Great discussion on the latest in and the future of funding. Presented by The Economist.
INNOVATION FORUM 2014 EXCERPTS:
FUNDING THE BIG IDEAS –
Eric Migicovsky, CEO, Pebble Technology
Slava Rubin, CEO, Indiegogo
Sharon Vosmek, CEO, ASTIA
Moderator: Matthew Bishop
SLAVA RUBIN: When we came up with the idea in 2006; and when we launched in 2008 to create the industry which is now known as crowdfunding, which we never called it that; we had four concepts in mind on why people would fund:
#1 is because they cared about the person, the cause or the idea which often would be called a non-profit charity. We call (that) Passion.
#2 is most of you probably paid for your shirts we call that Perks. So people want to pay for things, services.
#3 If you want to be part of a movement; they want to be part of a revolution; they want to be part of community; something bigger than themselves. We call that Participation.
#4 If you give $1 and you get $5 back, which we call Profit.
These are the four reasons why anybody would fund anything in life. And we want to create a market place immediately for all four of that.
And there is a lot of regulatory issues going back to 1933, so we weren’t able to launch with the 4th one. And we launched with the first 3, and things have been growing fairly rapidly.
And then in 2011, there was a campaign in Indiegogo which was the crowdfunding campaign which changed the crowdfunding law, which was then a petition to Congress. And then later in 2012 we all know there was the JOBS Act to get signed and actually on the stage was a campaign on Indiegogo with President Obama. We were the only platform presented.
And it’s now 2 years later almost, and out of this need we’re talking about equity funding but it hasn’t happened yet. I think right now the Oculus Rift event is exciting. I think we’re stuck a little bit in the moment. If you think in hockey terms, where the puck is going we will have all these four options, people will fund for whatever reason they want. …
That’s why they pay a higher margin. Apple does a good job, it’s called ‘Brand’. When you move from transaction to relationship, you can charge for a lot incremental value besides the commoditized good which is exactly what happened. …
We have campaigns that have raised $12.8 million, campaigns that have gone up after $15 million of VC funding. I look forward to one of the companies getting sold for a $billion and that sounds great to me. But more important is there is every single one of these is campaigns.
Think about it on YouTube. If you were somebody who had 10 million fans who followed somebody on YouTube, and then Justin Bieber got a huge contract, were you upset that you didn’t get a piece of that contract? We’ve already established these relationships on other platforms. i think people just want a debate. It’s exciting. The equity crowd family will come out, and it will be huge.
ERIC MIGIKOVSKY: There’s definitely that idea of participation. People want to participate in a movement. I think there’s different avenues for participation. I’m not a professional crowdfunding expert, I don’t know too much about the equity crowdfunding laws. I know they’re in progress, they’re continuing. I think this kind of story may energize that for the future, may act as a statement saying, “Look, this may be something that people could pursue in the future”. The possibility is there.
I think that in our case, we made a couple of pledges to our external backers, and we work really hard to fulfill them. The biggest thing that we can do for people that backed us on Kickstarter is build a community and nurture that community around the product that they imagined originally and then follow through and actually support it. So our job is not done. Our job will never be done.
We did raise money after going through Kickstarter from a more traditional VC source and noone really had any problems there. It was definitely about building the community, building the product forward.
MODERATOR – MATTHEW BISHOP: So as an entrepreneur with an idea, what drew you to crowdfunding and what have you learned about when to use it? – What it’s strengths and weaknesses are? – When you might want to go to a VC or some other form of money?
ERIC MIGIKOVSKY: We posted our project on Kickstarter in April 2012. I had been working on smartwatches – watches that that talk to smartphones for around 4 years to that point. I had borrowed some money from my parents, I had gotten into YCommodator which is a startup incubator in Mountain View. We’ve raised a fairly small amount from seed investors, but getting to that next step getting to the phase, where we could actually go into larger scale, making manufacturing what you imagined and take it into reality – that was where we reached a brick wall in terms of funding.
