Are startups wasting their time hoping venture capitalists will come calling?
Sandi MacPherson, the founder of Quibb, a news-sharing site for professionals, didn't want to wait around to find out the answer. She decided that crowdfunding her angel investments might be a viable way to keep her San Francisco-based company afloat past its infancy.
MacPherson is partnering with Alphaworks, a crowdfunding platform, to raise capital from Quibb's 11,000 members. "For me, that just makes sense," she says. "These are the people who've helped built the product."
Members who want to get in on the action just have to visit Quibb's site and enter how much they'd like to invest using Alphaworks's widget. (This week the startup also announced a $650,000 seed round from Bloomberg Beta, betaworks, Lightbank, and other investors.)
Alphaworks will do the hard work of getting all those angel investors accredited. The Securities and Exchange Commission requires angel investors to earn more than $200,000 a year or possess a net worth over $1 million, not including their residence.
Once that's settled, MacPherson can sit back and watch the money roll in. It's probably not as simple as that, though. Only a handful of crowdfunding platforms, such as AngelList, FundersClub, and SeedInvest, have yet developed solid reputations, and Alphaworks isn't among them.
That's not to say it will never gain prestige--or that crowdfunding platforms can't be a boon to fledgling companies like Quibb. "Thus far, it looks as if the platforms are funding companies in early stages," says David Verrill, the founder and managing director of Boston-based investment group Hub Angels. "And oftentimes, those companies have not made enough progress to get a venture capitalist's attention." In this way, they can serve an important need, helping to bridge what he calls the startup "valley of death."
There's also another factor at play: the dreaded Series A crunch. As Inc. has reported, the tremendous competition has threatened to send thousands of startups under due to lack of funding.
So with all this in mind, is it better to crowdfund angel investments or go the traditional VC route? As with most startup issues, it will depend on your personal goals. If it's contacts and wisdom you want, look no further than a venture capitalist who shares your vision. If it's a fast-track to capital, then crowdfunding platforms may be the way to go.
One thing's for sure: "The crowdfunding platforms are aggregating capital better than anybody else, and because they're so young, the potential is significant," Verrill says. "If a noteworthy investor is on the AngelList platform and he has 2,000 people following him and those followers make an investment, he's effectively generated a venture capital firm without even trying. When he makes an investment, all of the people that follow him make an investment."