8 Crowdfunding Sites to Watch
Julianne Pepitone @cnnmoneytech – April 5th, 2012
The just-passed JOBS Act will let businesses raise cash from small-time investors through crowdfunding. These sites could become the go-to spots for those deals.
The Jumpstart Our Business Startups (JOBS) Act, signed into law by President Obama this week, wipes away a batch of regulatory restrictions on small companies.
For the tech field, the single biggest change is that it legalizes crowdfunding for business ventures. Previously, entrepreneurs couldn’t sell shares in privately held companies to the general public. Now, with some restrictions, small firms will be able to raise up to $1 million from small-time investors.
Where will those potential investors go to shop for deals?
The site that helped catapult crowdfunding into the mainstream might not jump in. Kickstarter, a platform for funding creative projects, has been such a smash success that other sites often bill themselves as “the Kickstarter for [fill in the blank].”
Kickstarter lets makers of things like video games, magazines and quirky products raise money for a set period of time. It’s all or nothing: If the project isn’t fully funded by its deadline, no money changes hands. Backers don’t get any financial stake in the projects they fund. They get other incentives and rewards, like a DVD of the play they raised money for or a copy of the book they funded.
Would Kickstarter be interested in letting ventures offer equity as a “reward”? It’s unclear. The company has repeatedly declined to comment to media outlets, including CNNMoney, on the effect the JOBS Act will have on its business. But plenty of other companies are ready to expand — and new startups are springing up almost daily. Here are some of the players who could be influential in the business crowdfunding market.
Crowdtilt is one of the buzziest companies to emerge from the latest crop of startups at incubator Y Combinator. The brand-new Crowdtilt focuses on “groupfunding”: private projects among people who already know each other. Friends can raise money for a common goal, like a week at a beach house, a wedding gift or a community gardens.
Crowdtilt founder James Beshara says he’s not sure if the company will expand to offering equity. But the JOBS Act could help him score big bucks anyway: In a few weeks, Crowdtilt plans to begin licensing its API — which means that other crowdfunding sites won’t have to worry about the technical details of building the back-end.
“Crowdfunding is part social and part billing system, two really difficult things to build out,” Beshara says. “When we built our site we thought, man, this is going to be such an undertaking for everyone. Why not let others build on the shoulders of what we’ve already created? No need to reinvent the wheel.”
Beshara says the API release has been in the works since he created Crowdtilt, and it’s a “nice coincidence” that the product timeline matches up with the JOBS Act signing.
“I think that’s the equation for all big successes: Things out of their control tend to work in their favor,” Beshara says. “We couldn’t have planned the timing, but it worked out very well for us.”
AngelList is true to its name: it connects startups with a roster of high-profile investors and entrepreneurs.
Startups seeking funding visit Angel.co and browse through a long list of techy types (currently almost 110,000 people), including LinkedIn co-founder Reid Hoffman and venture capitalist Fred Wilson. Seekers can cull the list by selecting roles like “seed fund” or “VC” and check out investors’ profiles, including what they’ve invested in, and what they’re looking for. In turn, investors can check out what their counterparts are backing.
No money or equity actually trades hands on AngelList — that would be illegal under current regulations. It’s simply a service to connect the players.
Silicon Valley has taken notice. Dave McClure of 500 Startups’ calls AngelList “the single most important innovation in venture capital in the past five years.” On the flip side, Bryce Roberts of O’Reilly AlphaTech Ventures quit the site, saying he was turned off by the pack mentality and focus on hype.
AngelList seems the player best positioned for the JOBS Act — it’s already sitting right at Silicon Valley’s networking nexus. Will it take the plunge and add in a funding platform? Stay tuned. The company didn’t return a request for comment, but many in the startup field expect it to dive in.
Crowdfunder has been an active backer of the JOBS Act, since its entire business model is illegal until the legislation kicks in.
Chance Barnett founded the company in November, immediately after the House passed its version of the bill. For months, Crowdfunder’s site has essentially served as an explainer and advocate around the issue, featuring a petition and fighting words like “the government won’t let you invest $100 in a small business you believe in.”
