We are a crowdfunding market where companies can sell shares to any investor and raise up to $1M.
Wednesday, March 21, 2012
Nick Bhargava, Law School, 2012, firstname.lastname@example.org
Kaiting Chen, Pratt, 2011, email@example.com
Melanie Plageman, Trinity, 2011, firstname.lastname@example.org
Alex Zhang, Trinity, 2011, email@example.com
Write a summary paragraph: In about a paragraph, describe what problem you are solving, how many people are experiencing the problem, and what your solution is.
Every year in the United States, almost a million startups and small companies struggle to overcome a systemic funding deficiency below the $1M mark. As a result of recent legislative changes, we are able to offer a platform that will allow such companies to raise this capital by issuing equity to a crowd of investors (both accredited and nonaccredited) to create a vibrant market where information is openly exchanged and investors can are not locked out of exit opportunities.
Tell us more about the problem you are solving. Why is it a problem and how big of a problem is it?
While the US is recognized for its deep capital markets with total angel investments reaching $22.5B in 2004 alone, an estimated 912,000 proposed ventures went unfunded that same year. Much of this has to do with the limited resources and risk tolerances angels and VCs have.
A Department of Commerce study has shown angels typically offer term sheets to only four or five companies out of hundreds. They simply do not have the resources to give everyone adequate due diligence.
Crowdfunding can solve this problem by giving seed and startup stage companies a platform where they can effectively harness the efficiencies of the crowd to disseminate information, make valuations, and spread risk on a scale that angels and many VCs cannot match. Similarly, investors benefit by being able to make affordable investments into private equity without being forced to assume substantial financial risk. While current federal securities laws have precluded the vast majority of Americans from making these types of investments, the environment is changing rapidly and soon crowdfunding will be open to anyone.
Who do you think your target customers are and how many are there?
We believe that startups and small, high growth, companies seeking capitalization on fair terms represent a large potential customer base. In 2004 alone, the Department of Commerce estimated that almost a million proposed ventures went unfunded while recently Kickstarter, a donation platform, funded almost 12,000 projects with donors committing nearly $100M in total. As a result we feel the company market is underserved and largely untapped.
We see our investor base as composed of mostly two segments: tech savvy people who are aware of entrepreneurship and may already use services such as Kickstarter; and people who want to diversify their investment through new ideas. Both segments want access to the types of high growth private investments that have previously been restricted to accredited investors as a result of antiquated legislation. As a point of reference: in 2011, over 1.1M Kickstarter users have pledged funds. Funding on Kickstarter is done entirely in the form of donations where the donor may or may not receive a product or some other benefit. We believe a market where users can actually own the companies they are interested in has tremendous potential.
Do you think your customers are looking for a solution?
Yes, both our customer sets have been actively looking for solutions. On the investor front, Crowdcube, a UK based crowdfunding portal, has nearly 9,000 registered investors and has funded a total of several million dollars in nearly a hundred companies. Kickstarter received approximatly 31M unique visitors in 2011.
To illustrate company demand, we believe that every single candidate in the Duke Start-Up Challenge would seriously consider funding their business through a crowdfunding platform. We have already received inquiries from dozens of companies and have begun preregistration on our platform so companies can set up a profile and begin to engage the investor community.
Tell us about your solution. How does it work and what are the benefits?
First, companies are able to make stock offerings to a crowd of investors by giving notification on its profile page and beginning to disclose required information. We have a proprietary process where by investors can interact with each other and the company. This process allows the crowd to effectively valuate the company. When a company is ready it will then conduct an offering for its shares using the feedback from potential investors to adjust its offering based on demand. The company is funded when the total amount sought is fully committed.
The second part of our solution is omitted from this public facing document.
Angels, VCs, and other accredited investors are free to participate in all parts of our market, but they will be particularly interested in investing in companies that have already proven themselves to be successful on the crowdfunding market. There are no other solutions like ours in this space, which is why we are very excited about crowdfunding.
Do you have any regulatory hurdles, and how will you get around them?
There are two main hurdles from a legal standpoint: legislative and regulatory. Crowdfunding in this form is not possible under existing securities laws. However on March 8, 2012, the JOBS Act, which provides an exemption to allow this type of crowdfunding, was passed in the House with almost unanimous support. The Senate is expected to follow suit by the end of this week. As this bill is a part of the President’s job creation initiative, he and his staff are eager to sign it into law by early-April.
Throughout the legislative process we have been heavily involved in lobbying for crowdfunding. We have been involved in ongoing discussions with the leading Senators on this issue in order to draft language that will ensure a vibrant and effective crowdfunding market. We have met with Senate staff every other week and are in a fortunate position in that we are able to tailor our business to mirror the legislative language exactly. We have been invited to testify before the Senate on this matter, but the hearing was postponed because the vote on the JOBS Act was moved up.
