Saturday, May 15, 2010

Kiva Co-Founder's New Startup Wins $50,000

Yesterday evening, the Summit Series held a pitch competition to give $50,000 to one young startup. Unlike other competitions, the winner was determined by the audience -- not just by voting but by actually trading shares on a simulated market. When all was said and done, the winner was crowdfunding for founders startup ProFounder, the new startup of Kiva co-founder Jessica Jackley.

I believe that over the next five to ten years, the number of people who decide to strike an entrepreneurial path is going to increase dramatically. Some of this will be new people (schmuks like me, in fact) who join existing low-barrier-to-entry startup fields like software. But a lot more of it is going to be people building homebased or "lifestyle" businesses.

For these groups, the state of current funding just doesn't work. These are groups who are unlikely to ever have (or sometimes even want) returns that would justify traditional angel investment, much less venture capital. Bank loans, when they are available, add nothing to the founder's company except cash and interest rates.

Even for entrepreneurs who need bigger infusions of capital, crowdfunding from friends, communities and contacts might bring the benefit of creating a team of loyal evangelists and lead supporters right from the beginning. ProFounder works on a debt and revenue sharing model, so people theoretically get their money back, plus a rate of return based on how well the company is doing. It can accommodate capital raises up to $1,000,000.

I'll admit, I've been and to some extent remain pretty skeptical of the crowdfunding for entrepreneurs idea. It's hard (if not impossible) to make it work legally if people are getting equity for their investments, and debt is often not an attractive option for companies that are going to need a series of pivots to achieve a fit between the product and the problem they're trying to solve. What's more, undercapitalization (a business that raises $18,000 instead of $30,000 and tries to make it work, for example) could be a major problem.

All that said, there are some places where it makes a lot of sense. Like I mentioned above, for small home-based businesses that don't need huge amounts of capital to get started. I think that we're just going to see more and more of this. There are already a huge number of eBay businesses and Etsy businesses. I think we'll start to see Airbnb businesses soon, as well. Beyond these platforms, I think people will continue to want to open restaurants, pet supply stores, and all the other businesses where local still matters.

For that sort of group, raising money on a site like ProFounder means that they're basically rolling marketing and customer acquisition into the process of funding, which could be a really valuable process. What's for sure is that we're going to need a more complex funder environment for a new generation of businesses, so I'm glad to have them experimenting no matter what comes of it.

The prize was funded by Presumed Abundance, a new fund which I've written about previously that builds in a pay-it-forward mechanism into every investment. When companies are successful, they become angels with presumed abundance and fund a new set of companies with the money they made. $10,000 of the $50,000 investment prize will be churned right back into a scholarship fund to help people attend Summit.
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