So you want to invest in startups, but you either don’t have enough capital lying around, or you don’t want to allocate all of your capital to one startup. After all, you’re wealthy, but you’re not wealthy enough that you won’t notice that the money is gone. MicroVentures is hoping to become the solution to your problem.
MicroVentures is an investment firm that crowdfunds startups with capital from a large pool of angel investors, billing itself as the connector for angel investors and startups. The firm finds startups that are raising a round of funding, and begins thinking about investing. It performs the due diligence on the deal by looking at company finances, the burn rate, background checks, and other factors. Then, it decides if it would be a good fit for investors.
MicroVentures then posts the deal on its site for investors to see and learn about. Once investors learn about the startup, they can then individually make the decision to invest however much money they like. The minimum is $1,000, and can go upwards from there.
As investors send money to MicroVentures for the deal, the firm holds it in escrow while the deal closes. Once all of the money is together, MicroVentures is then the face of the investor pool for the startup. The firm itself is the only party that the startup has to deal with, simplifying investor relations, management, and the capitalization table.
In the beginning, MicroVentures had a hard time getting off the ground, which is expected for any startup that is trying to disrupt the financial or investment sectors. This is especially true for the crowdfunding industry. From the beginning, cofounder Bill Clark wanted to do everything by the book. After all, being hit with a cease and desist letter from a patent troll is nothing compared to being hit with a lawsuit from the SEC.
With the goal of doing everything by the book, Clark began the battle of obtaining approval from the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). Clark described the process as endless, with the only method of communication for months being via an online form on the SEC site. The SEC would respond via phone call but would never leave a message or a return number or provide advice as to how to not break regulations, if you did answer. It was essentially like a GPS that only communicated with the driver if you were going the wrong way.
Eventually, Clark was able to get the phone number of someone that actually worked for FINRA, who then took on the case personally. At times, it looked like MicroVentures would be denied, and other times it looked like a certainty that they would be approved. At one point, FINRA was signalling that the venture would go through, only for Clark to receive a call that the application would be denied the next day. Then, two weeks later the venture was finally approved.
According to Clark’s man-on-the-inside, the only reason that the deal was approved was because Clark had inundated them with paperwork, documentation, and evidence that it was a good idea. Clark provided evidence of his technological experience, his credentials, showed them a working prototype of the system, and sent piles of paperwork. All of this pushed FINRA to approve MicroVentures, when no other crowdfunding platform had been approved before. Essentially, MicroVentures out-paperworked the federal government.
With the system approved, MicroVentures began to move full steam ahead. So far, MicroVentures has raised $1.2 million in funding from investors in 2011, without the investor pool being filled. Now, in 2012, the firm has already raised $2.9 million to date, and that’s only halfway through the year. Those numbers are with a small number of startups, as well, with MicroVentures only listing and funding 16 startups to date.
This model has a number of advantages for everyone involved. For example, consider one hypothetical investor that has a quarter of a million dollars that they want to invest in startups. Instead of investing in only a handful of startups with larger amounts, the investor could theoretically invest in 250 startups via MicroVentures. It would decrease the size of the return, but it would also decrease the risk involved in any one particular startup. Prior to this crowdfunding model, that would have been impossible.
On the startup side of the equation, there is little extra hassle for the startup. The company is still getting the money it wants, and is still only dealing with one face for the investment pool: the MicroVentures partners. It also increases the chances of successfully raising a round of funding, by bringing in more potential money that would normally be out of reach. There is the risk that the deal leaks to the public, but that is mitigated by the fact that MicroVentures only shows the deals to accredited investors.
MicroVentures also dabbles in secondary offerings, like one offering that the firm did for a secondary investment in Facebook. The firm raised and purchased $300,000 in Facebook shares in a secondary offering. In fact, this secondary offering was such a big deal for the firm, that the firm raised $40,000 from investors in the first 10 minutes after the deal was posted to the site.
Investors do seem to be liking the process and how it is progressing. The investors are investing in 2.2 deals on average, with the firm expecting that number to increase as more deals are posted. The average investment is also $5,200 per investor for investments in startups, and $11,300 per investor on secondary offerings like the Facebook one.
Right now, the firm is largely alone in its field, what with being the only FINRA approved crowdfunding platform. That being said, when the crowdfunding exemptions in the JOBS Act come into effect next year, there will likely be an increase in competition in the field. By that point though, it is theoretically feasible that MicroVentures will have seen a startup post a return, which is something that no other crowdfunding platform could claim.
MicroVentures has decided to provide a bonus for PandoDaily readers, for both startups and investors. For startups, when you sign up with the referral code “Pandodaily”, the firm will waive the submission fee. For investors, when you sign up with the referral code “Pandodaily”, the firm will provide a $100 gift card once you make your first investment.
The real test for MicroVentures moving forward will be if the firm can truly find good deals. The investment model may be innovative, and investors and startups may be happy with how it works, but that doesn’t mean much if none of the startups succeed.