Episode 202

Tea stakeholders globally find it difficult to access capital via traditional financial networks. Institutional investors cite daunting obstacles, including persistently low prices, a fragmented supply chain, and low profit margins in commodity markets. The tea industry’s vulnerability to climate change heightens risk.

Since 2021, several tea companies have successfully turned to equity crowdfunding as an alternative to traditional loans and elusive venture capital.

Nepal Tea Collective founder Nishchal Banskota raised more than $600,000 from small investors to expand operations, including new retail stores in Kathmandu. Young Mountain Tea founder Raj Vable’s ongoing WeFunder campaign has raised $225,450 to construct and operate a community-owned tea-processing factory in Kumaon, India. Others include Revival Tea and CUSA Tea and Coffee, which raised $1.2 million in 2022.

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Crowdfunding Backers Have Evolved into Equity Investors

By Dan Bolton

Since ArtistShare pioneered the concept in 2001, crowdfunding ventures have evolved into sophisticated, multifaceted platforms that support creators and mission-focused businesses. Drawing on the enthusiasm of their fans, entrepreneurs can effectively leverage crowdfunding to secure funding, validate ideas, and build strong communities around their brands.

BIO: Peter Yang is president and CEO of OverSubscribe, a non-crypto, fully regulated way for customers and fans to fund company growth and earn back a share of the money made. He graduated from the Massachusetts Institute of Technology (MIT) with a degree in computer science and holds an MBA from the University of California, Berkeley. He worked for 15 years in Silicon Valley at banks, as a Goldman Sachs financial analyst, and at Emergence Capital Partners, and was head of corporate development at Corel Corporation. Peter and co-founder Jae Kim founded New York City-based OverSubscribe in 2018.

Dan: Will you explain the fundamental reasons why crowdfunding has flourished?

Peter: Large institutional investors’ primary objective is to make financial returns. So, they have established profiles that set a high bar for investment. Companies that fit these characteristics are considered Venture Fundable.

But there’s a whole class of companies out there that might not fit what a venture capital firm is looking for, companies with different characteristics that might allow them to raise funding from other sources.

OverSubscribe uses equity crowdfunding, and we’re looking for a different set of characteristics. In this case, the companies are understandable to a broad set of folks interested in funding them for smaller amounts.

They might be investing for financial reasons. They might invest because they believe in the product. They might be investing for other reasons as well.

The kind of crowdfunding we enable came from a set of new regulations that were implemented after the Great Recession, the big global pullback of 2007 and 2008. Here in the US, the JOBS Act was a whole package of measures enacted by Congress to stimulate business in America.

Different measures touched on various aspects of business. One small section was called the Equity Crowdfunding Act. The idea was to help a whole host of companies that might not attract the attention of private equity firms or venture capital investors but might be able to find other investors, and in particular, individuals who might be interested in investing who haven’t been able to invest in these kinds of companies in the past.

The concept is that there is capital available globally that can assist these businesses in expanding.

Regulations in place from the SEC to protect investors were not allowing folks to invest in these companies. The JOBS Act allowed folks to invest, not just in big public companies on the stock market, like your GEs or your Googles or GMs of the world that are large companies that have already had public offerings and are on the stock market. But everyday investors, Main Street investors, were able to invest in small private businesses that were not yet on a public market but that could use the capital.

Dan: Your career started at the very point you’re describing, where you can see a big transition from a colossal miscalculation by banks and major investors. So, talk to me a little about the niche. What excites you about the investment is closer to the rubber in the road, right? It’s more like the rubber meets the road part of it than some theoretical, you know, economist assessment of whether there’s a return on investment.

Peter: That’s exactly right. The laws created a whole new set of individual investors, called unaccredited investors, to invest in private companies. Going back many years the SEC has classified and kind of segregated the world into two classes of folks. You’re either an accredited investor or an unaccredited investor.

And really, what this applies to is not investing in the stock market or buying stocks through your E-trade account. What this pertains to are companies that are still private companies, companies that are not listed on a stock market, and who can invest in those private companies. So for example, if you are a hot tech startup, the only folks you can get to invest in your company are either these big VCs and these big firms or what are called accredited investors.

