It seems like everyone in the Valley is talking about crowdfunding. From innovative models like Wahooly (which issues equity to noisemakers with high-ranking Klout scores) to reward-based platforms like Kickstarter, RocketHub, and WeFund, funding options are actively diversifying and taking flight.
No longer bound to the tired 60-year-old roots of the VC boardroom authority, startups are leveraging the power of the crowd and reconsidering who should take stake in their companies and why. According to a recent report, crowdfunding has gone from a $32 million market to a $123 million market in the past two years. In 2011, more than 31,000 projects sought crowdfunded donations, nearly triple the number issued in 2010.
Legislation is also emerging to support the rising portals. Late last month, Obama signed the Jumpstart Our Business Startups (JOBS) Act, allowing non-accredited investors to legally purchase a limited amount of equity (ranging from $2,000 and $10,000 dollars) in startups looking to raising $1 million or less.
Can crowdfunding disrupt the VC industry?
But crowdfunding options are as of yet immature and more often a precursor than a solution to VC funding. “Kickstarter is useful to VCs in that it feeds us with companies we otherwise wouldn’t see,” said BV Capital’s Mathias Schilling from his office on the 42nd floor of the Transamerica building. “Is it threatening? No, because it can’t provide the support that we provide companies. It takes us 7 years to raise a company to maturity.”
“That’s something no crowd will do.”
AngelList meets Kickstarter meets Quirky
UFOstart is a San Francisco-based crowdsourcing community that lets you exchange equity for services traditionally provided by VCs. As a Facebook platform, it evaluates your social profile and initiates you into a community of entrepreneurs, experts, and investors with a description of your network value.
Once you’re in, here’s how it works
- Entrepreneurs pitch ideas and state needs to operate for 3 months.
- Experts and Investors evaluate ideas and bid tasks or funds for equity.
- If an idea gets funded in 3 weeks, a deal is closed. If not, all pull back.
“Startups need more than just funding,” says UFOstart founder Thomas Hessler. “Sometimes it’s software. Sometimes it’s a developer. Sometimes you need the CEO of walmart to get your product on the shelf.”
Incentivizing crowds with equity
Kickstarter’s great at determining a product-market fit, but it was never intended to be a business tool. It provides the critical step of letting founders know if there’s a market for their products, but it doesn’t help entrepreneurs execute their models or connect them to non-cash resources. Unlike Kickstarter (which investors are essentially donors), UFOstart ensures continual incentive in a company’s success by offering shares.
When you sign into UFOstart, you offer a portion of equity to the community-redeemable for services, connections, or even office space. “You make 5% available to the community, specify exactly what you need, and see who takes interest,” Hessler simplifies. “There’s nothing as motivating as equity.”
Who is Hessler? Founder and investor
Hessler is best known as the founder and CEO of zanox, the affiliate marketing platform that sold for a whopping 300 million in 2007. On his blogspot page, he identifies himself as an “Angel Investor in Crowdsourcing, Crowdfunding, and Crowdeducation.”
We meet up at an awkward Vietnamese restaurant in Fisherman’s Wharf. He’s just returned from the Startupism Conference, the 2-day interactive founders conference held at Fort Mason in SF.
“When I moved to the Valley in 2009, I came with the mindset of an investor,” he tells me. “I signed up for all the angel groups… Keiretsu, Sand Hill Angels, Band of Angels, you name it. It soon became clear to me that even the best of these groups were working inefficiently, getting thousands in deal flow and only closing ten or so a year. I had experience running a scaleable business and wanted to bring this strength to the angel scene.”
Alternative funding options still shy to big money
Thus UFOstart was born. Will it be successful? Only time will tell. It faces the challenge of acquiring networks as big as both AngelList and Kickstarter. But maybe it has timing on its side. With emerging legislature and early-stage interns requesting equity in place of compensation, the funding landscape has never been more fertile for change.
UFOstart is in private beta.