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Funding Circle Raises Series B Funding

Thursday, President Obama will sign the pro- crowdfunding JOBS Act into law. Once signed, the SEC will have 90 days of rule making, and then the SEC will open the draft for 90 days of comments.

Already, competition in the space is heating up. Just days ago, UK-based Funding Circle raised a $16 million dollar round to presumably move into the US market once the pro-crowdfunding law is enacted. Funding circle raised Series B capital from Index Ventures and Union Square Ventures (USV). Notably, USV was also one of the first big names invested in Kickstarter.com, a potential indirect competitor to Funding Circle. It appears Funding Circle will directly compete with established players in the P2P debt lending marketplace like Prosper and LendingClub.

Crowdsourcing.org, the industry website, has also developed a crowdfunding accreditation for platforms. Accreditation is awarded based on passing marks in operational transparency, security of information and payments, platform functionality, and operation procedures. So far 7 platforms have received their ribbon of accreditation.

Crowdfunding offers value for both business owners and investors alike. First, for Entrepreneurs, Crowdfunding (in its different iterations) is a powerful alternative to raising money from Banks or VCs. US IPO offerings have declined significantly since the passage of Sarbanes-Oxley (SOX).  The JOBS Act seeks to reverse some of the negative regulations that have adversely affected US IPOs. Second, Everyday investors will have more options for taking advantage of potentially higher (albeit riskier) returns on their capital that would otherwise be sitting in low risk-low growth financial instruments.

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JOBS Act Looking for Senate Support Tuesday

American Jobs Act

Tuesday marks another important milestone for Crowdfunding Legislation. The Senate is set to vote on the JOBS Act which promises to liberalize small equity markets and change the regulatory structure that prevents equity funding platforms to operate currently.

Entrepreneurs want it. Investment is difficult to attract. According to a January 2012 report by the Kauffman foundation, a $750 Million funding gap exists for start-up businesses. Investors are ready to take their money out of banks with low interest rates; however, the government still has not made the necessary regulatory changes.

A few road blocks stand in the way.

Senate Democrats are worried that liberalizing small equity markets will invite corruption and fraud. To some degree they are right. Allowing freer access to capital will entice those looking to launder money and abuse the system for personal gains.

What policy makers don’t seem to understand is that internet users understand that fraud is possible. The problems arise when users are not notified about the fraud. Policy makers cite Enron-style scandals and the recent financial meltdown as reasons for the delay in passing this bill; however, there is a difference. Both instances caused calamity because they were billed as “safe and lucrative” financial investments. However, due to the institutional structure, the reality of the situation was shrouded in obscurity and complexity.

Surprisingly and refreshingly, online financial lending sites have been transparent regarding notifying users of fraud. One example that comes to mind is Kiva. I read a case study from one of their founders who addressed this issue directly. The Kiva management team found out that one of their partners in Africa was funneling Kiva funds to the management rather than the borrowers. As soon as Kiva learned of this misallocation of resources, Kiva management immediately notified site users of the improprieties and issued a formal apology. Importantly, it seems as if online financial sites have been playing by a different set of rules, those that are more transparent and honest. I believe the reason for the increased transparency is a function of the difficulty in developing and maintaining trust. These types of platforms cannot operate if that trust is not developed, so it is more a matter of the self interest of the business that all lines of communication stay open.

Transparency of operations and developing a platform with exceptional safeguards to protect investors and entrepreneurs have always been paramount to the Davka Team. The key is information. Obviously, the more information an investor has regarding a venture helps determine. Davka safeguards investors through a partnership process similar to Kiva, as well as a multistage funding process that requires transparency from ventures. We need the opportunity to showcase our process.

In short, I would be pleasantly surprised if the bill was passed in the Senate in a form acceptable to be passed back in the house.

Start-up Profounder Decides to Shutdown?

All-star backed start-up Profounder announced on February 17th that they would be closing their doors at the end of March.

Despite our progress, the current regulatory environment prevents us from pursuing the innovations we feel would be most valuable to our customers, and we’ve made the decision to shut down the company (Profounder Blog)

Cofounder of Profounder Jessica Jackley

The start-up, headed by Kiva.org founder Jessica Jackley and fellow Stanford grad Dana Mauriello, had a very impressive advisory and investment team. Judging from list of investors, money should not have been an issue for keeping the site running. That leads me to believe that the Profounder team confirmed something I have suspected for the past month or so. The Crowdfunding equity bill will not be passed this year.