So the way an SEC defines an accredited investor is somebody who’s savvier about the investment world, someone who’s savvier about the risks involved in private investment is able to properly assess those risks, and then make an investment in what is inherently a riskier proposition than buying stock like an apple or buying stat stock in Google or buying stock in GM. So the idea there is that these folks, the SEC has said, okay, they’re in a position to properly assess these risks, so we’ll allow them to invest in these riskier companies.

But the cutoff for that is kind of a strange test. It’s not based on a test that you take and sit down and take and say, hey, you know, what are the risks involved in investment? Or it’s not based on speaking with someone and having them assess your investment knowledge. They base that purely on an income and asset test. So the rough rule of thumb is, if you have more than $200,000 in income, then you are considered an accredited investor that you understand the risk you’re getting into and making an investment like that, and then you can invest in these private companies.

So prior to these new sets of laws, I’m speaking about here, if you heard about a hot startup in Silicon Valley or in your hometown, for example, a hot tech startup, if you did not know the founder of that company, if you were not friends and family of them, and you were not an accredited investor if you didn’t pass that income test, you would not be able to walk in the front door of that company and just write them a check and say, hey, I want to invest in your company, because that was closed off to you, because the SEC was saying, if you’re below this cut-off, then you are not in a good position to assess these risks properly for yourself. We are not going to allow you to invest in these companies.

What changed with the JOBS Act and with the Regulation Crowdfunding (Reg CF) is the SEC is, hey, the world has changed some you know, people are savvier generally about investments in general, and about the risk they might be able to take in making an investment. And we want to open up all this capital to help stimulate more small businesses and more business in the US, this capital that’s been unable to be put into these private businesses. So what they said is, okay, we’ll allow those folks to begin to invest. These unaccredited investors, folks who make less than $200,000, can invest in private companies, even if they don’t know the founders. They can invest in a company that they came across in the news or that’s being offered for investment. And that was the idea there, again, was to help more companies have funding, to help them to accelerate their growth, to help stimulate the economy, to make to continue to help the US economy to thrive and grow, kind of in this new era.

But you know, as part of that, what the SEC said is, okay, we still want to make sure there’s guardrails in place for these unaccredited investors to make sure they’re not being scammed. So the whole idea here was that the concern of the SEC is not that you know who gets to make investments or not, or who gets to make money or not. They’re thinking more about the risks, and you know someone who’s not necessarily as well informed or as savvy to assess the risks, or who does not have as much capital to be able to absorb those risks, there’s a bigger risk of them being kind of victim of a scam or fraud, right, where a private company has a really slick message and really charismatic kind of CEO of the company and says, we’re going to do all these things and somebody who might not have the right background to assess that, to assess invest a large amount of money, even though their income might not be able to support that, and then the SEC would not be able to protect them.

What the SEC did to allow this capital to come into the market from these unaccredited investors but still protect them is to set up a designation for certain online platforms called equity crowdfunding portals. And what these portals do is they take on a lot of that job for these investors, of assessing the risk of the company, to make sure these are legitimate companies that these unaccredited investors are investing in, to make sure that the founders of the company, you know, have a background check or kind of attest to certain things in terms of what they’re offering to the public, and to take on this role of vetting these companies that are being offered to these under credit investors to invest in, they also put in additional measures, like certain limits on the amount an unaccredited investor can invest. It can only be up to 10% of their income, for example, or a certain percentage of their assets, all in the name of making sure these folks can invest in these businesses, that these opportunities are not closed off to them, but also that they’re not. They’re not put at great risk in these riskier classes of companies.

Dan: Will you contrast online equity investment with crowdfunding donations?

Peter: Crowdfunding itself, separate from investing, has been around for a while now. The first wave was companies like Kickstarter (2008) or Indiegogo (2009), then companies like Patreon and GoFundMe

The idea was an outgrowth of the internet, right? That is because now it’s easy and frictionless to bring together a lot of people for good causes like a GoFundMe or to help pre-fund a company, like Kickstarter, where you might pre-order product or get perks, or, like Patreon, to support your favorite content creator. People were getting used to using money online and had the idea to aggregate that money to do something bigger.