And while the idea was strong and I think our Kickstarter campaign proved that the core fundamentals of what we’re pitching resonated with people, we just weren’t able to get the support maybe from the people that I know — the process that I need to raise money was completely unsuccessful. And I tried for several months to find funding from more traditional sources and we were unable to.
Kickstarter and the idea of going on this crowdfunding campaign allowed us to tell a story directly to people all around the world. 45% of our Kickstarter backers were outside of the US. So that means only 55% were from the US, of those 45% we shipped to150 different countries around the world.
So I think it was that there was a way for us to talk about the core essence of the product we’re trying to make and convey that to the world. Because when you’re making what seems is a niche product people often forget the world is fairly big out there. And when you’re able to have a platform like Indiegogo or Kickstarter to spread your message, it can go pretty far.
We didn’t have to raise money for another year after our crowdfunding campaign. We raised $12 million on Kickstarter that was enough to fund the first 85,000 watches that we created.
SLAVA RUBIN: To segue from your story about market-validation— So there’s a product which some of you might know now known as Canary on Indiegogo. They didn’t want to be on Indiegogo. They didn’t want to do crowdfunding. They went to the Valley, and they looked for investors, and the investors, several of them said, “Yeah, we got a term sheet for you.” But the term sheet was just wasn’t what they wanted. Old school- you have to just decide which of the 5 term sheets you got and which is the good problem to have to choose. But actually none of them is good enough.
What we have is actually better but we have nothing to do because we cannot convince you. So we’re just gonna go on Indiegogo. They wanted to raise $100,000. They ended up raising enough, to $1.9 million.
But the best part about it is they already had a few angel investors. So one of the VCs flexed to their terms. Found out the actual banking information from one of the angels that already invested and sent the money into their bank account, and said, “We agree to your terms”. That’s market validation. And they didn’t even accept. They said, “Are you kidding me?! Everything’s changed.”
SHARON VOSMEK: We’re just another model of using the crowd and the wisdom of the crowd. ASTIA was established at a time when about 2% of the VC went to women CEOs. Today it’s around 5%, so we’re doing so much better.
We just really saw an opportunity in the market to redesign the ecosystem. So what we’ve managed to carve out globally is a community of experts men and women around the globe comprised of investors, serial entrepreneurs, industry experts; who one reason or another like to being near entrepreneurs, that are very attractive people. We’d like to be near them and we’d like to invest invest in them, and in particular, like to be near inclusive teams.
We’ve seen our crowd perform extremely well. Our model is- not the entire crowd is funding the companies; but instead, the crowd serves as the expert sift for choosing the company. So imagine a sift where you’re trying to make decisions about the best companies to invest in and put not just your capital but your human capital as well into. You want to get into the best decision-making about which companies those should be.
The classic venture model is you’ve got four guys, usually four guys sitting around the table trying to make that decision.
At ASTIA we take those 5,000 individual tools and we slice and dice them by their expertise. And on average, a company that reaches the end, the best sift has been touched by no fewer than 50 individuals men and women from investments, industry and entrepreneurship saying, “Yes- this is a company that we think ASTIA should move forward and continue to work with.”
What that really enabled is a success rate that is unparalleled in the market. ASTIA companies when they come to ASTIA have in the market about 1% chance of success. That’s what it is in the market when an entrepreneur goes out to raise money.
ASTIA companies have a greater than 60% funding success rate. So those companies that make it to the end, within one year to making it to the end 60% of them have achieved funding either from a VC or an angel group. So we use the crowd, we just use it differently.
(MOD) MATTHEW BISHOP: Any notable exits?
SHARON VOSMEK: Last year there were only 2 women CEOs that went public, and ASTIA company was one of the two. Pam Maroney of Maroney Organic Innovations went public in July. Phenomenal company, out of UC Davis, a serial entrepreneur in the agri-tech space, and a really exciting example of true innovation in the market. It’s a space that needed innovation. Talk about sustainability.
