schumacherYou may remember Smallknot from TechStars NY’s 2012 class of startups. The company, started by two former securities lawyers, aimed to help small, local businesses crowdfund small projects.

I was into the idea, calling it a heartwarming take on the crowdfunding craze.

But with projects ranging in size from just $2000 to $10,000, the idea had obvious questions of scalability. I’d heard earlier this year through the rumor mill that Smallknot had shut down, but the company’s site was still running, so I never followed up.

Tonight, at the Northside Innovation Meetup, I found out what actually happened, and it’s slightly more interesting than a “Thanks for all your support, we’re shutting down” blog post. (The likes of which New York tech has seen plenty this week: TechStars NY class of 2011 grad Urtak announced it would shut down on Monday. Urtak’s classmate, Sidetour, sold to Groupon. Another 2011 grad, Veri, abandoned its original premise as an educational quiz company, launching as a photo storage app called Memoir. And Sonar CEO Brett Martin published an explanation for the company’s failure.)

Smallknot founder Jay Lee spun the tale of his startup’s early progress. The company had an exciting idea, plenty of press coverage, and $500,000 in commitments from venture investors. The lead investor had even handed the company their first check as the round was closing up.

But something felt off about it. The founders knew venture investors needed Smallknot to become a billion-dollar business. But Lee and his co-founder Ben Rossen knew deep down that wasn’t likely. “I realized we didn’t believe in the company,” Lee said. “The way the company was going, it was not a billion-dollar company.”

“It was like we took a VW Beetle and skyrocketed it into space,” he said.

So they called it quits and told their investors to keep the money. Rossen boomeranged directly back to his lawyer job, and Lee took a job at Brooklyn startup Farmigo.

But they also realized that there was value in Smallknot’s platform. It had already helped a number of restaurants, wineries and shops. So they decided to keep Smallknot alive and run it like a small business instead of a tech startup.

A company can be small and authentic and still be powerful, Lee argued. In fact, he said, speaking to the theme of the event, he hopes Smallknot can join a new breed of Brooklyn-based startups that are not necessarily massive, scalable tech platforms, but still deliver innovative, valuable products.

It’s easy for founders to get caught up in the excitement of raising money, announcing their funding, and “hustling.” Which makes it all the more notable when one steps back and realizes it’s not the best path for them or their company. Later in the evening, Charlie O’Donnell, who runs a small investment outfit called Brooklyn Bridge Ventures, said he probably counsels more startups not to take venture money than he advises to take it.