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Crowdfunding: We Don't Need No Stinkin' VCs

Kickstarter investors pledge small amounts in exchange for products.

A proposed bill in Congress would give entrepreneurs access to capital from smaller investors.

Jellyfish in tank
Source: Jellyfish Art
Jellyfish in tank

Alex Andon’s interest in jellyfish went beyond his fascination with their hypnotic, graceful movements. Where most people would admire the sea life and leave it at that, Andon saw an entrepreneurial opportunity.

In 2008, he designed a special aquarium with regulated water flow that would prevent the water pump from sucking the delicate jellyfish into the pump. He assembled the first tank in his garage and started marketing his tanks.

As orders came in, he started building large, custom tanks for clients, funding his new business with credit cards. Profits were slow in coming. In 2011, he reworked his business plan to include smaller tanks. He also found a new source of capital: the crowdfunding platform called Kickstarter.

Kickstarter is one of several crowdfunding sources for the smallest of entrepreneurs. It works like this: Project creators describe their project on the website and state a goal for fundraising. Lenders kick in small amounts of money. Lenders do not become owners in the company, but instead are offered products or experiences in exchange for their financial support.

Andon offered donors tanks in exchange for donations. His goal: $3,000. His take: $163,000 in only 45 days.

All that money is being spent on making tanks, allowing him to ramp up quickly, since factories want mass orders.

Besides Jellyfish, his company — aptly named Jellyfish Art — sells jellyfish and food, alongside its $350 desktop tanks. His company sold 500 tanks in 2011.

Jellyfish Art wasn’t a venture capital-fundable company, Andon says, because VCs are looking for big ideas that will generate big payouts. Of the 2 million businesses created each year, only 600 to 800 get venture capital funding.

In the case of Jellyfist Art, crowdfunding was a perfect vehicle. He didn’t need millions, or even hundreds of thousands of dollars. He didn’t have to give up company equity. And the high donation rate proved there was strong market demand for his tanks.

Popular crowdfunding sites like Kickstarter and Indiegogo are just scratching the surface of a big funding void, say experts.

The Entrepreneur Access to Capital Act, which passed the House last November, hopes to solve that problem. Essentially, the bill would let small, savvy companies tap into a large pool of small investors by selling them unregistered securities. That would give small-businesss owners more access to capital, more quickly. A companion bill is currently stuck in the Senate, but it will likely include lower funding thresholds and tighter regulations than the House version.

While the bill is not on the Senate docket yet, Karen Kerrigan, CEO of the Small Business & Entrepreneurship Council says she thinks it has an 80 percent chance of passing the Senate when it does come up for a vote. “It has deep bipartisan appeal and President Obama’s support,” she says. The only roadblock is state regulators, who fear massive potential unregistered securities fraud. “They’re spreading fear and slowing the process,” she says.

Andon also applauds this bill. “It could furnish early-stage capital,” he says. Still, the idea of answering to 100 investors is daunting, he says.

Kerrigan sees additional shareholder accountability as a good thing, though. Currently, crowdfunding is relegated to donations — unregulated except as business entities. “But shareholders are a tough crowd,” she says, “requiring you to have a viable business plan that demonstrates growth and viability.”

Keller Rinaudo, CEO and co-found of Las Vegas-based startup Romotive, agrees. He says he believes this bill will put more power in entrepreneurs’ hands. “Allowing smaller investors to play in the same sandbox as venture capitalists is a great thing,” he says.

Romotive is on a mission to put a smartphone on a robot platform, allowing viewers a remote, three-dimensional view of any space. One possible application: Real estate agents can put Romotive in a room and drive it around the house to give clients a virtual home tour. The price — $99 — is also much cheaper than competitors offering higher-tech versions for $8,000 to $15,000, he says.

To differentiate itself in the highly competitive technology investing space, Romotive turned to Kickstarter to validate its concept. Romotive ended up raising $115,000 from 1,300 backers in mid-November. “Most pledged between $78 and $200,” says Rinaudo.

Propelled by its successful Kickstarter effort, Rinaudo and his two partners then presented Romotive to 500 enthusiastic investors at an incubator event. The team pulled in an additional $1.5 million in funding that’s being used to build more robots and create a national footprint. The Romotive partners still control 80 percent of the equity, which gives Rinaudo free range to tap into his investors’ deep startup knowledge.

“Crowdfunding is proof of market demand,” he says. “The power is now in our hands.”

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