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 CEOs 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 last month 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 industry's going through a huge restructuring right now," said Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. As the number of firms shrinks amid poor returns, venture investing is becoming concentrated in the hands of a few mega-funds, he and others note.
Meanwhile, many wealthy angel investors are now following suit, according to a survey Sohl recently conducted that found just 35 percent of angel money is going into the earliest startups.
The reduced options have 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 their members 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 invest as little as $1 in fledgling businesses through sites like Kickstarter and Indiegogo.
Massolution, a research firm in Los Angeles, reports there are now hundreds of crowdfunding platforms. Last year, they collectively channeled $2.7 billion to entrepreneurs, nearly double the previous year's tally.
Massolution CEO Carl Esposti cites the example of Pebble Technology, a Palo Alto, Calif., startup that had trouble persuading venture firms to back its product: a customizable wristwatch that interacts with a user's smartphone. In the spring, Pebble set up a Kickstarter campaign and raised an eye-popping $10 million from more than 68,000 people eager to buy the device.
"It beats any focus group in terms of how the market is going to respond to your product," Esposti said. "And it puts you in much stronger position to raise your Series A rounds from venture capitalists. Lots of entrepreneurs are now thinking of this as a primary strategy."
Current SEC rules restrict crowdfunding sites in the United States to investing in specific projects, such as the Pebble watch, rather than buying a piece of
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