Netcapital Connects Retail Investors with Private Companies in Need of Capital

In a Nutshell: Retail investors have traditionally lacked access to opportunities with early-stage companies with the greatest growth potential. And startups have traditionally had difficulty accessing capital. Netcapital solves both problems by connecting investors and firms on a common platform. Netcapital provides innovative tools and insights to manage portfolios and set up offerings that help streamline the investment marketplace.

Institutional investors — a category that includes pension funds, mutual fund companies, banks, and insurance companies, among others — have resources, tools, and training at their disposal. That gives them a significant advantage over individual investors — also known as retail investors.

The rise of fintech investment platforms and apps has broadened market access for individuals, but apps still can’t match what institutions can do.

For example, average retail investors have virtually no access to investment opportunities in private startups and early-stage companies. Although new companies often fail, those that succeed frequently show substantial early growth and generate better than average returns.

Because they often lack size and market share and haven’t demonstrated sustained financial viability, startups usually don’t meet the standards for listing on stock exchanges. That means they largely remain invisible to retail investors.

And while America values entrepreneurship, it’s challenging for individual entrepreneurs to access venture capital networks and seed funding. Sometimes, the winners are the ones who play the “who you know” game better than their competitors.

It’s an environment where individual investors with wealth-building goals struggle to find opportunities with early-stage private companies that could use their money to grow and create jobs.

Netcapital provides a solution for both parties through a platform that allows them to connect. For retail investors, Netcapital increases access to potentially lucrative startup and early-stage investment opportunities. And it gives startups access to a much larger pool of potential investors.

“It’s an effective tool for businesses to raise capital,” said Jason Frishman, Netcapital CEO. “And investing in private companies can provide an element of diversification to an individual investment portfolio that is able to allocate a small percentage to high risk investments.”

Diversification is a fundamental value proposition for investors on Netcapital. That’s the case not just because diversification is essential in any portfolio.

Frishman argues that although startups are a higher-risk asset class, retail investors still benefit because the winners win big.

“The hope is that the returns from one successful company will more than offset the losses from those that fail,” he said. “Because these companies are still in their early stages, those that succeed can show substantial growth.”

Starting with Netcapital is as easy as registering a standard account. The platform offers an intuitive card-based interface, essentially a searchable list of opportunities. Users can choose to view primary offerings only, and they can filter their searches in many ways.

Each startup presents an extensive pitch with a video, a chronological list of company updates, and space for user comments and discussion, which functions as a form of group due diligence. Investment offerings can start as low as $99.

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The platform does not focus on any particular sector. Companies represent industries as varied as artificial intelligence, alternative energy, education, health and medicine, and entertainment.

“The common factor among all these companies is that they are innovating,” Frishman said.

An extensive set of instructional materials help new investors get up and running confidently. With fewer and fewer companies landing on exchanges, Netcapital saves time for investors by pooling opportunities among up-and-coming private firms.

In some instances, high-net-worth accredited investors may participate in so-called side-by-side opportunities. Step-by-step details for making and managing investments include guidance regarding maintaining personal privacy, managing funds, and connecting bank accounts.

On the business side, particularly for startups and early-stage companies, an offering on Netcapital requires less time to go live because the SEC does not review the issuer’s offering statement. To generate an offering statement, the Netcapital platform offers comprehensive guidance, handles most of the tedious paperwork, and coaches entrepreneurs to become better fundraisers.

Netcapital helps dispel the stereotype of the founder getting by with credit cards or cash from family and friends. A business is more likely to fail when it lacks a secure funding source.

But many entrepreneurs find those methods the only way forward because other means of capital access are limited. Banks tend to demand collateral to secure loans, which can be challenging for companies in their early stages. Banks are also risk-averse, which makes affordable bank loans a rarity among startups.

Meanwhile, raising capital through an initial public offering is expensive and burdensome for early-stage companies. Netcapital cautions these types of investments are highly speculative, illiquid, and subject to risk of loss of the entire amount invested.

The venture capital world works almost as an exclusive club — it can be all about who you know.

“Entrepreneurs who don’t have connections to the venture capital networks may find it impossible to break through,” Frishman said.

Netcapital provides expert guidance that walks entrepreneurs through the process of creating an offering, listing required documentation and explaining the due diligence the platform performs. Companies must complete a marketing review before they receive a listing, and Netcapital can assist with document preparation and marketing.

The platform charges a small engagement fee at the onset of each relationship. Firms can access the site’s investor dashboard to gain insight into investor behavior. And professional investors associated with Netcapital are available to assist.

After the funding round closes, a Netcapital partner custodian holds the shares, and the platform handles all communication with investors. Firms typically receive funds within one week after offerings close.

The Netcapital team maintains regular contact with clients who raise money on the platform and solicits feedback regarding their customer experience and ongoing needs.

Examples of the feedback received can be found on their website, such as this one from Seymour Segnit of MAGFAST: “We chose to work with Netcapital because of its high-touch personalized approach.”

In 2020, that company sold out its initial $1.07 million offering on Netcapital on its first day. Later, the U.S. Securities and Exchange Commission raised the funding limit, and the company launched a follow-on offering that raised nearly $2 million within a few hours.

The leader of another company, a cancer immunotherapy technology provider, praised the platform for its ability to connect it with “direct friends and interested investors as well as people we don’t know but are super grateful to have on board as investors.”

And another, a former CEO of a global investment firm, remarked that Netcapital offered “a paradigm shift in the dynamics of capital markets.”

Anyone interested in staying up to date regarding events at Netcapital can sign up for a newsletter that informs recipients of new investment opportunities. Investors may choose among several dozen carefully vetted offerings at any given time.

By connecting retail investors to private firms that need support, Netcapital adds energy to the economy and helps create better business and investor outcomes.

“I founded Netcapital to meet a need in the market,” Frishman said. “We plan to continue our path toward growth while continuing to provide excellent service to our clients and investors.”