EquityNet claims crowdfunding patent

Crowdfunding will soon become a legal way for small startups to raise funds. This new financial market will lead to a fierce battle among crowdfunding directory sites. It's also going to flush out a bunch of patent holders. For example, EquityNet claims a patent -- with a working business around it -- for a process that evaluates startup risk.

The general opinion on patents is not favorable in the tech field, but I would not throw EquityNet CEO Judd Hollas under the bridge and call him a patent troll yet, for two reasons. First, EquityNet is a working business; his patent is far from idle. Second, while the process EquityNet uses sounds valuable, I don't think it's going to actually make that big a difference to most participants in crowdfunding.

The EquityNet patent, Hollas says, is about two things: First, it's a way to rate pre-public companies on risk. Second, it helps match potential investors up with companies in which they might want to invest.

Hollas says that more than 5,000 users are employing the automated analytics and benchmarking algorithm that make up the first part of the patent. It identifies financial statements and projections in one company that are out of whack with other companies in a space, and it ranks companies based on a number of computed criteria. Think Morningstar but for pre-public companies, and based on a combination of submitted survey questions and other automated research.

It sounds like a valuable service for entrepreneurs. It'll tell you, Hollas says, if your margins, or your profit projections, or your growth rates are outliers in your industry. It's an automated gut-check app. That's useful.

But the idea of using this data to help investors find investments is a little off-base, I think. Crowdfunding is not likely to be about finding tiny little startups by reading newsletters and then investing tiny little amounts in a lot of them. Crowdfunding will be a community play. People in a town will be able to invest in local start-up restaurants and shops. Or business communities not hemmed in by geography will use crowdfunding to keep innovation flowing in their fields, for the betterment of everyone in a particular market.

Furthermore, several people familiar with the crowdfunding bill in the JOBS Act told me that evaluating risk of multiple startups will remain outside the legal purview of crowdfunding directories.

Hollas says that a crowdfunding directory that doesn't use a multifactor score will be "just a disorganized mess of results," and in a sense he's right, but as I said I don't think users will mind. Crowdfunding could be about making smart, dispassionate investments in businesses across the board, but it is more likely to simply open the doors for people who want to invest based on their gut or social connections anyway.

Hollas says that he intends to license, and enforce and his patents, but we'll see if they hold, if he does.