Although the term conjures up ideas of Kickstarter and startups raising small amounts to get an idea off the ground, crowdfunding has a more sophisticated side, in which established entrepreneurs are pulling in serious money from investors with deep pockets.
Jeremie Bacon, founder of Synap Software Labs, is using VCapital, a crowdfunding portal of high-net-worth investors run by veteran venture capitalist Len Batterson. Synap previously raised $2 million in 2015 from venture funds Baird Capital and KGC Capital.
“It made sense,” says Bacon, 42, who previously co-founded Backstop Solutions, a financial-software company in Chicago. “Unlike most crowdfunding platforms, the entrepreneurs don’t have to raise the money directly. We received commitments from some of the well-known angel groups. We already had several institutions, which is unusual for a seed-stage company. We’re using a civic channel to get to 50 or 100 investors, people who can write $25,000 to $100,000 checks. Part of the reason is it allows us to do more market research since most of them work for companies we would like to work with over time.”
Synap makes software that allows employees inside a company to collaborate based on their work with a particular customer, create account plans and manage business reviews and sales activity.
A SLOW START
The Securities & Exchange Commission issued crowdfunding rules in May that allowed entrepreneurs to raise money from individuals on the internet. Those rules also allowed investment funds to use the internet to find more well-heeled investors and launch portals, or online platforms to list deals. In less than a year, 21 funding portals have launched, raising $10 million for 163 deals.
“The intent was to replicate the sort of Kickstarter model of equity funding. It’s off to a slowish start,” says Ethan Mollick, a professor at the University of Pennsylvania’s Wharton School of Business. “Right now it’s just sort of puttering around. The danger is that one big failure—or one big success—will determine the fate of Reg CF” as the crowdfunding law is known.
Startups and other companies have long raised money from wealthy investors in what are known as private placements. Because the companies don’t have to comply with the same financial reporting standards as publicly traded stocks, such deals previously were available only to “accredited investors,” or individuals who could afford to lose money. Currently that means having annual income of at least $200,000 or assets of at least $1 million, not including a home.
Len Batterson, a longtime venture investor who has raised money from wealthy individuals for 22 years to invest in startups such as data storage company Cleversafe, took advantage of the crowdfunding rules to launch VCapital.
“We have about 150 accredited investors and family offices, mostly in Chicago,” he says. “We’re trying to expand that to 500 or 1,000. We don’t consider ourselves crowdfunders. We’re trying to do classic venture capital and use the online resource to sign up additional investors. We want to go from a few deals to about eight a year, putting in maybe $2 million to $3 million.” It recently made a $1.2 million investment in SimMachines, a data science startup in Chicago.
Venture Connects, a consulting firm that helps startups raise money and assembled a network of 200 accredited angel investors over the past five years, also recently launched a funding portal, says founder R.J. Pahura.
Batterson and Pahura say portals like theirs provide due diligence that’s impractical for individual angel investors to do on their own.
ROOM FOR LITTLE GUYS
Desiree Vargas Wrigley is using more traditional crowdfunding site Republic to raise money for Pearachute, an online service that helps parents find and book activities for kids. Wrigley, 35, already built one startup, GiveForward, and raised $1.2 million for her new one from venture funds such as Chicago Ventures, Corazon Capital and Hyde Park Angels. GiveForward is a crowdfunding site that helps people raise money for medical treatment.
Republic, a New York-based crowdfunding site, caters to individual investors who put up as little as $10. So far, 189 investors have pledged to put up $142,173 for Pearachute. That’s not enough to turn Pearachute into the national brand that Wrigley envisions. She has access to institutional capital for that.
“It’s a bet on the ecosystem, even though she doesn’t need that capital,” says Kendrick Nguyen, co-founder of Republic. “But there are a lot of companies that would have a hard time starting a business without crowdfunding. For later-stage companies, it’s also about customer acquisition and branding.”
But Wrigley also wants to share the wealth.
“I’m working with 300 women business owners. I would love for them to be part of whatever outcome we get,” she says. “I wanted this to be part of GiveForward (funding) a decade ago. But it wasn’t available.”
Read more at Crain’s