Houston Startup Energy Funders Aims to Crowdfund the Oil Patch
The global energy business is dominated by multinational corporations and state-owned conglomerates. But the wildcatters of the oil age’s early days are still out there exploring holes and hoping for a big strike.
Two Houston attorneys say they have developed a 21st-century way to help those smaller operators raise money. The pair has founded Energy Funders, a crowdfunding website aimed at drilling projects worth $2 million or less.
“These projects are too small for institutional investors, the majors and super majors,” says Philip Racusin, a co-founder of Energy Funders. “But there are lots of reputable operators out there with good track records and projects.”
Racusin says the site will serve as a matchmaker, linking independent explorers with accredited investors interested in putting money into energy projects. The site, which Racusin says will be launched next month, is starting with just two drilling projects, a multi-well project in Pennsylvania that needs $1 million to develop and a 12,000-foot well in Central Texas that needs $1.5 million.
Racusin says Energy Funders wants to start slowly, build up credibility project-by-project with both operators and investors, and then scale up the number of projects. “We want Energy Funders to be a platform for good operators to advertise their deals,” he added. “We want to provide insider access to deals.”
Crowdfunding as a tool to help startups get investment capital has become increasingly popular, especially for ventures in their earliest stages. Since provisions in the JOBS act allowing online solicitation of accredited investors became law in 2012, these Web-based platforms have enabled many otherwise unknown entrepreneurs to tap audiences beyond what traditional fundraising could reach.
So far, crowdfunding has typically been used for more retail-level endeavors such as Jan Goetgeluk’s Virtuix gaming device or a method to help teachers solicit funds to pay for classroom materials or student field trips.
Racusin and his partner, Roger Gingell, a specialist in energy law, say the energy sector—which is increasingly using advances in technology to more efficiently find and deliver oil and gas—should take advantage of the crowdfunding platform as well. But Energy Funders won’t be a Kickstarter-style site where anyone can contribute: it will be closed to all but accredited investors (basically, those who have enough wealth, in the eyes of the Securities and Exchange Commission, that they can afford to lose their whole investment).
Crowdfunding platforms are agnostic to the technologies being funded and so could work for energy projects, argues Sherwood Neiss, principal of Crowdfund Capital Advisors in Washington, D.C., and a co-author of crowdfunding language used in the JOBS act. “What matters is you have a group of investors willing to step up,” he says. “You either already have that group of investors that’s willing to deploy capital or you need to cultivate them because there’s a ton of deals out there.”
But Kirk Coburn, founder and managing director of the Houston-based cleantech accelerator Surge, says he believes that crowdfunding makes more sense for tangible products being sold on the marketplace. “What value do investors bring to an (energy) entrepreneur when it is funded by strangers?” he asked. “The same applies to the investor. Energy is a complex industry and entrepreneurs need to align themselves with investors who are both financially savvy and domain experts.”
Racusin says this approach merely opens up the energy sector to knowledgeable investors who are already comfortable with investing in early stage startups through platforms such as AngelList, Fundable, CircleUp, and Crowdfunder. “The same investor—if properly educated about oil-and-gas investments and expected returns—would find oil and gas investments potentially much more attractive,” he says.
And, as in the case of the Pennsylvania wells, investors can sometimes be given a guarantee against dry holes, which is an additional layer of protection, he added.
Operators can use the Web to expand its target of potential investors. “We’re only going to work with operators who have a reputable track record as shown by drilling permits they have received from state regulatory authorities,” Gingell says.
At launch, investors will be able to register on the site and go through an accreditation process. Racusin says operators seeking funds will be scrutinized by Energy Funders in a process that reviews and verifies ownership of oil and gas leases in order to clear titles for drilling.
Operators decide to list their projects on the site for a time period between a month and three months and, in exchange, offer investors a percentage in a particular well. Investors could buy in with amounts as low as $1,000, Racusin says.
In exchange for connecting the parties, Energy Funders will take a 10 percent carried interest (revenues before expenses are factored in) in the project. So, for a $500,000 stake in a $1 million well, Energy Funders would have the right to 10 percent of revenue of the 50 percent stake, he explains.
In the past, operators have typically self-financed projects or sought investors through personal networks or at events like the North American Prospect Expo, the sector’s main trade show. “We’re taking a 100-year old business model and bringing it into the future,” Gingell says.
In the end, featuring more drilling projects on platforms like Energy Funders will serve a policing and accountability function, Neiss says.
“If you put something on the Internet, everyone can weigh in with their opinion; you can critique them openly,” he says. “If you’re not responsive and don’t show some credibility, you’re not going to be able to hide.”
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