(MOD) MATTHEW BISHOP: What’s the problem that you are solving with this system?
SHARON VOSMEK: The problem is a problem in the ecosystem. And really in our society, in Europe, in India, in the places where ASTIA operates, men and women are in separate business networks. It’s actually a really persistent social phenomena.
And that hurdle, as it comes to funding, just becomes more pointed. It’s trusted business networks that lead to investment. It’s who you know, who knows you, who around you knows you.
And 95% of VCs are still men. The partnerships, 95%. Interestingly enough, it’s 5% of VC money that are going to women CEOs. And that continues in my entire journey in ASTIA, for the last 10 years, and I think it’s true for the full 15 years of the organization. The % of vc (money) going to women CEOs tracks identically to the % of women partners in VC. And that’s not to say there’s a glass ceiling. It’s to say there’s a societal barrier. The elegance of ASTIA, the cult action, is just building your business networks across gender. It’s not anymore complicated than that.
I actually think what we’re doing is far more innovative than the classic venture model. I think the limitations of “four-people-around-the-table” are profound. I think the blind spots cannot be ignored.
The types of companies ASTIA sees , the types of investment opportunities we see are far more reflective of the needs in the market than what venture firms see.
Most venture firms I talk to are still struggling to see even one woman a deal a year. We see annually around a thousand women-led deal from around the globe that are ready for venture funding, ready for angel investment and evidenced, not by my investing in them, but by the ecosystem of VCs and angels investing in them.
Of those we invest in 6%, the percentage that get to the end.
(MOD) MATTHEW BISHOP: Have you seen them proceed to crowdfunding after that?
SHARON VOSMEK: That is an interesting question. They do crowdfunding a lot of the way. We just had a company announce that it is going to do crowdfunding along the way. It’s a phenomenal company called FinFix, and it’s this great new technology that has a charger transformer and what’s really exciting is they presented it at CES. There was high demand and interest in the products, so they’re going to do an online campaign while they, in parallel, raise their Series B.
We see that entrepreneurs are in control of the investment decision in a far more powerful way than ever were before.
(MOD) MATTHEW BISHOP: What do you feel is the problem of crowdfunding as a whole thing? Fundamentally what’s the market failure?
SLAVA RUBIN: When we created Indiegogo because the two co-founders and I had a mutual frustration of trying to raise money using the internet. At that time there was an interesting company that just came out- it’s called Prosper and at that time, there’s the interesting company that’s about a year old that looked interesting as well, called YouTube, and it was democratizing tv video and content.
And we thought for ourselves, why is it that the internet is democratizing everything and it’s supposed to be the ultimate democratization platform, yet access to capital is all about knowing the right person or the right four men around the table.
We had a really naive concept which was create an open marketplace where anybody can fund anything. And the thing you need to appreciate here is- noone else does that but us in this space. Meaning we have no application process. We have no judgement, there is no editorial. Imagine for a moment asking Google if it’s ok to be indexed by Google. Imagine for a moment wondering if it’s ok to have YouTube’s acceptance to be up as a video. It’s kinda mindblowing right? So shouldn’t the way a marketplace work be the same way for what is now called crowdfunding?
It’s actually what we do- Create this efficient market place of whatever happens, happens. As you said, 47% of the funding goes to women. It’s not because we try to get women on the site. We don’t try to get men on the site.
ERIC MIGIKOVSKY: The sensors aren’t aligned in the SEC. No one gets a bonus for being innovative. They only get fired for being a problem. So there’s no reason why they should move quickly no one is going to get sent to Hawaii for doing a good job. And when it’s going to happen, I don’t know. People have been saying it would be tomorrow – April 2012, which is well past tomorrow.
So you just have to look at it for a second. It’s so un-American, what actually stands today, in our investing rules. Imagine for a moment that the only way you could get a driver’s license was if you were rich. It’s kinda crazy right? Which is exactly what exists today in terms of who’s allowed to invest in these companies.
