By Spencer E. Ante
A few months ago,
Jakub Krzych didn’t know much about online investing syndicates — a new type of
venture financing vehicle that enables angel investors to quickly assemble a
group of investors over the Internet. (For a primer, read the profile of syndicates in today’s Journal.)
But like many entrepreneurs, Krzych had
learned the hard way how much of a hassle it was to raise a round of angel funding.
Krzych’s first startup, an online advertising network called AdTaily, took six
months to scrounge up $20,000 to get off the ground.
His second startup, Estimote, used a
syndicate listed on the website AngelList to raise $250,000 in just three days.
Estimote’s experience shows how syndicates could democratize private company
investing and disrupt the old boys club of venture capital.
Estimote, launched in April of 2012,
needed capital in part because it was making a physical product—a wireless
sensor that allows a retailer to send information and deals to shoppers based
on where they are in the store. To get his initial seed funding, it took Krzych
three months to raise $200,000 from more than a dozen angel investors in the
U.S. and Europe.
“Dealing with many small investors is a
challenge” and involved a lot of paperwork, says Krzych, 32. That money helped
fund the development of a prototype.
Earlier this year, the company applied to
Y Combinator, the technology incubator in Silicon Valley. They were accepted
and moved to California to participate in the 2013 summer class. As part of the
program, Estimote and the other startups received $100,000 in funding from the
incubator and its venture capital backers.
For the next financing round, Krzych
considered raising money from traditional venture capital firms, but he thought
they could not move fast enough. He needed to raise money in a few weeks — not
the few months that many big firms take.
Krzych was trying to get his product ready
for the late September launch of iOS7, the new Apple mobile operating system
that supported the low-power Bluetooth feature used in Estimote.
Estimote asked Betaworks, a New York seed
investor and digital media company, to lead its investment round after meeting
them through Y Combinator. Krzych says he felt Betaworks understood his vision
and could potentially rustle up a couple hundred thousand dollars in a few
weeks.
Betaworks CEO John Borthwick then pitched Krzych on something new: Syndicating some
of the deal on AngelList to bring in more outside investors, fast.
Krzych signed on to the idea after
Betaworks agreed to deliver $250,000 for the company. Betaworks committed
$100,000 to the deal and planned to syndicate $150,000.
The deal went live in late September.
Betaworks marketed it to a few thousand accredited investors that were
following the firm on AngelList.
The first $100,000 came through in about a
day, mainly through the Betaworks network. Krzych got excited as emails alerted
him when backers subscribed to the deal.
Then AngelList featured the company on its
website and the commitments accelerated until Betaworks shut the door at the
end of the third day.
The final result:
46 backers had reserved spots in the Betaworks syndicate worth $298,000, almost
double its initial goal. Borthwick and his investment partner Nicholas Chirls
are now picking who gets in but they estimate the final number will be 35
people.
“We’re trying to make sure that everyone
at least gets some allocation in the round,” says Chirls.
Krzych says the company will use the money
to hire designers, engineers and deliver product to more than 1,000 customers.
Borthwick is not sure how often Betaworks
will syndicate its angel investments, but he said it is likely to do more deals
using AngelList. He’d like to see the accreditation process improve, though,
before he moves forward.
“Aside from the complexity of screening
the investors, it’s all been positive,” Borthwick says. “It will
change the world of seed investing.”
This is a repost of an article that appeared on The Wall Street Journal on October 9, 2013.
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