As a result we are highly confident a crowdfunding exemption will be law by the beginning of the summer.
The second regulatory hurdle is the SEC rulemaking. The SEC will be given authority to define reporting requirements for crowdfunded entities and engage in related rulemakings. This process does not threaten the viability of crowdfunding, but it will shape some of our business practices and define part of the crowdfunding process. We have experience working with the SEC in rulemakings and are confident in a productive outcome.
Do you have intellectual property (IP) that can be protected? Is it protected?
A provisional patent has been filed and approved as of December 2011. It is a method patent. The scope of the patent is omitted from this public facing document. We need additional funds to pursue a complete application, as we would like to employ the expertise of a local IP firm.
What's your plan for developing your product or service including some dates and milestones?
The code underlying the market has already been written. We have a site which allows companies to preregister and create profiles. Soon, investors will be able to put up profiles as well. Right now, we are working on developing an interface for the offering system and systems which allow companies and investors to interact with one another. Our timeline for completing the interface and communication systems is late February to mid-March.
We also want to revisit our site with a User Experience (UX) engineer to ensure the user’s interaction with the platform is as positive and enjoyable as possible. We hope to have a UX tested site by mid to late summer. After this, the crowdfunding platform is essentially finished, and what remains is business development: ensuring that we have enough companies and investors to create a vibrant and healthy market.
How much funding to get to a company exit?
We need about $2M in investment before we are viable for exit. Some of that will be allotted to continued UX improvement and system development, but the bulk will be for continued business development and marketing purposes. We need as large of an installed base as possible before commencing offerings, and once we begin offerings we will be cash flowing and exit viable.
Tell us about yourselves (Who is on your team, what are you studying, what year are you)
Nick Bhargava is in the Duke LLMLE program and graduates in 2012. He has several years of experience in financial services. He has worked for the U.S. Securities and Exchange Commission and FINRA. After law school, he lobbied for banks on the Hill in the aftermath of Dodd-Frank. Prior to receiving his J.D. from American University, he worked on a trading desk at TD Waterhouse where he gained knowledge in equities and equity options.
Kaiting Chen graduated from Pratt in December 2011 with a degree in Biomedical Engineering. He has seven years of experience in web development for eleven startups in the medical, social venture, and high tech industries. He is currently an Arch Linux Trusted User and runs a network offering free shell accounts totalling over 180 users.
Melanie Plageman graduated from Trinity in 2011 with a degree in Literature. She has six years of experience in non-profit program development and fundraising and four years of experience in marketing, design and media production. She has worked with social entrepreneurs in Malaysia and Kenya and maintains contact with a network of entrepreneurs in both countries.
Alex Zhang graduated from Trinity in 2011 with a degree in Biology. He started a socially responsible design venture located in Durham and Chapel Hill, North Carolina. His experience launching that venture allowed him to build relationships with mentors and advisers such as Christopher Gergen in the entrepreneurship community. His design experience also nurtured his talent in web design.
Use of Funds - if you won $50,000 how would you use it?
$18,000 will be used to get a business method patent (or patents) on our system approved using our own expertise as well as the retention of a local IP firm.
$8,000 will be used to contract a local designer to refine the design for our user interface.
$8,000 will be used to build our network infrastructure through the purchase of software and hardware as well as the cost of colocation at local and nationwide datacenters.
$16,000 will be used to contract a cybersecurity firm to conduct a security audit of our market system.
Anything else you would like to share with us?
We are based in Durham and are particularly sensitive to the needs of the Triangle startup community. We have reached out to many companies and startup service providers here and the feedback has been great. We believe we can help grow the Triangle startup community by providing a new funding alternative. We hope to grow to be America’s funding alternative.
There are two particular concerns that have been raised with the equity-based crowdfunding model: protection of issuer IP and investor protection.
While companies will have to adhere to certain disclosure requirements as mandated by the SEC, they will still have much control to choose what information they reveal about their idea. As a result, a startup will never be placed in a situation where they are forced to provide information they feel would compromise their business. The process would be similar to joining a startup challenge such as this one, where certain information is made public but at the company’s discretion.
As for investor protection measures, we have built features into our market to specifically help the investor. Because this is an area of increasing competition, we consider our investor protection features to be trade secrets for now. We have a lot of expertise in this area, and have studied it intently for several months. Our proprietary features encourage disclosure and transparency by aligning incentives. We have developed a system which eliminates the possibility of traditional market frauds such as pump and dump schemes. Details are omitted from this public facing document.