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Shift in crowdfunding brings retail investors to fledgling energy tech ventures


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Shift in crowdfunding brings retail investors to fledgling energy tech ventures

With the 2018 debut of an energy technology company looking to raise hundreds of thousands of dollars in seed capital through a crowdfunding site, retail investors now have the opportunity to get early stakes in energy tech and oilfield services startups.

"Unaccredited" investors, those with less than $1 million in net worth, and energy startups looking to raise their first million can now meet up through, a crowdfunding platform in what investment bank Tudor Pickering Holt & Co. analyst Deanna Zhang predicts could become a growing source of early funding for energy technology companies.

Unaccredited investors, those with net worth of less than $1 million, can now buy into tech start-ups at the earliest stage, before venture capital firms make investment. This territory had been restricted to those investors with $1 million or more in net worth., which previously matched accredited investors with oil and gas projects, is offering investors the chance to fund an initial investment in energy tech startup Wellhub Inc. Wellhub says it will use the early capital to continue to develop an oil and gas drilling operating system connecting all of a company's data from the borehole to the sales office and present that data in a visual fashion. "We'll see how the crowd reacts," Zhang said in a May 8 note.

Crowdfunding takes the place of family, friends and angel investors in the early life of a company, Zhang said, and while oil and gas has a long history of wells being capitalized by rich investors in return for a part of the production and proceeds, there has been little activity in letting investors buy early equity in company-level projects.

"Risk and reward go hand in hand," Zhang said in a May 9 interview. "There's a lot of interest. … The rewards can be huge."

"Debut of new Regulation Crowdfunding platform in 2018 opens up company-level investing opportunities and allows participation by non-accredited investors," Zhang's presentation said after Wellhub kicked off a capital raise of between $300,000 and $856,000 on May 4 using the EnergyFunders platform.

EnergyFunders, which has been in operation since 2013, has raised nearly $5 million in capital, all from accredited investors putting money in to well-level projects. The SEC's requirement that project-level investments be left to richer investors is driven by the structure of the deals, which can require investors put up more money in a "cash call," EnergyFunders CEO and co-founder Casey Minshew said. "These projects usually require more money at some point, and the laws are written where non-accredited investors can't be required to do that," Minshew said. Minshew does not see the SEC changing Regulation Crowdfunding, to let unaccredited investors buy directly into an oil or gas well, but buying early equity in an energy tech or oilfield services company is well within the new regulations, Minshew said.

Zhang cautioned that investing early in startups is not for the faint-hearted, and the SEC limits how much unaccredited individuals can invest in any deal to $2,000. Zhang ticked off some of the characteristics of early stage deals: "It's risky. it's illiquid. You have to hold on to that risky investment for quite some time."

Crowdfunding for these young energy companies has been waiting for a platform such as EnergyFunders to come along, Zhang said. The amount of the investment capital crowdfunding can access will grow, Zhang said, though she said she could not be sure how much capital will be raised in the future, as the SEC limits companies to $1.07 million from unaccredited investors through crowdfunding. "It depends on how quickly they [EnergyFunders] can scale, like Kickstarter," Zhang said, naming the much better-known platform for creative projects such as novels and films. "They needed a platform first," Zhang said.

Wellhub CEO Jake Corley "chose crowdfunding to raise capital because of the flexibility to set deal terms, retention of control, and the ability to tap into the existing investor base," Zhang said in her presentation. "He sees the crowdfunding medium as a way for his ~400k podcast listeners to participate in the deal."

Zhang sees more investment opportunities, particularly in energy tech, coming soon. "We see equity crowdfunding as a key way for investors with limited or no access to venture capital or other funding vehicles to enter this emerging market," Zhang's presentation said.