Exercise bike meets virtual reality meets video game. Sound crazy? The idea has raised close to $3 million already from venture capital veterans, and its biggest potential investor audience has been blessed by regulators, starting Monday.
VirZOOM works with virtual reality hardware to turn fitness into a VR gaming experience. If the company's marketing plan is right, it could make overpriced gyms with boring workout equipment sweat some new competition. The key is a bike accessory compatible with virtual reality headsets like Facebook's Oculus Rift and Sony's Playstation VR (Samsung Gear is coming soon). Motion sensors on the bike work so that the harder someone pedals, the faster the VR game moves through its universe, which currently includes a horse race, Formula 1 race and even a mythical environment.
To get VirZOOM up and running, exercise buffs need to invest $400 for the bike and another $1,500 for the Oculus Rift and compatible PC.
"It's not the person who does triathlons, but more the average person who spends $70 a month on a gym membership they never use," said Eric Janszen, co-founder and CEO of VirZOOM. Janszen points to the popularity of games like Guitar Hero and Rock Band. "What people grasp very quickly and is an easy way to pass time is always a good idea," he said. "The key is to take something traditionally boring, like working out, and make it fun."
The key to the millions raised in the company's early days (it only set out with a goal of $750,000) is equity crowdfunding, which allows accredited investors and venture capitalists to invest equity stakes in private companies.
Unlike a classic crowdfunding campaign, such as a Kickstarter or Indiegogo project, where many individuals unknown to the project creator invest, VirZOOM's initial equity crowdfunding success can be attributed almost entirely to Janszen's close connections in the world of venture capital, where he has worked for a long time (he is currently on hiatus from the iTulip Investor Group because of VirZOOM's launch).
It is typical in equity crowdfunding for early funding to have a "friends and family" flavor. The money already raised by VirZoom ranks it No. 3 on CNBC's Crowdfinance 50 Index, which tracks investments made on equity crowdfunding platforms (see list at bottom of story). Future success, though, will depend on attracting investors Janszen doesn't personally know, and Janszen said the heavy tilt to personal connections in the early funding should decrease over time.
Ryan Feit, CEO and co-founder of SeedInvest, an equity crowdfunding platform on which VirZOOM is listed, said that after initial funding like VirZOOM experienced from a tight group, new investors will come on board and typically end up providing 25 percent to 50 percent of overall funding.
Feit thinks a big part of future success for companies like VirZOOM will come from Title III of the Jumpstart Our Business Startups Act, which starting Monday allows any investor to take part in equity crowdfunding projects. (SeedInvest has been involved in the legislative process for Title III and the JOBS Act for nearly five years.)
"We've spent three years facilitating investments with just accredited investors, but a big part of our mission has been to open up investing in private companies to everyone and not just the wealthiest 2 percent," said Feit.
Until now, only accredited investors and venture capitalists, such as Janszen's network, with a net worth of at least $1 million or an annual income of at least $200,000 could purchase ownership stakes in private companies. Now someone making less than $100,000, for example, has the option to invest up to 5 percent of their annual income, or $2,000 — whichever is greater — in private companies in the same way wealthy investors have been able to do for a long time.
Janszen said the biggest fundraising issue is the novelty of virtual reality itself, and that is what has had him concerned. Though the industry is growing, start-ups in the virtual reality sector have very little precedent to learn from.
"The problem with venture capitalism is that there are a very small number of firms that take big risks," said Janszen. In order to convince those firms to invest in their company, the team has to formulate a very particular type of pitch, and even then, "because the concept of [virtual reality] itself is so new, that makes it difficult for your typical venture capitalist, who may not be well versed in the field, to invest in the idea."
Title III of the JOBS Act will give companies like VirZOOM access to a significantly larger group of potential investors instead of just concentrating that risk with a small number of players. Equity crowdfunding backers say new investors may be more knowledgeable and passionate about the industry than a select number of accredited investors. Critics have countered throughout the Securities and Exchange Commission review process that it will expose relatively inexperienced investors of limited means to a high degree of risk.
"There's this notion that if you're rich, you must be smart and that you can afford losses if you make bad decisions," Janszen said. Title III takes another view. "It opens the door for you if you're very smart and in the know about a particular industry but you're not that rich," he said. "And if you're smart, you can also get rich," Janszen said.
Equity crowdfunding to the public will also change the rules of start-up marketing. Pitching a company to the public rather than to an elite few will require start-up executives to pivot toward less conventional guerrilla marketing. Janszen said tailoring pitches to venture capitalists and the wealthiest of investors typically requires entrepreneurs to adopt very particular and tedious marketing strategies.
"I had a close relationship with everyone I was approaching [to invest in VirZOOM], and in many ways that's something you have to do because you're pitching to such a small group," he said. Now "I can get my name and my product out there just by putting a bumper sticker on my car. Doesn't get any easier than that," Janszen said. Though he added that social media marketing already done by VirZOOM, such as YouTube, had very low return for the company and it has for the time pulled back on that approach.
Janszen acknowledged the risk to a much broader group of potential investors.
Venture firms have an increasingly stringent background-check process that involves a combination of data to assess a company's health, including current financials and financial models covering everything from expenses to headcount and growth plans. Venture investors also review marketing strategy and competition.
Equity crowdfunding campaigns will have to be able to provide a similar role.
"[Equity crowdfunding] platforms have to act as gatekeepers for investors upfront," Feit said. "We've always done the heavy lifting for investors as far as vetting companies goes, because at the end of the day, we're not trying to fund companies that shouldn't be raising capital."
The platform's evaluation process includes a number of criteria, like examining a start-up's minimum prototype, proof of product demand and ensuring the valuation the company is raising is appropriate to its level of traction within the industry.
"It's not lowering the bar for anyone in any way," Feit said. "It actually makes the system more efficient, and that's a big deal for the economy and economic growth."
It's likely the SEC will raise the threshold of scrutiny on companies soliciting capital from non-accredited investors, and "those companies will have to disclose more information publicly," Janszen said.
— By Sonam Sheth, special to CNBC.com
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