SHARON VOSMEK: I do think it needs regulation. I do think the first time that grandma loses her pension or her retirement account because she’s invested it on any platform, that therein lies a risk.
Having said that, I think not acting on it is as dangerous as acting too quickly. So I think it’s worthy of reflection to think about what a ‘sophisticated investor’ is. But to your point, ‘Sophisticated Investor’ is currently defined by wealth, rather than by understanding any financial literacy. Having said that, it doesn’t mean there isn’t some sort of policy that should be put in place. I think what’s disappointing is we are all sitting here waiting for some guidance.
SLAVA RUBIN: The world is created by people like us so we should create the world we want. So let’s think about how the world is created to what it is today. In 1932 in America, there were no securities laws, and it is okay to actually allow anything to happen so grandma was defrauded but really the people who created the rules were the people who wanted to stay in office. They wanted to be able to keep their jobs so they created a regulatory body to make sure that they’d be able to stay in office so grandma will not get upset and vote them out.
Why is it that the people that want to stay in office who created their checks and balances is how it still exists 90 years later? – Because there’s people who now work within those rules, who make a lot of money of those rules. And if you create a more open system, you have the YouTubization of tv.
(MOD) MATTHEW BISHOP: Do you think if you get the go ahead to do equity funding on your side then you would have a massive disruptive effect on the bench capital industry on Wall Street? How much impact would it have?
SLAVA RUBIN: I think equity crowdfunding is going to be huge. I think that if no equity crowdfunding ever exists, crowdfunding will be huge. It’s all going to be huge. You’re looking at a shift.
If you look at it, the ’80s was all about desktop computing; the ’90s was all about online commerce; the 2000’s all about social; by the end of this decade, we will go down as the decade of funding: crowdfunding, equity crowdfunding, banking of the unbanked, social credit scores.
Things will change across the world in a way that access to capital was never been available and it will revolutionize entrepreneurship. And it will change actually the way government works, the way people are able to interact with each other.
Because now they will have access to capital to change things. So if you have more access to capital, you create more Erics (Eric Migicovsky, CEO, Pebble Technology). You create more Erics or more of the entrepreneurs that you have. You have more amplification. You have the ultimate leverage, by getting access to capital to people who’ll make change.
SHARON VOSMEK: Venture needed a profound set of disruptions and this is just one of them.
ERIC MIGIKOVSKY: How do investors and people donating money in Kickstarter projects learn more about the entrepreneurs, learn more about the creators that are building it? And I think there will be a parallel system that grows alongside the crowdfunding platforms that would actually produce more information, and share information, and potentially, using crowdsourced methods around these investment opportunities.
And I think that’s what didn’t exist 90 years ago, is the ability for someone, anyone to investigate to learn and to research.
SLAVA RUBIN: A couple years ago every hospital in America turned down the Haleys, a couple from Florida, because they were in their 20s and had too low of a potential to having a baby. They wanted to have “in vitro”. And the risk model said, “This is not worth investing and giving you in vitro”. So the funny thing is they went to Indiegogo, and not only did they raise the money from mostly strangers, they got pregnant and they had a baby. So talk about backward in terms of business, entrepreneurs.
Think about (this day) March 27, 2014. Just think about March 27, 2004. Think about what platform you’re on for social. Think about how much you’re sharing, and I’m looking at the demographic – half of you are not on social at least. Now, just fast forward just 4 years, 2018; fast forward 6 years, 2010; not only were you experimenting with social but the company that you’re working at or the Fortune 500 companies that you are reading about, the CEOs are getting fired coz they did not know their social strategy.
This is 4-6 years later. It is the same thing this decade. It is March 27, 2014, by the end of the decade not only all businesses will use it, every business will do it; because it’s not cute – because it is good for the ROI.
