The cult of Kickstarter and the looming promise of the JOBS Act, which will let entrepreneurs to raise capital from non-accredited investors on a certified platform, have presented an opportunity that Fundable wants to pursue.
The service, which is backed by Virtucon Ventures out of Columbus, Ohio, debuted today with five projects and a goal of helping entrepreneurs raise capital for their businesses. (It’s not the only one, my colleague Bobbie has a profile on a European crowdfunding platform launching today called Seedrs.)
CEO Wil Schroter says while Fundable looks a lot like Kickstarter, its focus isn’t on creative projects (surprisingly for those in the tech world, most Kickstarter projects are related to film, literature and the arts). It wants to help companies raise money to build products or reach business goals. As part of this effort Schroter is cultivating relationships with distribution companies, retailers and other brands that want a pipeline for new products. Think of it as Kickstarter for sell outs.
“We want to be the LinkedIn to their Facebook,” Schroter says. “This money has already been out there, it’s just that getting to it has been painful. We’re taking inefficiencies out of the market.”
What Fundable is. And isn’t.
However the crowdsourced funding model isn’t for everyone. Schroter says the ideal customer in this case is a pre-product business that wants to use a rewards-based system, such as letting the pledgers donate money in exchange for the first production run or some special offer. For Kickstarter that might be a character named after a large donor in a soliciting film. When it comes to something like Fundable project StampTEG, which is making a small, mobile charging solution that generates USB power from any significant heat source, the rewards may have to get more clever.
Sometime later this year, or early next year, after the U.S. Securities and Exchange Commission approves its application, Fundable will also be able to help companies raise up to $1 million in equity. This isn’t going to put the traditional venture-backed startup model of investing out of business, but broaden it. There are plenty of entrepreneurs with an idea for a mobile app or a device that can build a business from less than $1 million, as is clearly seen on Kickstarter or even Quirky, a similar platform designed primarily for projects.
The biggest problem with crowds is security.
But, as exciting as opening up a potentially vast amount of capital from the pockets of family and Facebook friends may be, there are a few glaring issues that arise with the crowdsourcing that most of the parties aren’t keen to deal with. Fraud is the big worry, but Schroter downplays it. He points out that the community can help determine if products aren’t on the up and up and points out that has already happened on on Kickstarter.
He also feels that the company’s limiting maximum pledge amounts to $10,000 will help people limit their losses. “That’s a lot of money, but no one will lose their house,” he said. His larger worry is unhappy pledges. What if people donate the cash and the product isn’t manufacturable? Or it just isn’t any good. For now much of the money going to these projects is small, but when things get to the scale of Kickstarter’s highly successful Pebble watch, for example, people are going to get mad if the product doesn’t come through.
Economic gamechanger or just a new way to raise cash? Does it matter?
But when anyone can raise money on these platforms it does have the potential to unleash billions in capital from customers and select friends and family in a scalable way. This will reduce friction, benefit entrepreneurs and provide an outlet for a new type of manufacturing to emerge. For an epic take on this topic check out Om’s interview with Perry Chen, a cofounder of Kickstarter.
Running a Kickstarter, or presumably a Fundable campaign, is a lot of work, but the bar is low enough that anyone with an idea can take some time and see if it gels with the audience. For every Pebble watch there will be a set number that fail. Judging from Kickstarter’s numbers from 2011 that about one in two, and as more people list (and contribute to projects) it’s unclear where that number will go.
Fundable plans to take a 5 percent fee from the final raise to fund the business, and Schroter declined to list how much money the idea has behind it or its backers. Virtucon is one of the lab-style companies that throws a few ideas out and see what businesses stick. It lists supporting investors including Bessemer Ventures, Founders Fund, Dave Mcclure, First Round Capital, Charles River Ventures, SV Angel and others.
If Fundable succeeds, it may not only become a pipeline for retailers or consumer products companies looking for the next big projects, but it might be the next platform for early-stage financing for wide variety of business. It’s hard not to look at the evolution of crowdfunding in general and compare it to the emergence of eBay back in the late 90s. Within a few years hundreds of existing and new retailers found a new audience for their wares.
Yes, some of this was savvy people playing arbitrage games with people who didn’t understand or know enough to list their goods on the Internet, or a new type of storefront for existing shops but some legitimate businesses were created. Many view the emergence of crowdfunding platforms in a similar way. The question is whether this the new way to build and invest in startups or will it (as is more likely) join an established roster of existing options and open up entrepreneurialism to a slightly wider audience?