We now have the tools to do that, but the big distinction versus equity crowdfunding is that fans who funded new products or movies that a director wanted to make cannot receive financial returns.

They might be able to get merchandise or free samples of the product. Or they might be able to pre-order a product.

If you give money early, you’ll get an early version of the product at a much lower price than anybody else will because we’re going to use that funding to build it,

But those platforms, by law, cannot share any of the financial success with the folks who contributed money.

So, for example, on Kickstarter, if you did pre-order to allow this company to execute this product vision, if that company goes on to be a smashing success and has an IPO on the NASDAQ and is making billions of dollars years later, that money you put into helping it to get started got you nothing else, right?

Even though you identified that this was a great company and a great product, you wanted to invest early. You took a big risk—because, in some cases, the company was never able to execute the vision and might not even return the product they thought they were ordering.

They said, “Hey, you know, there might be other ways to do this.” Equity crowdfunding enables small investors to pool money to invest in a company, almost like angel investors, by aggregating money to help a smaller company accelerate its growth.

There are many contexts where folks see the opportunity to generate financial return, and they want to be able to participate in that as well. And that’s what this new class of equity crowdfunding portals and platforms allows.

They’ve combined a few concepts: crowdfunding and investing in a private company to allow financial returns to be returned to the fans.

Dan: You co-founded OverSubscribe to help influencers and creatives enhance their visibility and earn a share of sponsorships, merchandise, and revenue they generate from social media. Will this work for other fan-based businesses?

Peter: OverSubscribe is a mission-driven company. We’re here to help every person and every company we work with reach their full potential, regardless of where they’re starting from, right?

So, regardless of their level of expertise in raising money or the size of their network, we want to help them with whatever they’re trying to do.

So that’s very much the case with the creators we’re working with, but it’s also how we think about partnering with other companies.

We’re very, very focused on helping online content creators to bring their audiences the best of what they can bring. We help creatives raise growth funding, and financial investments from their own fans.

The key insight is: Where do those investors come from, and what is their incentive for investing here?

If you run a Kickstarter, you must effectively market and promote it to both your existing audience and new potential backers. Not everybody is positioned to do that, so they might have to spend a lot of money to market this crowdfunding campaign for varying results.

An investment fundraise is said to be “oversubscribed” when total investor commitments to a fundraising round exceed a targeted amount set by the company.

Peter Yang

Online content creators can effectively use existing infrastructure to raise money because they already have an emotionally invested audience.

They’ve invested a lot of time in following their content. They might be invested in the individuals behind that content. If they’ve been following them for a long time, they might even be invested in seeing them succeed.

They trust that individual, and they might be interested in supporting them, not just for altruistic reasons but because if they put money in, they’ll be able to get more great content, new products, or help that set of content creators reach their ultimate vision.

This is a perfect market to raise funding in this way because they won’t have to spend all that money to market and bring in new investors. Instead, they have people with whom they already have an established relationship who are, quote-unquote, “already investing in them” and might be willing to invest in them financially. They could get more of the stuff they wouldn’t be able to get otherwise and share in the financial success.

Audiences have become much savvier about how online content is made these days. We work with many individual creators, folks like YouTubers, Instagram creators, podcasters, or, you know, Twitch streamers who stream gaming.

Audiences know that, in the end, for almost all these folks now, it’s not just for fun, it’s not just a creative outlet, it’s not just a side hustle, it’s not just a labor of love, but there’s usually a business attached to it as well, and these folks are making money from ads and sponsorships.

They felt less comfortable using traditional crowdfunding methods to support these folks. They started to see that I was putting this money in for them to build something that would generate even more revenue for them. But if they succeed, they keep those proceeds. And I just ended up with this T-shirt.

So that insight, together with the understanding that those fans are still interested in supporting their favorite creators, led us to build OverSubscribe, where fans can support their favorite online content creators who might have a more challenging time getting money from those institutional funding sources that we talked about, like your VCs or your private equity firms or your banks, but could still use the funding and have this built-in investor base of fans, who they can appeal to those fans are most interested in investing if they can share in those financial results.