Chance Barnett says he founded Crowdfunder in order to give startups more options. Backers can choose to invest for more than just straight equity — they could also buy a cut of revenue based on time or percentage return. So an investor could buy 5% of a company’s revenue for three years, or 10% of revenue capped at a 200% return on their investment.
“In equity-based financing, [investors] aren’t guaranteed a return on their money unless the company is sold or offers dividends,” Barnett says. “Revenue lets them get a return. It lets them really share in the incremental growth of a company as it happens.”
Crowdfunder is in private beta testing right now, which will serve as a holding pattern until the Act takes effect.
Mike Norman says he created Boston-based WeFunder “specifically to respond to the new opportunities the JOBS Act provides.”
Norman and his three cofounders are alums of other startups including SoChange, Smartcloud and Crowdly.
“We’re serial entrepreneurs,” Norman says. “We created the kind of solution that we’d want for our own startups.”
WeFunder has been running a private beta test, through which nearly 3,800 backers have pledged almost $9.2 million to startups, the site claims. But until the new laws kick in, that’s all funny money. No actual cash can legally change hands.
Norman says he’s holding off on providing more details about the platform until later this year, when the new Jobs Act rules take hold.
But he pledges that the site will stay true to its “for startups, by startups” approach.
“We’re not a bunch of finance guys who saw a big number on a spreadsheet and decided to do this,” Norman says. “We’re focusing on the quality of experience for people who are just like us.”
Indiegogo is part of the old guard in the crowdfunding space, at the ripe old age of four. The company says it’s “the world’s largest global funding platform.”
Campaigners can raise cash for pretty much anything they want. Past projects range from a woman’s fundraising campaign to pay for in-vitro fertilization to partial funding for the movie Bully, which was later picked up by the Weinstein Company.
In a rather meta move, back in 2009 Indiegogo had a campaign called “Crowdfunding Campaign to Change Crowdfunding Law” — seeking changes similar to those the JOBS Act provides.
Still, founder Slava Rubin isn’t sure that Indiegogo will get into the equity game: “We’ve been a part of the [JOBS Act] process since the beginning, and we’ll continue to be involved. But we’ll want to review everything as it plays out.”
Austin-based MicroVentures is an online peer-to-peer investment marketplace. It helps accredited investors pool their cash together and get access to startup funding opportunities that aren’t usually available outside of the traditional venture capital network.
Right now, by law, it’s limited only to accredited investors — that is, investment funds and individuals with a net worth of at least $1 million. The JOBS Act could let MicroVentures expand to accept investments from anyone who wants in.
Will it go that route? CEO Bill Clark says he’s still deciding.
MicroVentures is a registered broker-dealer. That means it’s required to perform due diligence and provide investors with detailed information about the companies on offer.
“It’s not clear yet what our risk would be,” he says. “We have to be very selective, because if a bad deal goes through and due diligence would have caught it, then we’d be on the hook.”
The cost of submitting to those checks can be steep. Clark estimates that a startup could spend at least $5,000 to get its financials audited, and setting up escrow for the investment funds run another $3,000 to $5,000.
MicroVentures pays those costs for startups “because we understand they don’t have the money yet,” Clark says.
Before 2011’s spate of IPOs, few tech startups had gone public in recent years. That left employees and early investors holding stock that’s essentially illiquid unless they can arrange a private sale to an interested buyer. SecondMarket launched its private company stock marketplace in April 2009 to facilitate those deals.
The opportunity there has been drying up. Groupon, Zynga and Pandora and other hot properties went public in 2011, and Facebook — SecondMarket’s cash cow — filed its paperwork in February.
The crowdfunding market could be a fresh opportunity for SecondMarket, but a company representative says it’s not interested.
“We’re focused on working with companies on the secondary side,” says spokeswoman says Aishwarya Iyer. “But the exciting thing is that with crowdfunding, someone who raises capital can open up possibilities and then come to us.”