Don’t close your tech startup. Go raise from the crowd
Last week, I read a story about Washio, a very cool on demand laundry and dry cleaning service. It is Uber for your clothing. I used a coupon I received and tried it. Was really nice and inexpensive because the coupon was the key driver for me to become a customer. I liked it and kept using it. However, these amazing promotions to acquire customers are expensive and companies needed a lot of cash to afford it. The company raised close to $17M in total from venture capitalists and angel investors including Ashton Kutcher.
Washio is dead
Washio announced they are shutting down on August 29th 2016 and undergoing liquidation. It turns out, the existing investors decided not to invest any more money which is a really a death sentence to Washio. New potential investors see this as a sign the company is no longer valuable and the company ends up not being able to raise any more money from the VCs. Without any other options, the company shuts down, the investors lose all of their money and the Washio team walks away discouraged. It is not that on demand washing is a bad idea, it is because the management team did not meet the expectations of their investors. The investors are “smart”, they decided to not throw good money after bad money. They decided to call it quits and shut down the company. Now, for the 200,000 customers who have used Washio and found the service an amazing convenience, they also lose.
Why lose when you can win ?
It turns out the management could have read the JOBS ACT and realized that today instead of focusing on disappointed investors, they could have gone to their fans, customers and the general public and raise the capital they needed to continue. Pretty pretty simple. With $10M in fresh capital per year, Washio would continue, grow and optimize their business model and build a successful company with real profits. Using our stats on the StartEngine platform, the average investor is around $2,500. They only need 4,000 investors to get the $10M and they can repeat this raise every year.
The revolution is here
In 1789 the French revolution signaled to Europe and the rest of the world that monarchy was on its way out and new democratic age was beginning. Now, with Online Public Offerings made possible thanks to the JOBS ACT, Washio can raise capital directly from the public. So why did they not do it ?
Elio Motors did it. They tried to raise capital from hundreds of private equity and VCs and got the same cold shoulder. VCs prefer companies with Uber-like upside . So why should they invest ? I get it. Elio Motors decided to take advantage of the JOBS ACT and raise capital through an Online Public Offering. I was involved in this because I am the executive chairman at StartEngine, the platform they used. How much did they raise ? $17M from 6,600 fans and the stock became listed on the OCTQX and as of this writing, it is up 80%.
I ask again, one more time, why didn’t Washio do the same ? The founders read the press, they have smart lawyers, they probably hired a banker to sell the company and they have smart investors. Founders want to be with “smart” advisers and expect the best advice. But no one told them “schmuck, don’t close, go raise money from your customers!”. Too bad because I was hoping next week to use Washio to get my laundry done. Now, I will have to do it the old fashion way.
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The views and opinions expressed in this article are those of author Howard Marks. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:https://www.startengine.com/assets/Disclaimer.pdf