We’ve run some proprietary surveys of YouTube viewers and social media followers where 80% of the most engaged followers said they are very interested in supporting their favorite content creators with some type of financial investment where they can share in the financial success.

Two-thirds would very much want to see some kind of financial return over just doing it for rewards or early merchandise. We think that’s the right timing for us to come out on the market with a product helping creators on all different types of platforms, all different sizes, raise money to invest in their growth, whether that’s to invest in the content itself, new products, or business growth.

We’re helping creators accelerate their growth and reach their full potential through what we’re doing here at Oversubscribe.

Dan: When you look ahead and at this fast-changing, evolving sector. What do you see? What does your crystal ball tell you?

Peter: One parallel is the whole crypto boom, right? So you know this message of, hey, you have people who are passionate about what you’re doing, and hey, they are willing to be a part of that and want to be a material part of that, beyond just sending along their goodwill or giving you likes and subscribes. Still, they love to be a part of it financially as well. But they want to share the results, and you might want to share that with them to build a community, not just a producer-consumer relationship with them.

So that was a lot of the ethos behind things like NFTs that we heard so much about in the last few years here, which, at a base level, is very similar to what we’re doing. The problem there, I think, is that technology and the kinds of ideas got a little bit ahead of the reality there. So the most significant thing there is, you know, NFTs and crypto are not fully regulated instruments. And so, you know, we just spoke a lot about how the SEC puts a lot of attention, a lot of work into making sure small investors are protected and not scammed and not taken advantage of. But you know, those stories we heard when crypto had its pullback, you know, they’re doing well again now but was very much about scams and kind of things where the rug was pulled out from under small investors, and many people had very negative outcomes because of that.

So yeah, this idea of flattening of the world and allowing people to be a part of, all different kinds of efforts, and then sharing the financial results there, that’s embedded in a lot of places in the world right now, and it’s only going to become more and more common. And we think, you know, crypto will be a big part of that for the time being.

Though you know, we, as OverSubcribe, stayed away from that just because of that lack of regulation. We wanted to make sure that both you know, the creators on our platform, but also the fans who are investing, you know that they can have that sense of security that, hey, there’s folks who are looking out for us here, beyond, who are kind of more disinterested and more objective and are making sure that this is all working well. So, you know, there’s been a lot of thought on our end about, hey, do we make a move to being a more kind of crypto NFT type kind of platform? Because technologically, and in terms of, you know, in some ways, it seems to be more elegant.

The flip side is, you know, then people have to deal with number one, with kind of coins and wallets and blockchains, you know, metaphors they might not be as comfortable with quite yet. You know, on our platform, it is, you’re just investing in a company. You’re doing that through a credit card or ACH payment, and you’re receiving, you know, those returns in the form of a share of the revenue of that company through a bank transfer back here. So it’s all very kind of tools, and you know, platforms that folks are already familiar with.

So investing on the OverSubscribe platform should feel similar to buying a sweater online, to a typical e-commerce transaction. You’re just entering your credit card and ACH number, but you’re investing in the business and growth of your favorite creators. So that’s kind of one difference with crypto, but the other very much, the bigger factor for us and making sure in doing things the way we’re doing it right now is because of that lack of regulation in the crypto sector to date. So yeah, we want to make sure because there’s real money being handled here because this money is being used to fund the creators’ businesses, where it’s their own livelihood at stake, where the money being put in is people’s hard-earned money. We want to make sure people feel secure about that, that they know that there are folks looking out for them.

So we’ve chosen to stay in this world of real investments in a company and do that through normal financial channels, but in the future, like you said, Dan, this is not an idea. That’s just a flash in the pan here. You know, we’ll see in a lot of different domains. We think it’s only going to continue to grow, particularly kind of as those, as those blockchain and crypto tools, become more well established, as regulation comes to those as well, we’ll see, we’ll start to see a lot more in a lot of different spaces.

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• Photos courtesy OverSubscribe unless otherwise noted.