The New Way to Raise Startup Capital
There’s been a fundraising seismic shift in Silicon Valley. Want to get a startup funded and receive startup capital? Got a portfolio company that needs more cash? The fundraising rules have changed, again, and Sand Hill Road isn’t involved the way it used to be.
I’m not new to Silicon Valley. After working at a few startups and raising startup capital, I started a company in the dot-com boom. Funded by big name VC’s including Softbank and WI Harper, and they later by Norwest. A name change followed the merger, and Uber bought it in 2015.
I was an advisor to Google X and have been a direct report to Andy Grove. In addition, I was at General Magic when we invented the smartphone and the voice assistant in the 1990’s, a decade ahead of everyone else. Having stock in startups, I saw some investments fail and some suceed.
I saw the playbook and I get it. Angels → VC’s → IPO/acquisition.
However, that only works for a tiny fraction of the companies who try it, and the odds are only getting worse. Seed rounds used to be a few hundred grand and are now a few million. VC’s want to see $100k+/month in recurring revenue and hockey stick growth before they’ll cough up a term sheet.
Starting a company takes money. The founder has to put in money to just get it to a place where they can try to fundraise. You’re going to need money for lawyers and accountants. Plus you need to build your product, get customers (sales and marketing isn’t free), and the list goes on. If you can’t afford to self-fund your startup, and/or you don’t have family/friends rich enough and willing to fund it for you, by the current rules…you’re out of the game.
Don’t give up yet, though, there’s hope. The internet has changed the playing field. You can stand out now even if you don’t know anyone. You can raise money via crowdfunding, and people do. Lots of people do, some bringing in a lot of money.
How much is “a lot”? Bill Li was another portfolio company CEO the same time as me at Softbank. I was his interim CTO at the end of Carbon Motors as he was pivoting to Knightscope. Knightscope has raised $26M, none from Sand Hill Road (although he has a corporate VC or two), and he raised almost all of it from the crowd.
He’s a Silicon Valley insider and he eschewed the local customs. Some might say he’s crazy…I say crazy like a fox. He brought in over $18M on Seedinvest alone (and was Seedinvest’s most successful raise ever).
So, wait, you might ask, did they IPO or something? I thought you couldn’t sell shares before you went public? Unless it was to accredited investors or…something?
That’s how it used to be. In an effort to protect retirees and lottery winners from slick sales people dumping worthless stock on them, the SEC only allowed “accredited” (aka high net worth) investors to invest in private companies. Because you had to be rich to invest in a hot startup, only rich people got hot startup returns.
So the SEC has worked out a few ways the average Joan can invest. Generally, the non-accredited investor is limited to 10% of their annual salary or 5% of their net worth (minus their home loan), whichever is less.
You need a portal, though. Generally speaking, you can’t sell directly to non accredited investors without going through a funding portal to raise startup capital.
A notable difference between these fundraising mechanisms and an IPO is that the shareholders aren’t getting liquidity. This isn’t a cash out event, this is a fundraising event.
So, how does it work in real life? We tried three. The common theme is that:
If the platform doesn’t bring you investors you otherwise wouldn’t have found, then they bring no value.
To check out part 2 of this series, click HERE to learn about the different platforms we tried and the experience we had trying to raise capital online.
This piece is a guest post from Rick Bentley, Founder & CEO of Cloudastructure, rated a Top Deal by KingsCrowd. This guest post series is meant to highlight the new world of online startup investing, how it all works and what Rick’s experience has been in maneuvering this new space.
