CEO Roundtable: Equity crowdfunding’s value to entrepreneurs up for debate

BOULDER — For all of the enthusiasm surrounding equity crowdfunding, officials from the local entrepreneurial scene offered plenty of skepticism Tuesday, with one even worrying that crowdfunded securities could become the “penny stocks for private companies.”

Colorado earlier this month became one of the few states in the country to place into effect new rules governing equity crowdfunding. In essence, the new rules reduce some of the red tape involved for small businesses in raising private equity, allowing companies to raise up to $1 million through the offering of securities directly to both accredited and non-accredited investors.

Previously, only accredited investors — those with annual income of more than $200,000 and a net worth of more than $1 million — had access to such investment opportunities. While Colorado’s rules allow such crowdfunding to take place only between Colorado companies and investors, the federal government is also working to finalize rules surrounding equity crowdfunding.

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Proponents have hailed the idea as one that will help startups that are young and growing gain greater access to capital, while smaller investors will have access to the potential for sky-high returns. Skeptics still worry about the riskiness of startups and lack of protections for unaccredited investors.

Several who participated in BizWest’s CEO Roundtable on Innovation on Tuesday aren’t yet convinced of equity crowdfunding’s value to entrepreneurs, meanwhile. Tuesday’s event was co-sponsored by the accounting firm EKS&H LLLP and Boulder law firm Berg Hill Greenleaf and Ruscitti LLP, and was held at the Boulder office of EKS&H.

Pat Perrin, an attorney for Berg Hill Greenleaf and Ruscitti, said he and other members of his firm have dealt with the implications of crowdfunding as they’ve worked with entrepreneurs who are in various stages of raising capital.

“One of the problems results in having too many investors,” Perrin said. “Depending on where you are in your life-cycle, having fewer, more strategic investors can be of much greater benefit than just having a little (funding) from a lot of different investors.”

While noting the value that non-equity crowdfunding on sites such as Kickstarter has had for some startups in providing a boost of cash and early publicity, Brad Bernthal — a law professor at the University of Colorado and the entrepreneurship initiative director for CU’s Silicon Flatirons Center — echoed Perrin’s sentiments.

“I think that so far, equity crowdfunding has been a nonstarter,” Bernthal said. “Even if the SEC takes action, I have the same concerns that Pat does that this is going to be a total lemmings market and that it’s basically going to be like penny stocks for private companies.”

Mike Freeman, CEO of the Fort Collins-based Innosphere incubator, said that so far he still only sees equity crowdfunding working for consumer-product oriented companies.

“And they have to be relatively small amounts of money,” Freeman said.

Tim Bour, executive director of Innovation Center for the Rockies, noted that equity crowdfunding is certainly not a good fit for all entrepreneurs, especially those his organization helps that are trying to spin off companies from technology developed at universities or federal labs. Those types of startups, he said, need sophisticated investors who will be able to participate in multiple rounds of funding.

“It’s just not enough money and too complicated with the capital structure to get follow-on investment that’s larger, which is going to be needed,” Bour said. “So it’s not the right match yet for university IP.”

Other hot topics of discussion Tuesday included:

LONGMONT’S NICHE: Longmont Area Economic Council president Jessica Erickson said officials in that community have been working hard to build an entrepreneurial environment that works for Longmont, rather than simply trying to become the next Boulder.

“I think it’s important for us that whatever we do we keep a uniquely Longmont objective in mind,” Erickson said.

She said the LAEC has identified four target industries in particular that provide opportunities for the town: creative and culinary arts; advanced technologies; professional services and information technology; and bioscience.

“We really put a lot of work into understanding that these industries, from the idea stage all the way up to the big company stage make sense within our community and that we’re not just chasing the next big thing because that’s what everybody’s doing,” Erickson said.

ONE BIG HAPPY ECOSYSTEM: Oliver Davis, CEO of concept3D Inc., cautioned against communities becoming too territorial over their individual niches and what they have to offer. He said that such community boundaries aren’t so distinct in California’s large Silicon Valley, which has become the pace-setter for innovation in America. He said the entire Denver and Front Range region should view itself similarly and that what’s going on in Boulder, Louisville, Longmont and other cities can all be complementary.

“The more they come together I think the richer this whole thing becomes and the more relevant this area becomes,” Davis said.

GROWTH CAPITAL: Several present Tuesday noted the abundance of early-stage capital but the difficulty in local growth capital for startups that are more established. Loren Burnett, CEO of e-Chromic Technologies, said a key for his company was finding investors who were comfortable with clean-tech, which has often meant leaving the area.

“You really need to be able to identify the right match of investors and their zones of comfort with what your business is,” Burnett said, noting that once those investors are onboard your credibility with local investors will grow.

GROWTH TALENT: Weaved into the discussions surrounding entrepreneurial education and the opportunities and obstacles facing startups, Earthvisionz CEO Carla Johnson said there’s a “new wave of talent coming into companies that is really exciting,” noting that just the entrepreneurship moniker itself encourages people to think on their own and bring innovative ideas to the table. One thing she’s concerned with, amid all of the innovation, is what she perceives as a lack of discussion around what it takes to grow a company and educating the next wave of talent on that side of entrepreneurship.

“Ideas are interesting, but they’re nothing without action,” Johnson said.

Participants in Tuesday’s roundtable included: Brad Bernthal, entrepreneurship initiative director, Silicon Flatirons Center; Tim Bour, executive director, Innovation Center of the Rockies; Loren Burnett, CEO, e-Chromic Technologies; Oliver Davis, CEO, concept3D Inc.; Jessica Erickson, president, Longmont Area Economic Council; Randy Fagundo, CEO, MinuteKey; Mike Freeman, CEO, Innosphere; Tom Frey, CEO, DaVinci Institute; Carla Johnson, CEO, Earthvisionz; John Tayer, CEO, Boulder Chamber; Jim Cowgill, EKS&H; George Berg, Berg Hill Greenleaf and Ruscitti; Pat Perrin, Berg Hill Greenleaf and Ruscitti. Moderator: Chris Wood, editor/publisher, BizWest.