When Microsoft made its initial public offering in 1986, it did so for a mere $80 million, an unthinkably small sum of money for an IPO today. But as recently as 1929, stock offerings were one of the main ways that small businesses raised capital. Philadelphia, Boston, Baltimore, and other small cities all had their own stock markets where small to medium-sized companies could raise money from public investors.
The Great Depression and the securities reforms that came with it changed all that. Today the cost of a stock market listing puts the option out of reach for all but large companies.
Chris Tyrrell, founder and CEO of Tulane Street-based Offerboard, hopes to bring the investing world back to a more pre-Depression approach to finance. The Jumpstart Our Business Startups Act (the JOBS Act) of 2012 changed a number of regulations with the aim of encouraging crowdfunding — that is, companies raising money from many small investors (see Survival Guide, page 4). Further provisions of the law, which have yet to come into effect, promise to relax the rules even further.
The effect of the JOBS Act could be so great that Tyrrell believes that in the near future the term “crowdfunding” will go out of style. To him and the rest of the team at Offerboard, money from lots of small investors is just “funding.”
Today Offerboard is a platform for investing in growth companies seeking $5 to $50 million. Its software platform, borrowed from the Australian Small Scale Offerings Board, connects accredited investors with companies looking for capital. The company has connected investors and companies to the tune of $20 million since its launch in May, making it the third-most active reporting platform in the industry, Tyrrell says. The company now has 17 employees.
Tyrrell led a mobile existence growing up. Born in Germany, he moved from Army base to Army base along with his military lawyer father and homemaker mother. He went to college at age 15, graduating from the pre-med program at the University of Texas. He worked in the medical research field for five years after that, at the National Institutes of Health, the National Cancer Institute, the Imperial Cancer Research Fund in London, and the Institute of Human Virology, the same lab where HIV was discovered.
Tyrrell was on track for a promising medical career, but he eventually realized that he didn’t have the passion it would take to be a world-class researcher. “I didn’t have the fire,” he says. “I worked for some of the greatest scientists in America and abroad, and these people gave their lives to the development of their craft: 10 years of education, and another 10 years working their way through the early discovery process. You really have to have fire for that. You have to think it was what you were made to do. I realized that it wasn’t for me. That wasn’t my calling.”
In 1997 Tyrrell left the medical field and tried several other lines of work. He worked for the Catholic Church in Rome, and Steve Forbes’ presidential campaign in 2000. In 2003 he went to the University of Virginia Law School, graduating in 2006. He went straight to work for the Wall Street law firm Cadwallader, the oldest continuously operating law firm in Manhattan.
In 2010 he co-founded a Carnegie Center-based company called Right Energies that installed energy-saving fluorescent lights at factories and warehouses. Unfortunately, he had picked a bad time to get into the fluorescent business, with LEDs soon emerging as the wave of the future in lighting. Right Energies closed in 2011.
That same year, the lead investor in Right Energies asked Tyrrell to run the office of his family’s venture portfolio. In November of that year, he had a conversation with some other people in the office about small business capital formation, and about how a local stock market like the ones that existed before 1929 would be a great idea. With the JOBS act passing the following year, that idea morphed into what became Offerboard. It is the second crowdfunding company to be founded in New Jersey.
“The old way of doing finance is going to look like a garage sale, and this is the construction of eBay,” Tyrrell says. “We are taking the ways people have discovered to invest in small companies and bringing them into the modern age.”
Tyrrell says there have been $118 billion in securities offered nationwide under provisions of the JOBS act so far, and that when the Title III portion of the act eventually goes into effect, which will allow non-accredited investors to participate, it will grow even faster.
Tyrrell says he founded the company in Princeton because it is “an incredible ecosystem for the building of small companies.” He says he is looking to connect with local and regional companies that are looking for early investors.
“I think the Route 1 corridor is rife with companies that could utilize this kind of capital formation platform and technology,” he says. “In addition to pharmaceutical and technology companies, I also think the light manufacturing and transportation business is going to take advantage of this new model of capital formation, as well as financial services and real estate. The revolution is just beginning.”
#b#Crowdfunding? Caution Advised#/b#
The JOBS Act now makes it possible for entrepreneurs to advertise directly to accredited investors — a practice that was previously illegal. According to a statement on the Offerboard website — www.offerboard.com — the act “promises to revolutionize the way entrepreneurs in startup and early growth phases raise capital.”
Other provisions of the JOBS Act, according to Offerboard, “lifted the cap on the number of allowable subscribers from 500 to 2,000, and made it easier for companies to go public via an IPO. If you’re an accredited investor, the new law makes it possible for you — and thousands of others like you — to diversify your investment portfolio by easily accessing venture capital like early stage growth companies via specialized websites, which act as a sort of ‘kickstarter’ for startup companies.”
Investors should be cautious, however. “While some investments will pan out very well, others — likely a majority — will fail to meet expectations.” The Offerboard website offers the following cautionary notes:
Be qualified. To invest in crowdfunding equity under current law, you must be an accredited investor. An accredited investor is one who satisfies at least one of the following criteria established by the Securities Exchange Commission:
An individual income of $200,000 or more per year (or, $300,000 if filing jointly with a spouse) in each of the last two years, with a reasonable expectation that income level will continue in future years; or a net worth of $1 million or more (excluding personal residence)
Dig. You are responsible for your own due diligence. While a financial advisor may be able to guide you and provide some analytical tools to help you in that process, ultimately the decision, rewards and risks, are yours.
Understand the risks. Early stage and startup companies are risky ventures, almost by definition. Especially on the equity side. You are taking above-market risks in the reasonable expectation of above-market gains in the long run. But be prepared for any individual position to fail. Only invest if you can afford the risk.
Diversify. According to the Securities and Exchange Commission, 70 percent of initial venture capital investments lose money. Overall, venture capital is historically profitable — but generally because of that one big winner in a basket of ten or so positions. Put another way, the venture capital market has tremendous potential. But if you only have one position, you only have a 30 percent chance of benefiting from it. If you want to use private equity as an asset class, you may want to consider holding a number of promising positions — not just one.
Be humble. That 7-in-10 investments lose money statistic the SEC cites wasn’t dumb money: It was achieved by sophisticated, professional venture capital investors.
Be Patient. Expect that your money will be locked up for some period of time: Frequently three to five years. Don’t commit money you expect to need so to a private equity opportunity.
Consider IRAs. You can use a self-directed retirement fund for crowdfunding opportunities, such as a self-directed IRA. Be mindful of tax consequences, though, including the taxation of any gains as ordinary income, rather than as long-term capital gains. Also be mindful of required minimum distributions, if you are approaching the age of 70 and a half. You may not be able to cash out of these positions in a hurry.
Offerboard, 40 North Tulane Street, Princeton 08542; 888-633-3788; Chris Tyrrell, founder & CEO. www.offerboard.com.