According to The Hill’s Floor Action Blog, Sen. Rand Paul’s (R-Ky.) continued filibuster is blocking the Senate from debating any new legislation. The debate is regarding an amendment to strip the ruling regime in Egypt of its U.S. Aid for a month. Furthermore, many suspect that the bill in the Senate is too far away from HR2930 that passed in the House in early November.

Soon, if they haven’t already, politicians in Washington will move into election preparation. When that happens, you can kiss any hopes of new legislation goodbye. Just another reason to be angry at the “game” the politicians are playing in Washington.

Unfortunately, it looks like the Profounder team was just a little before their time. It takes a great team, financial support, and a little bit of luck to get a start-up off the ground. Jackley and Mauriello mentioned in their blog post that they will be joining the GOOD team to help develop “the next chapter of crowdfunding.”

I’m sure they will be heard from again. If you want more information on the movement to make capital accessible for entrepreneurs visit legalizecrowdfunding.org

Post Collapse Boom

What will the future look like in this post-near-financial-meltdown world? One thing is for certain. There will be lots of young entrepreneurs.

According to an Inc. post The 7 Best Times to Start a Company:

Reason 1 for starting a company: Youth

Young people have the time, energy, ignorance, and innocence it takes to go after starting a business. We don’t have a lot of responsibilities. We do have a lot of energy, passion, and drive. However, one thing that works against us is the pressure that many of us feel to succeed. Many students have lots of debt coming out of college. They get focused on that number they have to payoff to get above water. Yes, Start-ups are risky. Most will fail. All who try will learn more than their counterparts who chose the safe route.

Reason Number 2: You’re miserable at work.

The number of underemployed in this country has soared thanks to the economic downturn. A college degree doesn’t get you too far anymore. “Everyone” has them. If you are an ambitious college grad, the last place you want to be stuck is at the bottom of a corporate ladder or working part-time in a restaurant. Unfortunately, that is where many of us find ourselves. Start-ups give you the opportunity to take on new challenges, learn new roles, and, if you’re lucky, make some money.

Reason Number 3: You’re out of work

Need I say more?

More and more universities are pumping money into developing their entrepreneurship initiatives. Business plan competitions and entrepreneurship coursework that was once found at Ivy League Schools are now making their way to public and private colleges alike. Schools are making entrepreneurship a priority, and hopefully these initiatives will get more grads employed.

David Miller, a PhD Candidate at George Mason University, is focusing his research on the role of colleges and universities as hubs of entrepreneurial activity.  You can check out his Campus Entrepreneurship Blog.

Crowdfunding: The Best Option for Startups

Read an article today on BostInno that debated the pros and cons of seeing crowdfunding legislation passed through the Senate. First, even if the legislation that is currently on the table in the Senate is passed, there is no guarantee that it will be signed into law. Rep Mchenry (R-NC) says that the Senate version is too far away from the house version that passed with an overwhelming majority and the support of President Obama. Rep Mchenry is unsure as to whether or not he will support the bill if it makes its way through the Senate (Watch the video here). Unfortunately, It appears that crowdfunding equity platforms are still a ways off.

While people cannot crowdfund equity, entrepreneurs can still receive small no strings attached donations from funders. Yesterday, kickstarter.com, a crowdfunding platform for creative projects, had a project break the $1 million mark. Pretty impressive! At Davka we understand the benefits of the two models, and we hope to incorporate both into our platform. The grant model allows for startups to pursue their ideas, and the equity model allows them to expand. In the current climate, we think there is a need for both.

Just an anecdote. I met a woman the other night who began her own startup marketing firm a couple of months ago with her son. Her son is a computer programmer, and the firm he was just working for went under. Instead of looking for more “work” they decided to start something they both love. She is a photographer, so she takes pictures of the nightlife around the community she lives in. Her son manages the website and does all of the coding. They actually have an innovative business model, and they were in the black in the first 3 months. Now, she wants to expand to other neighborhoods, but she needs money. There is no reason that they should not be able to raise investment by reaching out to their friends, community members, and partners. Unfortunately, because of the current laws from the 1930’s, she cannot.

My Guess…we will continue to hear stories like this while people in our economy are unemployed and underemployed.  Tweet, email, call your senator and tell them to start legislating and stop playing politics. Lets not forget, there are market opportunities all over the country, and entrepreneurs still need the capital to exploit them. Banks still are not lending; VC and Angels rarely invest in anything under 100k; but friends and family still want to help friends and family out.

Help them help you.

Visit crowdsourcing.org for more information.

Welcome to the Beta Launch of the Davka Blog