How We Built And Launched A $100M Equity Crowdfunding Platform
Hello! Who are you and what business did you start?
My name is Howard Marks. I am the co-founder and CEO at StartEngine, a leading equity crowdfunding platform that allows everyday people to invest in startups and entrepreneurs to raise capital from the crowd.
Previously, I was the founder and CEO of Acclaim Games, a publisher of online games now part of The Walt Disney Company, as well as the co-founder of Activision Blizzard and Chairman of Activision Studios from 1991 until 1997. As co-founder, former Board Member, and Executive Vice-President, a partner and I took control in 1991 and turned the ailing company into the $50B market cap video game industry leader. As a games industry expert, I built one of the largest and most successful games studios in the industry selling millions of games.
I am also the 2015 “Treasure of Los Angeles” recipient, awarded for my work to transform Los Angeles into a leading technology city. I have also been named one of the 500 most influential people in Los Angeles by the Los Angeles Business Journal and am a member of Mayor Eric Garcetti’s technology council.
At StartEngine, we help companies raise capital on our website, similar to Kickstarter. However, the difference is that companies on StartEngine are selling equity, debt, convertible note, and other types of securities to investors rather than just products and perks.
StartEngine has helped more than 265 companies raise capital from a community of over 190,000 users on our platform. Those companies have raised close to $100M and include every type of business from electric bikes and solar panels to movies and open source voice assistants.
What's your backstory and how did you come up with the idea?
After the second video game company I founded, Acclaim Games, was acquired by Walt Disney (Playdom was the original buyer), I wanted to take a break from the entrepreneurial side of the business and become an investor. I set a personal goal for myself to invest in 60 companies, and since I was living in LA, I decided to invest in startups in LA too.
Where do you start with that goal? How do you find entrepreneurs to support? As I started this journey, I realized that an accelerator model was quite effective for my purposes, and so StartEngine, the accelerator, was born.
We offered companies $20,000 for a 10% stake in the company and 90 days of mentorship. Given we were one of the first accelerators in LA, we had a lot of interest. Ultimately, we accepted around 5% of applicants and had 60 companies participate in the StartEngine accelerator in total.
Of those, 50 failed rather quickly, and 10 remain today, some of which are very successful. Among the successful are TruBrain, a nootropic company, Tint (formerly hypemarks), a content curation and media touchup tool, Enplug, a digital signage software, and Carbon 38, an active-brand clothing company.
What I learned from that experience was that finding capital was hard. Many companies in the accelerator didn’t pay their employees, had to find rent-free places to live, and were struggling to make ends meet.
That issue was compounded for the women and minority founders that I invested in. I saw the bias of venture capital funding, and I grew frustrated when the companies I invested in couldn’t go on to get more funding. For context, female founders receive just 3% of venture funding.
Ultimately, raising capital was a problem of whether entrepreneurs could sell themselves to investors, at which point it becomes a numbers game. Pitch 100 investors and land 5 to 10.
I thought there had to be a better way for entrepreneurs to get funding.
Take us through the process of starting and launching the business.
This issue of finding investors at volume to pitch your business gave me a greater appreciation for Kickstarter and Indiegogo: raise capital from the crowd and let the crowd decide if the investment is worthwhile. However, the model only worked for consumer-facing products. That all changed with the JOBS Act.
Signed by Barack Obama in 2012, the JOBS Act allowed entrepreneurs raise capital from the crowd, and for the first time in 80 years anyone, not just angel investors, VCs and private equity firms, could invest in startups and private companies. Suddenly, the door opened by Kickstarter looked like it could become an option for a much wider range of companies. A new scale of crowdfunding.
As we waited for the JOBS Act to be enacted by law, I continued reading about the JOBS Act and run the accelerator at the same time, debating which of the two had more potential with my co-founder. Eventually, the choice was clear, and so we decided to pivot our business and become an equity crowdfunding platform.
We needed a name and a logo. The StartEngine name already had some notoriety, which would be useful in this endeavor, and I figured if a name works for an accelerator, which is in the business of raising capital for businesses, then it would work for an equity crowdfunding platform too.
Given the nature of equity crowdfunding, it felt disingenuous to go to venture capitalists, so we put our own money into the company and raised from friends who shared the belief that finance needed to be disrupted. Then it became a waiting game: when will equity crowdfunding by legalized?
On March 23, 2015 we received a phone call: the SEC would be voting on Regulation A+ in the JOBS Act. I hadn’t seen a draft of this regulation, so it was a surprise. The Regulation passed unanimously, and the date was set for Regulation A+ to go live. Suddenly, we had just 60 days to find a client.
Eventually, we got connected to Paul Elio, who ran the highly-efficient, light-weight car company Elio Motors, through another entrepreneur in LA. We met with him on June 1st, and he signed the next week. Elio Motors went into a test the waters page, which allows investors to reserve shares in the offering.
Within hours, there were millions of dollars in reservations, and when the raise finally went live in November that year, Elio went on to raise over $16.9M, a smashing success.
After that, it was slower going than I thought. Elio’s success didn’t spark the success I anticipated, but eventually things accelerated. The real turning point came when Regulation Crowdfunding was implemented in May 2016, which is an inexpensive and cost-effective alternative to Regulation A+ (the difference being you can only raise up to $1.07M to Regulation A+’s $50M max).
