The Taiwan Banker

The Taiwan Banker

Gen Z Leads Future Crowdfunding Trends

Gen

2022.01 The Taiwan Banker NO.145 / By Chen Ya-Li

Gen Z Leads Future Crowdfunding TrendsBanker's Digest
Although Generation Z has only just started working and making money, it will drive consumption and investment over the next 10-15 years. This group is willing to invest in small amounts to provide funding for start-up startups in exchange for a small share of future equity. If the company becomes prosperous, these small investments could bring considerable returns.Favorable factors such as low interest rates and hot money have boosted the investment boom, allowing Gen Z to begin seriously thinking about how to learn to invest and participate in capital markets. These young adults have gradually realized the importance of capital, and found that hard work is no longer the only way to grow wealth. It is better to put the same effort and wisdom into the capital market on a higher level, with more room for growth. In addition, loosening of US regulations, technological development and business model innovation have also lowered the investment threshold for Gen Z petty bourgeoisie, enabling young retail investors to become early-stage angel investors with small amounts of capital.The rise of Gen Z angel investorsGeneration Z, generally referring to those born between 1996 and 2016, are “digital natives,” having grown up with computers and the internet. According to a 2020 report by Bank of America, Gen Z will be “the most disruptive generation ever”; by 2031, its income will surpass that of millennials (born 1981-1995). Gen Z has an opportunity to redefine consumption and investment.Although people aged 20-25 have just started earning money, they will become a force in the economy and financial markets. They not only know how to learn to accumulate wealth for themselves, but have also started investing and managing their wealth.Some have joined venture capital companies, and have become angel investors while still in college. They hope to become early shareholders of unicorn companies, and to have far-reaching future influence in the venture capital industry.Venture capital and private equity funds usually invest millions or tens of millions of dollars, but the amounts here are small – only US$ 2,000-3,000 at most. But these investments can help fund a startup in exchange for a small percentage of future equity. If these targets do well in the future, or even go public, equity holders could earn considerable returns.For the investors, however, angel investing isn’t about getting rich – it’s about getting involved in the startup economy for the first time. “Obviously everyone wants a return, but most of the time you lose money,” said Dayton Mills, a 22-year-old entrepreneur who has been making angel investments for years. Most of the motivation is to buy “rights of access”, which may yield greater benefits than the investment itself.How does the younger generation make angel investments? Take Joe Niehaus, a 22-year-old University of Cincinnati student, for example. Through the Gen Z VCs Slack channel for venture capitalists, investors and entrepreneurs, he learned that Fishwife (a canned seafood brand) was seeking capital. Fishwife harvests its fish in an environmentally responsible and ethical manner. Through Slack, Niehaus made a phone call to the founder.After the two sides talked, Niehaus was disappointed that could not meet the minimum investment threshold, but he did not give up. He took the matter to heart and used the holidays to make money, seeking advice from mentors on the deal, and finally investing jointly with his cousins.Gen Z has become a target market for many startups, both for founders and VCs looking for partners. “What’s unique about Gen Z is that it’s entrepreneurial, digital native, values-focused, and we don’t accept the status quo,” said Meagan Loyst, 24, founder of Gen Z VCs. “I think angel investing gives us a new way to look at the world, and that’s why you see so many Gen Zers getting involved.”SEC relaxes equity crowdfunding standardsIn the past, the barriers to private investment were very high, and only a few Silicon Valley venture capitalists and angel investors with networks of contacts could participate. Recent regulatory changes have however expanded the pool of eligible participants.Historically, angel investing has not been suitable for young people due to the wealth requirements set by the Securities and Exchange Commission (SEC). While anyone can buy shares in public companies, the riskier and more speculative nature of investing in private fundraising led to tighter SEC oversight.Since the 1930s, to become an SEC-qualified investor, you needed a net worth of at least US$ 1 million alone or jointly with your spouse, excluding the value of major real estate held under your name, to qualify; or else to be an individual with annual income of more than US$ 200,000, or a married couple earning more than $300,000 a year. Most Americans, not the least young people, were turned away.Recent regulatory changes have however made angel investing more accessible. In 2016, the SEC created new rules that allow startups to raise more capital through equity crowdfunding, collecting small sums from those who do not meet the requirements of