Startups have new ways to find funding
Will Davis and Evan Baehr, co-founders of an Austin, Texas, tech company called Outbox, saw how tight the venture capital business has gotten when they went looking for money a few months back. When they'd first raised funds two years ago, Silicon Valley investors had been eager to deal. Then, Facebook's IPO flop popped that bubble.
But aspiring Zucks are in luck: Entrepreneurs have a growing number of alternatives, from new online platforms for meeting investors to nascent federal "crowdfunding" rules that aim to let moms and pops back startups.
Some startup chief executives say they're perfectly happy to raise money without giving a big share of their companies to venture firms. For others, it's a necessity born of math: The latest MoneyTree Report, released recently by the National Venture Capital Association and PricewaterhouseCoopers, found that VC funding for "seed stage" companies continued to drop toward historic lows, as venture investors seek less risky bets.
That's opened the door to online exchanges like AngelList, a matchmaking service for entrepreneurs and financiers that last year expanded its services to include small investors.
Outbox, which offers a service to pick up your mail, scan it and send you digital copies (winnowed of junk), used AngelList to raise $5 million in 10 days, Davis said. While some of that came from venture firms, the vast majority of the 100 investors were individuals cutting four- or five-figure checks.
While AngelList and similar services like FundersClub require investors to be accredited, which in the parlance of the Securities and Exchange Commission means having substantial financial resources and an investing track record, anybody with a credit card can pledge as little as $1 to fledgling businesses through sites like Kickstarter and Indiegogo.
Massolution, a research firm in Los Angeles, says there are now hundreds of crowdfunding platforms. Last year, they collectively channeled $2.7 billion to entrepreneurs, nearly double the previous year's tally.
Current SEC rules restrict crowdfunding sites to fundraising for specific projects, rather than buying a piece of the company itself. But that's expected to change late this year when federal officials hammer out new rules as part of sweeping legislation called the JOBS Act, which is short for Jump-start Our Business Startups.
It's not yet clear how the rules will apply to unaccredited investors. Though many entrepreneurs are eager to tap this new funding source, opening the doors to less experienced investors can bring problems, said Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. "Lawsuits probably will increase. People are going to lose money, there's no doubt."