Crowdfunding as a business and validation model has undergone tremendous growth these past few years. For instance, Kickstarter has seen its total amount pledged rise from US$28 million in 2010 to US$480 million in 2013.
That said, most current crowdfunding sites such as Kickstarter and Indiegogo work on a rewards-based model, where backers are rewarded with products and services when projects are successfully funded. While this model has its uses, particularly for hardware startups, it leaves out those that operate in different markets from their backers, for instance many social enterprises.
This is where equity-based crowdfunding comes in. A system that allows backers to own shares in a company, equity crowdfunding promises to give fledgling startups both, a money boost and the validation needed to grow. However, equity-based crowdfunding has not managed to garner as much popularity and buy-in as its reward-based cousin, with growth concentrated in Europe for the most part.
The situation is set to change, though, with the arrival of equity-based crowdfunding site FundedByMe to Singapore. Started in 2011 as a rewards-based platform, FundedByMe encountered many issues such as delayed delivery back then, and pivoted to focus more on equity-based crowdfunding in 2012, though still retaining a separate rewards-based platform. With its first project funded in 2013, it has raised a total of around S$6.3 million ( approximately US$4.9 million) for 21 campaigns since then. (The amount was wrongly put as S$2.2 million. It has been corrected to S$6.3 million. The error is regretted.)
According to Founder and CEO Daniel Daboczy, FundedByMe’s foray to Singapore is due to the local startup scene, as well as the status of a hub to spread out to rest of Asia. “We like the entrepreneurship energy displayed in Singapore; there’re many startups here that we can help,” said Daboczy, adding, “Also, Singapore benefits from global deal flow, enabling cross-investment between our Asian and European investors and companies.”
Described as a “dating site for investments” by Daboczy, FundedByMe connects startups looking for funding with potential investors among the public. In most cases, equity funding takes place as part of a VC round, where the crowd tops off the investment. Like rewards-based crowdfunding, equity crowdfunding provides a gauge of demand, though in this case it’s more like a crowd decision on whether the startup is sustainable or not.
Hot to get on FundedByMe?
Startups and projects seeking a space on FundedByMe have to go through a highly selective process, which helps weed out fraud and reduces risk for investors. “We approve only about eight per cent of companies that apply to us. We look at those projects that share as much information as they can, as we believe that transparency and trust is the key,” said Daboczy.
If a startup passes the checks and gets a spot on FundedByMe, it goes through two rounds, each lasting 45 days. First is the pre-round, which is a validation period of sorts where the public takes a look at the information available about the startup, asks questions, and decides whether it is fundable or not based on the answers received. At this point, investors can reserve shares of the company.
After the pre-round, the founders decide whether or not their startup will proceed with equity crowdfunding, based on the feedback received. Should they decide to proceed, the campaign is moved into the open round, where investors can actively get involved and purchase shares. According to Daboczy, about 25 per cent of startups make it from the pre-round to the open round.
During the application process, startups can choose how much of the company they will be offering as equity to investors, which is typically in the range of five to 15 per cent. If the funding falls short of the target, the equity percentage is automatically adjusted to the lower amount, with the valuation of the company not affected.
Not just cash inflow
With 32,000 users currently, the investor pool of FundedByMe is not a particularly large one. However, among these potential investors are owners or executives of distributors and retailing firms, lawyers, and other potential business partners. Hence, equity funding also provides value to startups over and beyond just monetary investment.
For investors, FundedByMe offers them a chance to be ahead of the latest trends in technology and be part of the early adopters of the “next big thing”, so to speak. It also offers investors direct access to entrepreneurs and founders, making sure they know all there is to know before making the decision to invest. Finally, many investors are from established firms, and hence investing in startups provides them publicity for their companies, showing that they support innovation and entrepreneurship.
Factoring in trust
In the end, though, like any transaction that involves large amounts of money, legal issues such as voting rights invariably arise with equity crowdfunding. Here Daboczy stressed that FundedByMe doesn’t handle payments, but instead routes all investor money to their accredited lawyers, who will then facilitate the deals between companies and investors. “This slows down the process, but we believe that it increases due diligence and trust,” he explained, “we may bring startups and investors together, but our lawyer makes sure the deals go through.”
In the future, FundedByMe aims to grow its investor base through greater publicity. “We will be collaborating with incubators, as well as use social media to advertise our platform. Our ultimate aim is to build an ecosystem of trust between incubators, investors, media and the legal fraternity, letting startups have a transparent network from which to gather funding,” concluded Daboczy.