an accredited investor.In August 2020, the SEC amended its rules to relax the requirements for accredited investors, allowing those who “understand private fundraising” to become angel investors. That is to say, even those who do not meet the SEC's wealth requirements can be considered accredited investors and participate in angel investing, as long as they pass the Series 65 exam and demonstrate professional financial knowledge and experience.In November 2020, the SEC announced the relaxation of equity crowdfunding standards, allowing start-ups to raise more funds through regulation crowdfunding; a company’s one-year regulation crowdfunding limit was increased from US$ 1.07 million to US$ 5 million, an increase of nearly 5 times. This means that individual investors will have access to more direct investment opportunities. Many emerging internet technology companies have offered equity investment opportunities to their members, users or developers to successfully raise working.The SEC’s new rules on the regulatory fundraising limits took effect on March 26, 2021. Sahil Lavingia, founder of the creator platform Gumroad, immediately benefited, raising US$ 5 million in just 12 hours from 8,962 investors; more than 2,000 of them were creators on the platform, and the average investment was US$ 500 per person.The rise of personal investment platformsSince the SEC loosened its regulations on equity fundraising, personalized investment platforms have emerged to help democratize venture capital and allow novice angel investors to participate in the initial stage of new startups. For example, Maven, a next-generation course platform, opened its seed round shares to the public for subscription; Snack, a dating app targeting Gen Z, also opened a seed round US$ 50,000 shares to investors. The new startup Stonks also responds to this trend. Advertised as a combination of Twitch, Kickstarter and Shark Tank (a well-known entrepreneurial reality TV show), users can watch live broadcasts of new startups’ fundraising pitches and decide whether to invest.Gen Z has three main requirements for angel investing: transparency and ease of use, with news and personalized investment advice visible at any time on the platform, and investment thresholds no more than US$ 10,000-20,000. Like-minded investors gather on TikTok and Twitter to discuss the valuable contacts and information exchange brought by angel investing and entrepreneurship, and also make use of social media such as Slack and Clubhouse to build networks and share ideas and information for mutual support with other investors. The Gen Z VCs Slack channel, for example, has grown to 10,000 members since its launch in November 2020, many of them teenagers.AngelList is another platform that matches startups with investors. In May 2021, Snack launched a financing project called “Gen Z Syndicate” on AngelList, opening a US$ 50,000 seed round. Snack founder Kim Kaplan has raised funds from traditional venture capital firms, but believes it is also important to involve young investors because doing so gives her direct access to her target audience.Investor John Smothers, 24, said that the adoption of new investment methods such as affiliate financing projects, rolling funds and AngelList not only lowers barriers to investment, but also helps to demystify the world of angel investing.In the past, the general impression was that angel investing meant cutting a check with a minimum amount of US$ 25,000. Today, through platforms like AngelList or by meeting startup founders, there are opportunities to make small angel investments, so that private equity investing is no longer a rich man’s game.Changing the world with investmentAngel investing carries a lot of risk, and most investments are unrewarding, like buying a lottery ticket. But for many Gen Z investors, angel investing isn’t about getting rich, it’s about making their voice heard – a way of influencing the future.According to research by McKinsey, Gen Z selects specific topics that are meaningful to brands and consumers, and companies and partners must act in line with their ideals to gain their moral approval. In other words, when it comes to investment, Gen Z tends to pay attention to issues such as sustainable development, environmental protection, and social responsibility.Gadi Borovich, 21, has made about 30 angel investments through WeFunder, mostly in ideas he believes will change the world. Examples include a startup offering internet services to students in developing countries, and a business developing gut microbiome therapies. He believes that even if the investment is small, it will allow him to participate in the entrepreneurial economy and show how he wants to live in the future.Karthik Senthil, founder of Hax – a startup that provides financial services for Gen Z – observed that young people are more inclined to express their stances through investment. In particular, Gen Z prefers Etsy, an e-commerce platform that supports the creator economy, and Robinhood, which simplifies stock trading.Loyst said that the creator economy, EdTech, social games and digital health are all industries favored by Gen Z investors. “The threshold for entrepreneurship and investing has never been lower, and our generation is very aware of the opportunities we have!”