Crowdfunding Gains Some Respect, But Startups Better Be Prepared

If there's no love coming from the angel and venture capital community, there's always crowdfunding.

And the rising investment channel -- including popular sites such as Kickstarter and Indiegogo -- continue to gain traction and respect from serious companies and investors alike.

That was the theme of a panel presentation that included perspectives from all sides of the equation at last week's International Bar Association's "Silicon Valley From Start-Up to IPO/Exit Conference" in Santa Monica, Calif.

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"What we're doing at Crowdfunder is we're really turning early stage funding, which is more of a black art, into a science and asset class that's both investable by an individual who's looking to diversify," Crowdfunder Senior Vice President Rafe Furst said during the panel.

Crowdfunding, which got its start helping creatives raise funding for their projects online, hasn't gotten the respect from the investment community some say it deserves. Some view the vetting process of a company looking to raise money as not as rigorous as more traditional methods employed by venture capitalists or angel investors. Those views may still hold in some circles even as crowdfunding takes off, but opinions are beginning to change.

Muizz Kheraj, senior vice president in the Santa Monica office of investment bank FocalPoint Partners and a former engineer at several technology companies, said his firm primarily focuses on the midmarket but more recently has been working on early stage deals.

FocalPoint is now working with an entrepreneur on sourcing funding, and it's become a question of going the traditional route or tapping into crowdfunding.

"I'm looking at the situation that we're in right now where we're helping our entrepreneur either source funds through [crowdfunding site] Our Crowd or source their funds from traditional VCs, and it's a competitive space," Kheraj said. "And Our Crowd is coming forward with a competitive offer, and the VC world has to respond or they’ll get pulled back on this opportunity and it will go to the crowdfunding channel. I think we respect it as an opportunity and as a channel that's out there."

At the same time, from an investor standpoint, the decision to fund a company online should not be taken lightly, Kheraj said.

"I think the downside thus far is to the investor because you're not going through a much more [rigorous] process," he said. "You probably don't get as much information as you need, although you think you might have the right information set. And it's not an arm's length transaction so it is a little bit riskier to the investor at this point. I'm sure there's a lot of investors that are successful, but when I view it and I view what we go through and what our process is to raise capital, there is a lot more diligence that happens on our side of the world than I can imagine happening in the crowdfunding world."

NEXT: A Differing Viewpoint

Jeff Curie, president and CEO of Irvine, Calif.-based Bitvore, offered a counterpoint to that perspective during the panel after his company successfully raised and oversubscribed on its funding goals.

Bitvore makes software that helps companies analyze data in such a way that the Internet is turned into what Curie called a corporate database for businesses. The company turned heads when it raised $4.5 million in Series A funding on Fundable in the spring, surpassing its $3.25 million goal.

Bitvore came in fourth in an April Forbes ranking of the top 10 business crowdfunding campaigns in history. Business crowdfunding is seen as the next-generation model of this fundraising channel and includes the swapping of equity stakes in companies for investors.

"We started off as an early company," Curie said during the panel. "We had a working technology, no customer. We had some pretty strong finances in the bank but not based on revenue and so we went to Silicon Valley and Santa Monica and knocked on pretty much every venture capitalist door and they all said, 'Thanks, go away. You know, you're not making a couple million dollars a year. You're too early for us.' "

Bitvore heard the same from the angel investor community so company executives decided to give fundraising site AngelList a try.

Bitvore raised about $250,000 on the site in four days last summer, and it was hooked.

"Wires and digital convenience made it extremely efficient," Curie said. "There's very little overhead. … Now we did have all our homework done. So we had our term sheets, we had our funding docs. We had everything [investors] needed so if they said, 'Send me the docs,' we sent them the docs. Sometimes we turned this around in two days from meeting them to having money in the bank. So it's a very efficient way to raise money."

Preparation on the company's part was key, Curie said, to Bitvore's success in raising funding online. And that, in some cases, made it stand out from other companies less prepared to go before investors online, let alone in real life.

"We did all the work that an angel-funded company would go through," he said. "We had a lead investor. We had a term sheet. [Our lead investor] had a lawyer; we had a lawyer. We had official docs. We had an advisory panel. We had an ex-CTO of Lucent on our board. We're a serious company. We had serious players, real players that vetted that and because of that other investors go, 'Well, OK. This isn't some company that's building a solar-powered water cooler that I don't know if they're actually going to manufacture."