Cherub Investing:

Funding between the Crowd and the Angels

Good night, sweet prince, And flights of angels sing thee to thy rest.

That’s great for princes, but for the rest of us, Angels can be harder to find.

I’ve spoken before about the challenges faced by women founders. And others have written more eloquently about the challenges faced by founders of color (and basically anyone who isn’t a 20 year old white guy).

The new Title III crowdfunding act, finalized in May, is a potential game changer. It allows regular folks (aka non-accredited investors) to invest in their friends and family at much lower levels than traditional angel investing. Think $25 vs $25,000.

So I was thrilled when Republic asked my company RaceYa to be a launch partner for their brand new crowd-investing platform. RaceYa is about teaching kids science and engineering through play in a way that makes learning accessible and fun. Using Republic to make investing in kids accessible and transparent felt like a great fit.

Here’s what I learned.

It ain’t crowdfunding

Anyone who has run a crowdfunding campaign will tell you that the biggest and best driver for success is your network. The hundreds and hundreds of email addresses you’ve collected, your Facebook and Twitter followers, your access to your hairdresser’s best friend’s sister-in-law’s Instagram.

Your network, your community, is the thing that does the kickstarting. You need early success to give your project momentum. Your community is the first follower that makes others think you’re a winner and decide to jump in.

But here’s the thing. Your community may adore you, may adore your project and may wish you all the success in the world, but they are probably giving you money to go away. You’ve just spammed them with 8 million, “fund my project” emails and facebook posts and twitter mentions so they are throwing money at the problem and giving you $25 to please, please, please just STOP.

Crowd Investing doesn’t work like that. People still want you to go away, but, because investing isn’t the same as donating, they can’t (yet) just use a credit card and be done.

The SEC wants to make sure that people who are investing understand that they can lose their entire investment. Even if it’s only $25. So they make you answer questions, give a few personal details and link your actual bank account. It’s a hurdle, but because investing can feel a bit like fancy gambling, it’s a good idea to make sure you’re not gambling on credit.

Similarly, with crowd investing, your friends need to not only be loyal but patient because the promise of investing is the potential for a return. With crowd funding your $25 donation can at least get you a cute T-shirt. But invest that same $25 in a start-up and the returns may not come for several years, if at all.

But it ain’t Angel investing either

Angels are accredited investors who have money to lose. They can take a $25,000 bet and be sanguine about its outcome. The experienced Angel is someone with an unusual tolerance for risk and a portfolio that allows them to spread those risks in search of the high returns only a few of their investments may deliver. They’re typically looking for more direct involvement in their investments than a crowd-investing platform allows and may become close advisors to the start-ups they invest in.

The best way to find Angels like these is through networking and personal introductions. But non-traditional founders are less likely to have access to the traditional networks where those introductions are made. So it’s a bit of a Catch-22.

There’s a gap between The Crowd and The Angels

Enter The Cherubs

What founders need is a tier of investors between their down-to-earth circle of supportive friends and the celestial heights of professional Angels. What Cherubs — nascent investors with a little money and a lighter tolerance for risk — need is an accessible way to get involved in start-ups they believe in. You may not be Silicon Valley rich or even Upper East Side rich, but you have some disposable income and an interest in putting it into something meaningful. Now you have the platforms on which to do it.

The promise of crowd investing is democratized investing. The chance to help a startup succeed and share in its prosperity. It is also the chance to break the barrier between those whose money works for them, and those who work for their money.

My own experience suggests the success of crowd investing won’t rely on $25 hush-money contributions. (In the best of circumstances, it would offer a trivial return for the upfront effort it demands.) Instead, the group of Cherubs it will work best for will be those with $500 to $5000 to put to work. Not enough to break a very early-stage investor, but enough to be meaningful for a very early-stage company.

Startups will still need to prove they have the team, the product and the grit to get it done. But maybe now the diverse landscape of innovative companies can finally access a similar diversity of funds.

And maybe some of today’s Cherubs will ascend to the ranks of tomorrow’s Angels.

Why, yes. I am fundraising for my company on Republic right now. I’m ever so glad you asked.