You No Longer Have to Be a Millionaire to Invest in a New Brand
When Kim and Tim Lewis presented their natural hair-care brand CurlMix on ABC’s Shark Tank in 2019, they got one investor to bite. The couple turned down Robert Herjavec's deal on the show – $400,000 for a 20 percent stake. Fast forward two years, and CurlMix is on its way to 9,300 investors, thanks to equity crowdfunding.
"It blows us away," Tim tells Allure. "We didn't know that people felt the way they feel about what we're doing until the crowdfunding campaign."
How Equity Crowdfunding Works
Equity crowdfunding is a newer way for entrepreneurs to raise capital. This system allows members of the general public to put in relatively small amounts of money to help a business meet its fundraising goal. It's different from rewards-based crowdfunding platforms, like Kickstarter, in that the investor receives ownership (equity) in the company in exchange for their financial commitment.
"If you're lucky enough to invest in a company and take the ride with them, it's pretty thrilling."
"[This] means once they give you those funds, they are expecting a return on that investment," explains Maureen Murat, Washington, D.C.-based attorney and principal at Crowdie Advisors, where she provides crowdfunding expertise to entrepreneurs. "And they are expecting that in exchange for the money they've invested, they are getting some ownership interest in the business, regardless of how limited it is."
A key element of the Jumpstart Our Business Startups (JOBS) Act, signed by former President Barack Obama in 2012, allowed small businesses and start-ups to take advantage of this securities-based crowdfunding method. One of the most recent changes to the Securities and Exchange Commission's rules surrounding crowdfunding happened in March of 2021, increasing the maximum a company could raise through a Regulation Crowdfunding campaign from $1.07 million in a 12-month period to $5 million.
Who's Using Equity Crowdfunding Platforms
Minimum investments start at $100 on some equity crowdfunding platforms, making investing possible for a population beyond traditional venture capitalists (VCs). On WeFunder, 78 percent of investments are under $500, according to the platform's latest impact report. And it's not just the usual tech start-ups seeking this type of capital. Brands in the beauty and wellness sector have set up campaigns on other equity crowdfunding platforms like StartEngine, Republic, and LocalStake.
CurlMix's campaign hit its fundraising goal of $5 million in June of 2021 on the equity crowdfunding platform WeFunder. (Full disclosure: This author and her husband were two of the company's funders, securing a $250 investment.) Another beauty-related business that has seen success on that particular platform is CLICS, a digital hair color mixing dispenser dreamed up by Leilani Macedo, a veteran hairstylist and former owner of a salon in Reno, Nevada.
"It's kind of like Home Depot paint center meets professional salon hair color," explains CEO Charles Brown of the CLICS technology. "But much more sophisticated than that."
Brown's experience in the tech industry includes senior roles at numerous tech firms and raising $8.5 million for a tech-based start-up in 2013. He went to Macedo for a haircut and found himself with a new business partner after she pitched the idea to him.
"Those returns that VCs would get are now available to people who look like us, who may not be millionaires or billionaires — it's a really revolutionary thing."
CLICS' digital system includes a dispenser that mixes and produces a client's preferred hair color and a mobile app that stores all client profiles. The La Jolla-based start-up had already raised millions of dollars from VCs and angel investment groups, according to Brown. He says that raising more capital through equity crowdfunding was his idea, as he was drawn to the concept of democratization. At the close of the campaign in February 2021, more than 250 investors contributed to CLICS' fundraising total of $1.4 million.
"It's a dynamic and powerful space; that's why people like to engage and hear the stories because entrepreneurs work hard, fight hard, and face a lot of challenges," explains Brown. "If you're lucky enough to invest in a company and take the ride with them, it's pretty thrilling."
As part of their investor package, Brown says CLICS' WeFunder contributors get quarterly updates on how business is going. CLICS is through the development cycle and the dispenser is now live and market-ready, with thousands of salons expressing interest in their product, according to Brown.
What Investors Stand to Gain… Or Lose
Just as entrepreneurship is a risky undertaking, returns aren't 100 percent guaranteed for those making financial commitments on equity crowdfunding platforms, says Murat.
"The business may fail in one shape or form, or one way or another, and you will lose your money," she says. "That is something, as an investor, you have to be OK with, because investing is inherently risky, even at that low $250 entry level."
In CurlMix's case, though, a portion of its WeFunder investors are also its customers, meaning they are part of the brand's success outside of the equity crowdfunding space. Tim says he considers being "community-owned" as a positive thing.
"Typically, those returns that VCs would get are now available to people who look like us, who may not be millionaires or billionaires, so it's a really revolutionary thing," he explains. "We just fell right behind that because that's exactly what we've been doing this whole time – pushing boundaries, trying new things, and making sure that we're taking care of our community along the way."
Above all, equity crowdfunding has created more options for entrepreneurs to get their product, service, or goods out into the world, many of whom would've had a tougher time doing so through traditional funding, says Murat. Black and Latinx founders accounted for only 2.6 percent of venture funding, raising $2.3 billion in the first eight months of 2020, according to a Crunchbase report.
In the equity crowdfunding space, founders of color are accessing capital, despite the recent origin of the platforms. Since 2017, Black and Latinx founders have raised $23.6 million on Republic, according to managing director Janine Yorio. This includes Backstage Capital, a Black-owned firm that invests in startup founders who identify as LGBTQ, a woman, and/or a person of color, which raised the maximum of $5 million in 10 hours.
And with more industries tapping into this new way to raise capital, it has also created options for aspiring investors, to get in on the ground floor of brands they believe in and, hopefully, turn a profit.