Marvell Technologies, $3 billion market cap; they’re using Indiegogo today (Marvell Co. release) Right now (with) Kinoma Create they’re market validating whether they wanna come out with these kits, so people can learn about the Internet of Things.
Why are they using Indiegogo? – because it’s good for business, instead of spending a hundred thousand dollars on marketing research, which is yesterday’s information you can have instantaneous feedback.
Every company will do this. Put it in perspective. Don’t get caught up with what’s happening today – Figure out where the hockey puck is going.
AUDIENCE QUESTION: A Kickstarter project called the “3 Legged Cat” – The top dollar was $2 NOT TO GO AHEAD with the project. I was at a loss what to teach my students. It was an unusual phenomenon I didn’t explore it any further.
ERIC MIGIKOVSKY: There’s some other things that have popped up something like that in the crowd. A game that raised money on crowdfunding “Cards Against Humanity” had a black Friday sale last year that was quite interesting. They actually raised the price on their product by $5? or $10 or something like that .. for the day for Black Friday. And their sales exploded completely counter-intuitively.
I think it’s out of the sheer uniqueness factor, to beginning, but also about the fact that’ it’s something new, something that is interesting, something that people actually talk about and share.
It kinda ties back to the decade of social, the crowdfunding is a very social mechanism. Those people who are paying $2 to NOT have a book about 3 legged cats are sharing that on FB.
SHARON VOSMEK: Getting back to your point – People want to be part of a movement. Even to tell not to go for it, you’re still part of it, and you’re engaging it. I think your point about social is so well taken, that we’re at the tip of an iceberg; except there’s so much more that’s going to happen with the power of connecting.
SLAVA RUBIN: People want to push innovation but they also have to worry about things going alright. How many people have been defrauded on MasterCard, on eBay? You just have to take it in as part of business; it’s gonna happen. You’re just gonna have to walk past it.
When equity crowdfunding comes out, and there’s gonna be the first grandma that comes out and NY Times, Time Magazine will be crazy; “Oh this is so bad”. We’ll walk right past that. Because it will be small as compared to the overall percentage of the (gain).
The interesting thing is just ask yourself, do you believe 10 years from now equity crowdfunding will thrive. If you say “No” that’s fine if you say “Yes”, you believe people will solve it.
If you then put it into historical perspective per se, in the mid 90s, there was a thing called eCommerce. And at that time there was a lot of people not fulfilling on eCommerce.
And there was actually and I know the people at The White House, that were pulled together by the Clinton Administration to figure out “Will we regulate this thing called eCommerce, coz there’s a lot of complaints coming in?”
And the people who made these decisions, they came together, and they called upon the industry leaders, who at the time was a guy called Jeff Bezos, and some other folks. And they were like, “We are going to potentially regulate you unless you figure this out yourself”. And the funny thing is they didn’t say “Unless you figure this out yourself”, coz those guys and women were like, “We don’t need your thought process here. I’m trying to create a big business. And if I’m not actually having fulfillment I’m gonna lose customers, and I’m gonna go out of business. So no one has to regulate me to make sure that I do not have fraud”.
Customers won’t want to get defrauded over and over. That’s just the natural way of the market so you don’t actually need regulation, in the hat of work. If it wants to work it will work.
SHARON VOSMEK: With the S&L crisis and the last market crash where investors lose their investments, bad term sheets, wonky investors, there has to be some parameter within which this should function. And it’s healthy dialogue by people who are in the business, to your point, it shouldn’t be made in a vacuum, it should be made on both sides. To protect the investor, but also and equally, to protect the entrepreneur.
Held on March 27, 2014, Innovation Forum 2014 was hosted by UC Berkeley Center for Executive Education at the Haas School of Business, Berkeley and also sponsored by Citrix and Intel.
Event Chair – Vijay V. Vaitheeswaran, China business and finance editor, The Economist.
Matthew Bishop, US business editor and New York bureau chief, The Economist
Martin Giles, US technology correspondent, The Economist