Has anyone tried any crowd-funded startup assistance?


6

I came across this site: http://www.startupaddict.com/, looks like it's fairly new; there are only a half-dozen startups on the site and none are even close to achieving their goals.

I know Kickstarter has been a pretty big success for alot of non-tech companies. I wonder if it can be successfully recreated in this regards. I'm guessing the big disadvantage is the fact that you don't get the guidance and mentorship may small tech startups need. On the flip side; you might not have to give up much (if any?) equity. I just don't get the benefit to those who chip in for your idea other than the intrinsic satisfaction of helping startups but usually THAT comes with equity!

Crowdsourcing

asked May 6 '11 at 11:35
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Nick
1,171 points
  • As an investor, I'm only interested in getting equity for my contribution. As a startup I'd be keen on getting the mentoring opportunities that often come with regular angel investment. These crowdsourced models don't seem to offer either of these. – Edralph 8 years ago

4 Answers


11

The emerging market of crowdsourcing is exciting for start-ups of all kinds. While I am not a Registered Investment Advisor, nor am I am invetment or securities lawyer I would like to post a word of caution for those that are exploring this model in the United State (well, any where for that matter).

Securities are regulated Securities is a regulated industry. Offering and selling equity in your business is a regulated market. There are laws. Laws about to whom a offer can be made (SEC definition of an accredited investor ). rules about when an offer can be made. Laws about how an offer can be made. There are laws about how many people who don't know each other can invest in a company before a Private Placement Memorandum must be put together. There are rules about how an offering is publicized which trigger Public Offering requirements and disclosurws. There are rules about offering investment opportunities to people from different countries. There are rules about what you can say and promise and project.

It is not just an issue of fines -- these are issue of going to jail. SEC agents can carry guns. Even IRS officials can't do that.

I have a hard time seeing how offering equity in your company in a crowd-sourced model would be anything but making a public offering. I have a hard time seeing how offering equity to to non-accredited investors would be anything but a problem. In fact, offering a security of any kind through a website is just a dam poor idea at the moment based on my review of every one of these sites.

Here is the SEC guide for small businesses.

Selling Your Product is Not (usually) Now, there are ways to raise money which don't involve selling an equity or offering a loan. One option is preselling product. Another is selling premeir or special access to the product/service. Most of these are not regulated -- unless the sale of the product itself is regulated -- like drugs or medical devices.

When I review the sites above people are just saying thanks (like this example on startupaddict ) pre-selling product (like this example on Kickster ), selling special features like VIP seats and back-stage access to a show (like this example on Rockethub ),

Will it Work for you? If your product can be configured in a way that people would like to pre-purchase your product -- and that there are premiums that can be added to the product to allure folks to make donations to your endeavor.

I think the safest way to think about these sites is not as a investment funding source-- but a source of beta customers. Change Comming?

On April 9, 2011 the Wall Street Journal reported (sorry -- I think the full article is behind a paywall) that the SEC was looking into opportunities to bring securities law into the 22nd century and allow social mediium and crowdsourcing to be used to solicit investment for small and startup business without trigger Public and/or Private Placement requuirements. he story cites a letter SEC Chair Mary Schapiro recently wrote to lawmakers this way:

The agency has "been discussing
crowd-funding and possible regulatory
approaches" with small-business
representatives and state regulators
... A petition calling for the
securities rules to be eased for
crowd-funding share issues of up to
$100,000 has been backed by almost 150
organizations and individuals.
However, Schapiro also made clear that
any relaxation of the rules must be
accompanied by adequate safeguards to
protect investors from the
"enterprising fraud operators" common
in the 1990s.

But no changes to the law have been made yet. Here are some links to articles which use the WSJ as it's source docuement: BNET, Gaebler, Triple Pundent You know, just for your evening reading.
answered May 6 '11 at 13:40
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Joseph Barisonzi
12,141 points
  • **Additional Note** I have contacted all of the sites above to ask them how they are navigating these securities issues and will edit this answer if I learned something significantly different from what i posted (and reviewed with our securities lawyer and RIA) above. – Joseph Barisonzi 8 years ago
  • this is a very important issue and your follow up will be most appreciated. – Kenneth Vogt 8 years ago

3

From a pervious post, here is my list of sites doing crowd funding:

(I pulled this from my blog post at the beginning of the year)

The basic concept is that you place you idea up with an amount of money you need to boot strap the idea. People then pledge donations, if you get enough donations you get the money pledged and get to start your idea.

I would recommend listening to http://thisweekin.com/thisweekin-startups/this-week-in-startups-96-jessica-jackley-ceo-of-profounder-and-robert-wolfe-founder-of-crowdrise/ for some good background on the concept.

Personally I'm looking for a good chance to try it out with one of our up coming projects, reasons include:

  • You get the money to kick start it. (obvisouly)
  • You get a premade audience of early adopters and people wanting you to succeed. More important than the seed money.
  • You get advertising and other larger investers floating round waiting for you to pass the first hurdle.
answered May 6 '11 at 11:39
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Robin Vessey
8,394 points

0

Most of the crowdfunding sites (pretty much all of them on list except for profounder.com) do NOT have you issuing securities, so you bypass the SEC issue that Joseph mentioned.

I have studied hundreds of company's who have successfully raised money from Crowdfunding and there are specific things that each of them did.

answered May 7 '11 at 01:04
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Dave
1 point

0

As explained above, selling equity to anyone who is not an accredited investor is an absolutely terrible idea, with potential civil and criminal penalties.

answered May 7 '11 at 04:17
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James
1 point

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