Startup Fundraising: What has to change to make it work for the rest of us
An open letter to the SEC on why Title III of the JOBS Act would really help…
Dear United States Securities Exchange Commission,
I’m an entrepreneur. I left my job and started a mobile app company 10 months ago and it has been a wonderful, stressful, incredibly exciting time in my life. I’ve been draining my hard earned savings rather than adding to it, but I’ve been happy with the decision. I get to work on building something that doesn’t already exist—something that really matters to me.
After months of hard work, testing my idea with prospective users, designing the product, and then building and refining it, I decided it was time to take that next step and try to raise some money so that I could build out my team and really try to drive adoption. My thought process:
“Hey, I attended a great undergraduate university, worked in private equity and at a top tier consulting firm, and earned my MBA… I have a good idea that I’m ultra-passionate about, and have thus far managed to accomplish a whole lot with very limited resources. Oh, and I’m based in San Francisco—right in the heart of where it all happens! This should be an easy sell!”
(Are you picking up on the foreshadowing?)
First Try: Professional Investors
The VCs were out of the question. I didn’t have traction yet, so I didn’t even try. Instead, I began approaching angel investors—you know, those accredited investors that are the only people out there legally allowed to invest in my company. And after all, pre-traction seed investments is exactly what the angel community is there to provide, so I should be all good, right?
Sure I would… if my name was Biz Stone. The reality for me is that the angel investor community is actually quite risk averse. These were the people who had turned Silicon Valley into what it is today, but they are almost more afraid of making bad investment decisions as your average Joe. A connection of mine recently put it into words that I thought were incredibly on-point:
When you think of the angel investor crowd, imagine high school social politics. The thing they care most about is not getting laughed at by their friends. The ‘cool kids’ are the ultra-rich super successful investors, and everyone else in the schoolyard sees their own investments as social capital. They want to be involved with only the best, most sought after, ‘sure thing’ opportunities, because that’s what keeps them part of the gang. No one wants to get laughed at. No one.
As an unknown commodity in the start-up world and pre-traction, my company and I were just too big of a risk for these guys. And that’s okay. Hell, I’m building a company around the idea that we need to be more focused on socializing in the real world, so if anyone can understand the desire to conform to those kinds of social pressures, it’s me.
Second Try: Crowdfunding
The facts being what they were, I accepted that what I needed was traction, plain and simple. If I needed money to get that traction, I was going to have to get it somewhere else. Not enamored with the idea of raising that much money from friends and family, I turned to crowdfunding. After all, the tech blogs I read every day were awash with Kickstarter and Indiegogo success stories…
I worked hard, put together a great video that made 4 out of 5 people laugh, and used it to launch a Kickstarter campaign. I thought with a cool product, a video with the potential to go viral like Dollar Shave Club (it hasn’t yet), and the power of the internet and my social network, I could raise a bit of capital to help keep me marching forward.
The campaign is still active, so who knows what will ultimately happen, and I have received some amazingly generous support from friends and colleagues. Even a couple of second degree connections have backed the campaign, and one or two that I don’t know who just managed to find me on the site, but that moderate success has come at the cost of an enormous amount of my time trying to get the word out there. Thousands of individual emails and Facebook messages, even the occasional text message to friends to whom I am especially close to and who I know wouldn’t mind a little direct social pressure, and still just 30 something backers.
So why isn’t crowdfunding working for me?
Crowdfunding is a really powerful idea that has the power to tear down the established gatekeepers to the seed capital young companies need to have a chance, but it’s not working for some of us yet for a few reasons. Here’s my perspective on why:
#1. Even the people that want to back me don’t always do it. They see my email or my message and think, “Oh yeah, I’m totally going to show him some Kickstarter love.” Then their phone rings, or an important work email arrives, or the baby starts crying… and they forget. The only way to counterbalance that is to be as “spammy” as my personal sense of decency will allow me to be, and that tactic comes with the social cost of the goodwill of many people I’d like to continue calling my friends. Plus, real success with crowdfunding happens when “the crowd” is bigger than just the people you know—when it reaches beyond your personal network to appeal to the masses, which brings us to…
#2. My product isn’t right for crowdfunding—at least not as it exists today. Yes, it’s for consumers. Yes, it’s cool (trust me, it is). Yes, my video is awesome (if I do say so myself)…
…but it’s not a physical, tangible good. Projects featuring physical goods (electronics, gadgets, art) do well on Kickstarter because backers feel like they are getting something that has real value in return for their support. Even video games work because the average video game consumer is accustomed to paying for those products. When the end product is an app (and not a video game), people expect it to be free (and mine will be once it’s completed). That means my crowdfunding rewards can’t really feature the product itself, so I’m left offering things like branded t-shirts and invites to my company’s launch party, which does not a backer make.
So what needs to happen?
The answer is actually pretty simple. Title III of the recently passed JOBS Act need to be implemented. Why? Because it will let me offer a reward that actually is compelling for someone who likes what I’m doing but wants something more meaningful than a t-shirt… equity. The opportunity to actually be part of what I’m doing, to be actually rewarded for their belief in me and my product, to actually share the idea with their friends.
It’s been taking time because you guys want to make sure that the “unsophisticated” investor doesn’t get taken advantage of by the unscrupulous among us. You want sensible safeguards in place. And Kudos to you for that, but I’m just idly wondering if it’s really that hard? Can’t we just cap the maximum single individual investment via crowdsourcing at some reasonable number like $50 or $100? It seems to me that if we’re willing to let people buy as many lottery tickets as they want, we should be willing to let them make a small investment in a company like mine. It may be entrepreneurial delusion talking here, but I’d like to think my odds of success are at least slightly better than those of winning the lottery…
Thanks for listening, SEC. Looking forward to Title III…
Sincerely,
Jason
