When it comes to which social network you choose to join, there are plenty of options, some more chat-focused, while others rely on video and images. However, all social media networks are increasingly clamping down on behavior frowned upon by their owners. Whether it is YouTube removing advertisements from controversial videos or Facebook removing articles identified as fake news, these networks are increasingly starting to flex their muscle. A new entrant into this field of giants called Gab is trying to buck that trend by attempting to be the leader when it comes to freedom of expression, information, and speech – and now you can invest in it. But is that a good idea?
The company just opened a round of investing on the equity crowdfunding platform StartEngine as they attempt to raise funds to continue and expand their network. With a sales pitch to “help to build a new platform owned by The People and built for The People,” Gab is aimed squarely at the conservative, libertarian, nationalist, or populist internet user that may feel increasingly persecuted on more mainstream social media sites. So, what is equity crowdfunding, and is this a good investment?
Launched in 2016, Gab now boasts nearly 200,000 users on a platform that functions like a mashup between Twitter and Reddit. During their initial rollout, the business was funded solely through donations and a $5,000 loan from one of the owners. Now that the company is ready to expand, they have turned to the nascent equity crowdfunding industry in an attempt to raise at least a million dollars.
When other brand-new companies need startup capital, they can go about securing it many ways. Perhaps most common in traditional businesses is to get a small business loan from a bank or credit union. When it comes to tech startups, angel investing has proven to be popular over the years. Companies like Twitter, Uber, and AirBnB all got their start when one wealthy individual decided to pour a sizable amount of money into each fledgling organization during its earliest days. The problem with this approach is that angel investors typically demand a sizable chunk of ownership in the company in return for their investments, as well as a seat at the table when it comes to decisions about how to run the business. The loss of operational control is exactly what Gab is looking to avoid as they combat censorship and burdensome content policies, so this would probably not be a good fit.
How, then, to raise money? The owners of Gab decided to turn to the very people who are using their service. Rather than asking for a handout a la Kickstarter, Gab is selling real shares in their company to any individual willing to buy at least $200 worth of stock. How exactly does this work, you might ask? Is this a scam? What kind of returns can you expect if you do take the plunge?
To explain how this works, imagine that you wanted to build a house. You start a company which will own the house, and by default, you own 100% of that business. Let’s say three friends each give you $50,000 in exchange for some stock in your new enterprise. Great, now you have $150,000, and you set off to build your house. What does it mean for your friends? It all depends on the valuation that you assume your company should be worth. Let’s say you value your company at $250,000, divided into 250 shares worth $1,000 each. Each of your friends would now own 50 shares of your business, and you would own 100 shares. Now fast forward to when your house is complete. You list it for sale for $250,000, but a bidding war breaks out, and it ends up selling for $300,000. Now, each share is worth $1,200. Each of your friend’s stakes would be worth $60,000. You could take the proceeds of the sale and do whatever you wanted with them. You could start building two houses. You could cut each of your friends a check for their share of the profits and start building just one new house. Alternatively, you could let a few more friends in through the second round of stock offerings. Say you go the fundraising route. The tricky part here is that since you are a private company not subject to the rules of the stock market, you can legally create new shares of stock in your company out of thin air. This action would dilute the value of the existing stock if you valued the company at a lower value than $1,000 a share. You could sell as much stock as you wanted, but if you sold or created more than 200 additional shares, you would be hurting your original investors. There is a lot of trust involved and a large potential to harm early shareholders if the owner chooses to go that route.
The key to this whole stock issuing practice is that the value of the company is purely arbitrary. If we had assumed in the last example that the company was worth a whopping $500,000 at startup and then only been able to sell the house for $200,000, everyone would have lost 60% of his or her investment. When it comes to Gab, they are valuing their company at $10 million dollars while trying to raise $1 million. You need to decide if you think Gab can turn this $1 million investment into a company worth more than $10 million one day. Is a ten-times return on investment realistic? When it comes to venture capital funding, according to AngelBlog, out of every ten companies, one will return one hundred times the initial investment, one will return ten times, and eight will fail.
All of that means that investing in Gab is part gambling and part charity. You would be providing the means for this company to continue to grow and thrive while taking a chance that your money could also grow in the process. Statistically, the company will not succeed. Legally, the owners could dilute your shares to such a worthless level that even if Gab does succeed, you would still have lost money. Chronologically, you will be stuck with these shares for what is likely to be years before you can sell them. However, if you believe in the company and want to see it succeed, and you trust the owners and have faith in their abilities and their honesty, then, by all means, invest. Think of your money as a donation that comes with a raffle ticket, and relish in the fact that you are making a statement and sticking it to the mainstream social media networks in the process.