30. May 2014–
Last week, we asked Indiegogo and Seedrs to explain to us how their crowdfunding platforms provide unique advantages to startups looking to raise pre-seed or seed capital. We examined equity-based vs. reward-based crowdfunding in particular and why choosing one over the other is an important consideration for startups who want to start off on the right foot.
We have heard from the crowdfunding platforms - now what about the startups? The businesses that we talked to were unique in that they not only chose to crowdfund but also entered into an accelerator. It was intriguing for us to find out if this combination could be somewhat of a “secret sauce” for startup success. On the subject, Jeff Lynn, CEO of Seedrs says, “There is a huge amount of overlap for collaboration between accelerators like Wayra [and crowdfunding platforms].”
To explore this potential for collaboration further, Lynn and Garan Goodman, Director of venture accelerator Wayra Germany, held a panel titled “Unlock International Startup Funding” during Berlin Web Week. The panel explained to the audience that “virtually any business coming out of an accelerator needs additional capital.” However, the startups are still often too small for VC funding. The investment atmosphere in Germany is also an influencing factor. Goodman explains by saying, “There is not a very vibrant VC community in Germany like in other countries. That makes crowdfunding a very convenient way for startups to raise a pre-VC level of funding.”
Crowdfunding can also play a beneficial role before startups enter into an accelerator. As any startup who has gone through an accelerator selection process knows, the challenge of securing a spot is very competitive. “There is an expectation that you have something. In some cases, that requires a bit of capital,” says Lynn.
So, how is crowdfunding matched with an accelerator experience in practice? We sat down with two startups, TinkerBots and Satago, to talk about how and why they chose to crowdfund (at Indiegogo and Seedrs, respectively) and join an accelerator.
The Brandenburg-based company TinkerBots claims to produce “the most innovative robotic building set available today”. Targeted towards children and their families, the startup describes its product as the “living Legos”. With a giant robotic ant hanging out at the table with us, Matthias Bürger, CEO of TinkerBots, discussed with us his experience at Indiegogo and the ProSiebenSat.1 Accelerator.
“Crowdfunding for us was rather a proof of concept. We wanted to show potential investors that you can make money with this business idea,” says Bürger. On this point, TinkerBots certainly reached its goal. Within six days of its Indiegogo campaign going live, the startup raised its entire goal of $100,000, and when the campaign closed six weeks later it had raised $190,006 more.
When asked why TinkerBots chose to raise money through a reward-based platform, Bürger says, “Having equity-based investment could turn out cumbersome when you want to enter the market and you need bigger investment. Then you definitely need a real investor. When you have many little equity stakes to private investors to keep in mind, some investors don’t like this.”
Bürger points out that TinkerBots needed an investment of $1 million - “quite a big sum.” Therefore, the startup chose to search for an investor instead of raising this money through crowdfunding. Don’t be fooled, though. There are startups crowdfunding for $1 million or more. A couple from Idaho who wants to pave roads with solar panels just recently raised over $1.5 million on Indiegogo for their company Solar Roadways - and the campaign is still running. For more impressive numbers, check out Kickstarters’ Most Funded Page.
However, TinkerBots also understood that, with reward-based crowdfunding, raising more than what you can deliver in rewards can be detrimental to the health of your startup. Though Bürger knew that he could raise more capital on Indiegogo, he explains “at the prices at which we sell the construction sets we don’t make a profit, so selling more doesn’t improve our situation since it is such a small batch.” That is a lesson that Kickstarter campaign leader John Campbell learned the hard way. Wanting to raise $8,000, but instead raising $51,615 led him to burn the books (rewards) that were promised to his backers.
TinkerBots knew it wanted to crowdfund when joining the ProSiebenSat.1 Accelerator. Though Bürger first considered using Kickstarter because it had “the bigger name and bigger reputation”, Indiegogo turned out to the easier platform to use abroad. It was also fitting that ProSiebenSat.1 Accelerator had a partnership with Indiegogo at the time, which meant TinkerBots was not “just another campaign for Indiegogo. They knew the people behind the campaign.”
For TinkerBots, the decision to join an accelerator was to gain a strategic partner for the future. “They have a huge network. It was about getting professional input and getting a different view. They invest in later stages in media-for-equity deals so you can get TV ads, and they get shares in your company or they get additional revenue.” ProSiebenSat.1 is also one of the investors in the startup’s latest funding round of $1 million.
Based out of London, Satago is a platform which automates credit control for small businesses. Its goal is to help companies get paid faster by chasing customers for payment by Email, letters and on the phone.
Satago was one of the first startups to be funded on Seedrs. On why equity-based crowdfunding was the right decision for the startup, CEO of Satago Steven Renwick says, “When I got my funding, Satago was an idea in my head and a powerpoint presentation.” Since Renwick couldn’t “give anyone anything” as a reward, he explained that platforms like Kickstarter and Indiegogo weren’t right for his startup.
According to Renwick, he needed £30,000 in funding to build an MVP. As he does not have a technical background, he needed to get someone else onboard to help do the job.
This was what Renwick has to say about how he went about getting the capital he needed: “People always say you raise your first money from your family and friends, and they talk about it as if everyone out there has got access to £30,000 from their family and friends. The reality is that most people don’t have £30,000 waiting from their parents - I certainly fall into that bracket. For normal people that want to access thousands of pounds, Seedrs is perfect, because I can’t ask my mom and dad to give me £30,000, but I can ask them to give me £30, and it all helps. So, with Seedrs, I have investors putting in thousands of pounds, and I had friends putting in £10. And it all adds up. It all makes a difference.”
The results were that the startup raised the £30,000 on Seedrs in six days. It was also this capital that helped him secure a spot at the micro-seed investment and mentoring program Seedcamp. Satago was originally rejected from Seedcamp Berlin. “They liked the market. They liked the product. But the end message was: we are not going to invest in a solo non-technical founder. Go away and find a cofounder.” After doing so, Satago was accepted right away and is now a permanent member of the Seedcamp “family”.
When asked if he would do anything differently looking back, Renwick says he would have considered giving away less equity at the crowdfunding stage.
What is right for your startup?
As seen with TinkerBots and Satago, the decision to crowdfund and join an accelerator comes down to the individual circumstances of each startup. What type of product you have and what you want to achieve through crowdfunding will ultimately help you choose with platform (reward-based vs. equity-based) is the right one for you.
Though there are increasingly more accelerators to choose from, securing yourself a spot remains a competitive process. However, keep in mind that the specificities and offerings of each accelerator vary greatly. Wayra, for example, looks for tangible products. Seedcamp is a seed investor that offers startups the opportunity to join their Academy that provides access to software perks and mentorship events. As with crowdfunding, your decision on which one is right for you should come from researching and networking with the accelerators themselves and their startups.