Startups have new resources for funding
San Jose Mercury News
Venture capital is vanishing for young startups.
That’s causing entrepreneurs to rely on alternatives from new online platforms for meeting investors to nascent federal “crowdfunding” rules that aim to let moms and pops back startups.
It’s occurring as funding for seed stage companies nears historic lows as investors seek less risky bets, says the National Venture Capital Association.
“That industry’s going through a huge restructuring right now,” said Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire.
As the number of firms shrinks amid poor returns, venture investing has concentrated into the hands of a few megafunds, he notes.
Meanwhile, many wealthy angel investors are now following suit, according to a survey Sohl recently conducted that found only 35 percent of angel money is going into the earliest startups.
The reduced options have opened the door to online exchanges like AngelList, a matchmaking service for entrepreneurs and financiers that last year expanded its services to include small investors.
Outbox — which offers to pick up your mail, scan it and send you digital copies — used AngelList to raise $5 million in 10 days, said Will Davis, co-founder of the Austin, Texas, tech firm. While some came from venture investors, the majority of 100 investors were individuals cutting four- or five-figure checks.
AngelList and similar services like FundersClub require members to be accredited — which, in the parlance of the U.S. Securities and Exchange Commission, means having substantial financial resources and an investing track record. But anybody with a credit card can invest as little as $1 in fledgling businesses through sites like Kickstarter and Indiegogo.
Massolution, a research firm in Los Angeles, reports there are hundreds of crowdfunding platforms. Last year, they collectively channeled $2.7 billion to entrepreneurs, nearly dou- ble the previous year’s tally.
Massolution CEO Carl Esposti cites the example of Pebble Technology, a Palo Alto, Calif., startup that had trouble persuading venture firms to back a customizable wristwatch that interacts with a user’s smartphone. In the spring, Pebble set up a Kickstarter campaign and raised $10 million from more than 68,000 people eager to buy the device. “It beats any focus group in terms of how the market is going to respond to your product,” Esposti said. “And it puts you in much stronger po- sition to raise your Series A rounds from venture capitalists. Lots of entrepreneurs are now thinking of this as a primary strategy.”
Current SEC rules restrict crowdfunding sites in the United States to investing in specific projects, such as the Pebble watch, rather than buying a piece of the company itself. But that’s expected to change late this year when federal officials hammer out new rules as part of sweeping legislation called the JOBS Act, which is short for Jump-start Our Business Startups.