering, instead of venture capital firms, which have been in the power position during VC raises, he added.
“Equity crowdfunding is truly the democratization of business financing,” Gosselin said.
Why Now
The Great Recession made it challenging for startup businesses of all kinds to get funded. So Congress stepped in and forced the SEC to act. The SEC did that by creating an exemption to the federal Jumpstart Our Business Startups Act, which became law in 2012 with the intent of catalyzing funding for small businesses by easing some securities regulations. The SEC did not want to make an exemption for unaccredited investors because of fear of fraud and the “highly protectionist attitude in Congress and among the Democratic members of the commission that consumers need protection from the capital markets,” said Richard Swart, chief strategy officer of Los Angeles-based NextGen Crowdfunding LLC, which provides education, information and events focusing on equity crowdfunding.
The previous chairperson of the SEC, Elisse Walter, resigned rather than allow that exemption to proceed under her watch, Swart added.
There still are hoops to jump through for companies looking for funds from unaccredited investors under Title III. Those startups have to be listed on a funding portal authorized by the Washington, D.C.-based Financial Industry Regulatory Authority Inc., a not-for-profit organization dedicated to protecting investors through regulation of the securities industry.
The most successful so far is Boston-based Beta Bionics, which is building a bionic pancreas for those with Type 1 diabetes. It’s raising funds through Wefunder Inc., with offices in Boston and San Francisco. Beta Bionics did a soft launch on Wefunder in May with no promotion and had raised more than $900,000 as of July 19, according to Nick Tommarello, co-founder and chief executive of Wefunder.
“Across all of Wefunder, we’ve raised just short of $4 million, and have processed over 80% of all investments across every [Title III] offering,” he said.
