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Using the power of the masses to raise money

Posted: May 5, 2012 2:00 a.m.
Updated: May 5, 2012 2:00 a.m.

Guest speaker venture capitalist Brad Feld addressed a group of local high-tech startup entrepreneurs at the SCV Startup meeting April 11. Business owners have pursued different finance options for their companies.

 


When the Jumpstart Our Business Startups, or JOBS, Act was signed into federal law last month, it modernized the means by which startup businesses can raise capital.

Among the key elements of the JOBS Act is the sanctioned use of the Internet as a fundraising tool.

“Social networking has accelerated the sharing of ideas and the requirement for authenticity,” wrote Slava Rubin, CEO and co-founder of crowdfunding site IndiGoGo in an article for Inc. magazine. “The JOBS Act is an acknowledgement of these changes. To put it simply, the new law reflects today’s reality.”

Startups and small businesses will be allowed to raise up to $1 million annually from many small-dollar investors through Web-based platforms, democratizing access to capital, the White House officials said in a press release issued on the day the bill, with bipartisan support, was signed into law.

Partnering

Allowing people access to startup equity ownership via small increments of money through crowdfunding will allow all people a new way to create wealth, said Eric Arndt, founder of Santa Clarita-based Timeshare Juice.

Access to money, however, isn’t the only commodity of value, Arndt said. Partnering with people who can help guide the entrepreneur can be important.

“The venture capital partners I am talking with offer me more than just capital,” he said. “I selected them because of their knowledge, experience, and their personal relationships and networks. To me, the right team is more valuable than the capital.”

The right investor can help a business solve key business issues, introduce the owners to customers and strategic partners, as well as make introductions to other mentors and advisers that are critical to all successful companies, Arndt said.

Technology-poor

For other startups, crowdfunding may be the only option to get going.

When Lisa O’rrell and her business partner started their business-to-business-to-consumer software company Skin Metro in 2007, it was nearly impossible for the retail technology company to raise seed-funding during the recession.

In 2009, the Los Angeles-based company sought capital from angel investors and venture capitalists.

“We’d hear, ‘Wow, you have a great idea and huge revenue potential. We’d have funded you on paper last year, but now you have to produce revenue,”’ O’rrell said.

Producing revenue without any backing when the company’s target subscribers are the Lauders and L’Oreals of the world is impossible, she said. Software startups don’t qualify for traditional financing.

“My co-founder and I liquidated our IRAs at 50-percent penalties, re-mortgaged every bit of equity from our homes, drained savings and sold investments at huge losses, while living every day in fear of losing everything we have worked 20 and 30 years for,” O’rrell said.

In a country with a broken financial system that allows a lucky few to live their dreams “We have persevered tirelessly in hopes of fulfilling ours,” she said.

Still, other startup business owners feel crowdfunding is like rolling dice.

A lot of effort

Crowdfunding is a viable source of funding if a startup company’s funding needs are low, if your project already has a wildly devoted following or if you have access to a large and active community of people who would be sympathetic to your project, said Tania Mulry, founder of Stevenson Ranch-based edRover.

“We’ve tried two different crowdfunding approaches,” Mulry said. “Neither were successful despite pouring tons of time, money and hours into promoting the opportunities on social media, through business and traditional media partners.”

In both cases, the allotted time expired before edRover secured enough funding or votes to gain any benefit, she said. It’s a long shot; many projects get rejected or never get fully funded. You may have to apply to several before your project gets selected, Mulry said.

“Our time and effort could have been better spent on other business building activities,” she said.

Expanding the marketplace

Raising capital requires a tremendous amount of time, Arndt said. Most CEOs of startups do little else other than raise capital.

Still, he believes in the future of crowdfunding.

“So many more outstanding ideas will be funded and new innovation will be brought to the market as a result. The capital-raising bottleneck of today slows down innovation. So many good ideas go unfunded for various reasons,” he said.

Even if the ideas are funded and the companies are not commercial successes, the products, ideas and intellectual property are still valuable to future businesses and the economy in the long term, Arndt said.

The technology entrepreneurs all agreed there are both pros and cons to crowdfunding. But just knowing the fundraising method will be formalized is exciting, they said.

“Crowdfunding is changing the way small startups are working,” said Joshua Maddux with SCV Home Town Web. “Small businesses are able to pitch their idea to not just one investment firm but rather a large amount of small investors.”

Maddux referred to a large crowdfunding project he knew as an example. A San Francisco-based video game company, Double Fine, launched a fundraising campaign on crowdfunding site Kickstarter.

Double Fine’s goal was to raise $400,000, Maddux said. But 87,142 backers later, the company raised $3,336,371, according to the company’s website.

Today, Double Fine has jobs posted for business-development managers, finance controllers, product development managers and programmers.

And as Rubin cited, all new net jobs in the last 30 years have come from businesses fewer than five years old, according to the Kauffman Foundation.

“Enabling startups is the key to stimulating the job market,” he said.

jadkins@the-signal.com
661-287-5599

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