New Twist on Crowdfunding for Startups
Published in a recent article by the Wall Street Journal:
New Twist on Crowdfunding for Startups By Iris Dorbian
Looking for capital? There’s a new way to crowdsource it. A pair of online platforms are offering a new twist on the usual crowdfunding model for small businesses. Entrepreneurs can post their vitals, their business ideas and how much cash they need—and then solicit donations from interested backers.
So far, that’s familiar. The twist is in what backers get in return. The entrepreneurs agree to give backers a small percentage of their earnings each month for a certain period. In effect, they’re selling a temporary equity stake in themselves.
Getting a Boost
The sites, Upstart and Pave, aren’t designed to completely fund a business idea or cover all of an entrepreneur’s expenses—just to provide some breathing room, such as paying down some outstanding school debt.
And they come with caveats. They don’t have long track records, and it isn’t clear how the model will play out over time. It also isn’t clear how much investors can expect to gain—both sites say something in the ballpark of an 8% return is feasible, but it obviously depends on how much the entrepreneur earns.
And there are restrictions on who can use the services. Backers must be well-heeled “accredited” investors, and the sites are either explicitly or implicitly targeted at a very specific demographic: recent graduates.
Consider Trina Spear, a 29-year-old graduate of Harvard Business School. Confronted with a $170,000 debt when she got out of school in 2011, the Miami native put her entrepreneurial dreams on the back burner and got a job.
Then she heard about Upstart, a platform that launched last November and is open to people who completed college or grad school between 2010 and 2013. Ms. Spear raised $20,000 from 13 investors—which she says will help defray her living expenses and let her focus on Figs Scrubs, the medical-apparel company she co-founded in February. Half of her backers also offered mentorship opportunities.
For her part, she will share 1% of her future earnings with backers for 10 years. The site sets the percentage based on each applicant’s earnings potential, using the same process Google does to assess the success potential of young hires, says co-founder Dave Girouard, former president of Google Enterprise.
The Freedom to Focus
A similar site, Pave, is open to U.S. citizens 18 and over who meet certain qualifications, but is focusing on recent grads and soon-to-be grads because that’s where it’s seeing the greatest demand from backers. One user: Lawrence Cann, the 34-year-old founder and CEO of Street Soccer USA, a nonprofit initiative that works with homeless youth and adults. He’s using Pave, which launched in December, to manage the near-$150,000 cost of an executive M.B.A. program at Columbia University.
Within a month of filling out a profile, Mr. Cann raised $40,000 from 11 backers. Once he receives his degree at the end of the summer, he’s expected to start paying his investors 3.5% of “an adjusted income” for 10 years. The funding is a boon for Mr. Cann. “It gives me the freedom to focus on my business and also earn money to pay back [my investors],” he says.