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Crowdfunding Success!

Written by Don Ross // 28 April 2012 //

Pebble Technology receives $6.9 million—20 days remain! Headlines from Bloomberg, CNN, ABC, and others have been shouting out about the record amount pledged through crowdfunding at Kickstarter. Pebble has become a poster child for the crowdfunding movement.

Who are Kickstarter and Pebble Technology? Kickstarter is a highly successful crowdfunding website for products and projects, where people pay companies for rewards and discounts. The overhead cost is 5% to Kickstarter plus another 3-5% to Amazon Payments, which handles the money.

Pebble Technology is a three-year old startup company that offers a wearable gadget—a smartwatch that brings some of the functionality of a smartphone to a wristwatch. The standout features are its screen and ability to connect wirelessly to an iPhone. The iPhone connection is the real difference maker. Both the Pebble and its competitors can connect to Android phones via Bluetooth.

Kickstarter pledges for Pebbles watches range from $1 to $10,000 or more. People who pledge large amounts will receive 100 Pebbles in about four months. Prior to Pebbles, the top 10 Kickstarter campaigns produced from ~$500K to more than $3 million. Pledges for the average project was less than $10,000 and the most common pledge is $25. Still, the success of Kickstarter and others has been a key driver for the equity crowdfunding provisions in the JOBS Act of 2012.

Many Venture Capitalists have supported crowdfunding and would like to use Kickstarter for their portfolio companies. Who wouldn’t? It is non-dilutive, fast, and low effort.

Non-Equity vs Equity Crowdfunding

To date, all crowdfunding has been for projects not equity. These non-equity payments are outside the purview of the Security and Exchange Commission (SEC). The new JOBS Act enables the use of crowdfunding to sell equity to the general public (unaccredited investors). Equity crowfunding will be subject to SEC oversight, and the legislation contains several “legal land mines” and restrictions, such as early disclosures, personal liability, and a $1 million cap, among others. (See prior post: Will Crowdfunding replace Angel Funding?).

Will Angels/VCs ignore the legal risks and invest in companies with shareholders from equity crowdfunding? The startup financing world is a market-driven environment, and when a frenzy of buying occurs (throwing money at companies irrespective of terms), thoughtful consideration of details often goes out the window. The devil is in those details, which may come back to bite those investors in a big way during the ensuing years.

What About Mentoring?

Post-investment Angel participation can make the difference for a successful outcome. Involved Angels provide mentoring/coaching, strategic consultation, and monitoring of financial information. Angels also are a key source for making connections. Rookie or seasoned veteran, entrepreneurs benefit from guidance and/or perspectives that an Angel who has “been there and done that” can provide.

In the crowdfunding model, investors are uninvolved and distanced from the company. Is this better for entrepreneurs? The answer is no, according to data from the Kaufman Foundation. When Angel investors participate in a company after making an investment, returns nearly triple. At HealthTech Capital, one of our core philosophies is to be involved and mentor companies for success—both for us and the entrepreneur. 

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