By the end of 2016, we did 10 launches. By the end of 2017, over 100, and in 2018, we launched 263 companies.
Since launch, what has worked to attract and retain customers?
As it always is with business, attracting and retaining customers is a mix and match of strategies.
We use Facebook and LinkedIn ads, as well as Adwords. However, ultimately, we’ve found that while ads will always be a part of our marketing strategy, they aren’t delivering as high of quality leads as we are ideally looking for.
We realized that the best leads are organic and sign up on our website (it doesn’t hurt that organic leads are cheaper too). As a result, we are ramping up our own blog discussing equity crowdfunding and building out more web pages to rank better in Google Search.
Our exploration of content marketing started last year, and I wrote all over the web for publications such as The Next Web, Forbes, Hacker Noon, The Mission, and The Startup. With the explosion of cryptocurrencies and ICOs last year, I positioned myself as a thought leader by generating a lot of written content on Medium, discussing why these crypto tokens were more often securities than not. It brought us good business, including PopCom, who recently raised $1.07M on StartEngine. PopCom’s founder Dawn Dickson is one of the first 40 black female founders to raise over $1M in the US, reinforcing our mission at StartEngine and helping entrepreneurs achieve their dreams.
The other significant part of our strategy is email marketing. We have an email list of over 211,000 users, and we email them 4-5 times a week, which includes our investor newsletter as well as updates on new launches and major funding updates for companies raising on StartEngine (if they raise more than $500K, for example).
In terms of retaining customers, we’ve spent a lot of time and resources developing a platform that simplifies the process of raising capital from the crowd and takes care of all the plumbing, but a successful raise is ultimately dependent on the company and their marketing efforts to their community. StartEngine’s audience accounts for around 30-40% of a successful raise, and the rest comes from the company itself. If the entrepreneur successfully raises capital, they often come back to raise again the following year and further strengthen their community by converting more of their customers into investors and giving them a real stake in the business.
How are you doing today and what does the future look like?
As of May 9th, there are currently 60 companies raising capital on StartEngine, and the future looks bright. We aren’t profitable yet, but we are growing. In 2018 StartEngine increased revenue to $4.68M from $2.04M in 2017, a total increase of 129%. We also decreased our gross margin to 44% in 2018 compared to 64% in 2017.
We are actively raising capital on our platform, “eating our own dog food” as it’s described in the industry, to fuel our growth, and I’m very excited for what’s in store this year.
Our main goal in 2019 is to become registered as a broker-dealer and ATS (Alternative Trading System) with the SEC. With these licenses, we will be able to launch StartEngine Secondary, which will allow investors to buy and sell the securities they purchase on StartEngine with other investors on the secondary market, giving investors the possibility for liquidity. I believe that creating liquidity is the final component of unlocking equity crowdfunding’s potential.
Through starting the business, have you learned anything particularly helpful or advantageous?
What I have learned is that you need a clear mission statement for your business that drives the company forward. This helps you hire the right people, build a company culture, and get customers. I did not have a mission in the past, and it was hard to explain what we did, which became a disadvantage.
The second lesson is that capital is king. In the past, I was always worried about dilution, but in reality my worry should be focused on having the right amount of capital and keeping control of the business. Dilution isn’t an issue if the company is growing.
The last lesson is that an entrepreneur must have grit, the intersection of resilience and passion, to succeed. Without both of these qualities, an entrepreneur will eventually succumb to the difficulties of building a startup, and the venture will fail. If you lack those qualities, it’s better to stay at a real job.
What platform/tools do you use for your business?
- Email marketing: MailChimp and Zealot
- Management organization: EOS
- Management tools: Asana and Jira
- Team Communication: Slack
- Customer Communication: Zendesk
- Bank: Prime Trust
- Social Media: Hootsuite
- Blog: WordPress and Kinsta
- Ad Landing Pages: Instapage
What have been the most influential books, podcasts, or other resources?
Right now I am reading the Business of Platforms, which is a great book for anyone building a platform company. I am also a fan of Nathan Latka’s podcast.
It’s authentic and well done. The ultimate book for entrepreneurs who want to disrupt an industry is The Innovator’s Dilemma by Clayton M. Christensen.
Advice for other entrepreneurs who want to get started or are just starting out?
My main advice is this: NEVER QUIT! This may not seem obvious, but those who stay through the ups and downs and emerge on the other side always win.
Along the way, they discover who they are. They pivot. They hire and fire. They breakup with their co-founders and best friend. They get screwed by investors and at the end of it all, they realize what this is all about: their life journey.
Are you looking to hire for certain positions right now?
We are a startup and are often hiring for new positions. You can see a full list of current openings on our Lever page.
Where can we go to learn more?
To learn more about raising capital or investing in startups via equity crowdfunding, please visit StartEngine’s website.
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Download the report and join our email newsletter packed with business ideas and money-making opportunities, backed by real-life case studies.
Download the report and join our email newsletter packed with business ideas and money-making opportunities, backed by real-life case studies.
Download the report and join our email newsletter packed with business ideas and money-making opportunities, backed by real-life case studies.
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