Advantages of Crowdinvesting in Financing New gTLDs

By Alex Tajirian
Alex Tajirian

The second-round new gTLD applicants have a tool they don't even know about: "crowdinvesting." That's when a venture sidesteps banks and venture capitalists and instead raises money by selling shares directly to the public. Usually this is done over the Internet, and often enough the investors can hope for a financial return that's far better than what banks and stocks offer.

Since the end of 2013, crowdinvesting has raised more than $600 million from more than 5,000 offerings in the United States alone. According to the Aite Group research firm, there are about 350 crowdinvesting platforms in the U.S., 90 in the United Kingdom, 50 in France, and 30 each in Germany, Spain, Canada, and the Netherlands. Some major governments explicitly encourage crowdinvesting. For example, in the U.S., the Jumpstart Our Business Startups (JOBS) Act of 2012 lets private companies with less than $1 billion in annual revenues advertise and solicit funds directly from the public as long as the company provides accurate financial and personnel information. In March 2014 the Securities and Exchange Commission relaxed qualifying restrictions, allowing investors to participate in some offerings of less than $50 million. Previously, only individuals with a net worth of at least $1 million or an annual income exceeding $200,000 were qualified to take part. In the U.K., which has the world's second most vigorous crowdinvesting market (after the U.S.), all investors are eligible to participate with very few restrictions. The U.K. government is considering making it mandatory for banks to direct small-business customers to crowdinvesting if the banks can't fund them.

Crowdinvesting provides a number of benefits to new gTLD applicants in the coming second round. It would level the fund-raising field so that incumbent registries and those backed by a few rich investors wouldn't be the only contenders for new gTLDs. And the ability to attract a large number of investors would be a good sign of a proposed gTLD's economic viability, at least if more brains are better than a few. Incumbent registries can get in on the action by using the crowd for some of their funding, thus boosting confidence in the viability of their identified gTLDs and increasing the likelihood of success of the gTLDs program.

Entrepreneurs worry that crowdinvesting creates opportunities for people to steal intellectual property. This is not a problem for new gTLD entrepreneurs, as ICANN periodically updates the list of applicants on its website and is not expected to stop doing so. Revealing the amount of funding does not provide any valuable information to competitors, who have access to the same public information and would still need to crunch the numbers and have the necessary success capabilities. Another concern is that specifying the amount of funds sought would reveal private valuation information. But multiple rounds of financing are not uncommon, so the competition couldn't be sure that a request necessarily reflected an applicant's valuation or the maximum being sought. For investors, combined success and failure analyses of the first round can provide more performance information than is typically available with a crowdinvesting project. The reduced risk can draw a bigger pool of investors, giving the applicant an advantage and creating a win-win source of financing.

By Alex Tajirian, CEO at DomainMart

Related topics: New TLDs

Comments

Before we send in our money John Levine  –  May 26, 2015 11:33 AM PDT

Is there any reason to believe that any new TLD is profitable?  We can skip the vanity brand TLDs that are part of an overall marketing budget, but what about the ones that accept registrations from the public?

Who says that you need to win Christopher Hofman Laursen  –  May 27, 2015 12:44 AM PDT

Who says that you need to win the rights to a new TLD, John? Just ask M+M how much they made on losing out.
Anyway I think it's a good angle to think about investing in a new TLD. I haven't seen any examples of crowdfunding in the 1st round, however many registries are based on external funding, so it's not a far fetched idea.

Good Post Jean Guillon  –  May 27, 2015 1:26 AM PDT

Very good post Alex, Thanks.