Everyone knows how hard it is to raise funding right now. But the European VC market has been even more abysmal than the US one of late, with first round fundings thin on the ground and down-rounds aplenty. So one startup has decided to jump ship from the VC merry-go-round and seek a ‘third way’ for itself.
Trampoline Systems , specialists in “social analytics” for companies, launched in the UK and the US last year but a search for a new £5m round after an initial £3m round in 2007 from Tudor Investments (the venture arm of US hedge fund Tudor Group) drew a blank after Tudor was hit massively in the credit crunch.
They’ve instead turned to “crowdfunding” to pull in lots of £10,000 or more from high net worth individuals around the world. They worked with lawyers for a month on how to structure the deal in compliance with UK regulatory rules, and aimed for £1m.
The efforts are bearing fruit. Two weeks after launching the initiative they’ve now closed £330,000.
Of course, this puts the round in the realms of a down-round, but somehow CEO Charles Armstrong is confident it will work out. He says too many of his assumptions as an entrepreneur have been dictated by the norms of the VC industry: “There is something unhealthy about the dominance VCs have had.” He also says raising funds from a myriad of different investors won’t jinx the deal for a VC if that time ever comes again.
We’ll, admittedly you would say that if you couldn’t raise a new round from a VC right now. However, as he says “Nobody’s ever done equity crowd-funding at this scale.” In other words, we’re in uncharted territory here.
There is also no time scale on when they will reach the £1m, though they’ve structured the process with an initial completion at £500,000 and are confident of raising the full £1 million.
They’ve also put together an entire web site twitter feed and hashtag (#crowdtramp) to explain how they did it for the use of other startups.
Is this a PR stunt to get the attraction of real VCs? Armstrong says not and “the Proof is in the pudding.” He also says VCs he’s spoken to are warming to idea as a way of keeping a company going long enough for VC to come back to the table later on. I guess £330,000 is nothing to sniff at in the current climate.
Never imagines crowdsourcing could turn to crowdfunding. Now we call can be VC’s . Horray!!!
Interesting approach but may come across as desperate. I would be interested to hear more on how they get around the legal issues of experienced investors.
I would only invest in something like that if the company had to wait until they secured the entire amount they wanted before they got any of the money. If a company needs a certain amount of investment and only raises a small fraction of that, your money isn’t exactly in a good position.
Then maybe high-risk investing is not for you
Makes sense, yet another field to be disrupted by the crowd.
I think the genius of this isn’t the use of crowdfunding (not a new concept) it’s the fact that they leveraged their web development and promo skills to the task of finding financing by making a fully-featured social site with full PR push to get the round done. As they say, “do what you know”
But isn’t this totally outlawed by the SEC in the US? Or limited to revenue sharing or something?
Yes, in its infinite wisdom, the SEC has decided that it must protect consumers from themselves. We had considered this approach to raise our initial round, but quickly were shot down. Fucking gubment…maybe we should move to Britain…
Responding to Patrick’s comment, the article implies that we’ve closed a round at £320,000 but that’s not the whole picture. Trampoline’s crowdfunding process has two pre-determined completion points. The first is at £500,000 (with a special incentive pricing) and the second is at £1 million. Investors are making commitments day by day but no money is transferred to Trampoline until we hit those completion points. From an investor’s point of view it needs to work this way.
charles,
so your model is essentially a pledge to pay system. Are you going to oversubscribe on the pledges to account for drop off? I was involved in a program like this and we found that 40% of all pledges did not follow through with their promise to invest.
cheers
dave
i hope it takes off, if we are ever going to have a decent ecconomy ever again any source of funding for entrepreneurs is going to be vital.
however, when the city gets back to a stable footing, i hope instead of being masters of the universe they use some of their massive flows to invest in startups. can you imagine what it would do jobs, wealth and even hope in britain if our entrepreneurs had almost guaranteed access to funding?
Hmmm classifying ‘crowdfunding’ with ‘investor’ in startups selling conceptual software sounds oxymoronic so caveat emptor comes to mind!
Charles – delighted it’s taking off and watching closely. How are you going to manage so many angel investors?
This is not entirely new – back in 99 Richard Noble raised 1M UKP for his aircraft venture over the internet. See:
http://www.thrustssc.com/richardnobledotcom/Projects.htm#f1
http://www.stibbe.net/Writing/Articles/farnborough.htm
Why not social micro funding? Yea, that sounds good
having been around the crowdfunding space for quite some time I can tell you that this is really not crowdfunding but simply a crowdsourced private placement.
Crowdfunding gets around these legal issues by large groups of people supporting a project through membership or donation and in return they are usually allowed access to something for their donation like a download or a coupon for a discount on another item of purchase. There is no loan…no expectation of making money, and the units are not structured in such large amounts that a risk statement must be issued.
If there is any perception by the crowd that they may come into money in the future as a result of their placement of funds, i can assure you that this would be deemed way offside and shut down.
just my two cents….www.biracy.com – coming soon!
I agree. It is innovative but not ground breaking from a legal perspective, as far as I can tell, so I am curious why it took their lawyers a month to figure it all out. If there is anything legally innovative about it, please share!
[Disclosure - I'm a lawyer]
What I found interesting was that to self certify and progress to reading about the offer, all I had to do was sign off on the fact that I have made more than one investment in non-listed companies in the last 2 years. Also, there didn’t seem to be any onus of proof to this, so although I was telling the truth, it seems like a pretty low barrier to entry.
Thanks, it’s an interesting example of this model of funding — which follows similar approach by Stocktwits late last year.
See my blog on ICAEW’s IT Counts — ‘Is web 2.0 enabling a new kind of financing?’
http://www.ion.icaew.com/itcounts/16309
great comments! please feel free to leave comments at http://crowdfunding.trampolinesystems.com/discussion/ too.
@david1 yes, we’re factoring in a margin for drop-off.
@ron the question of “what skills do we have” was a big factor in choosing this route.
@kalam we’re working with jp rangaswami and others to design a governance structure for trampoline that enables the crowdfunding investor community to play an active role.
@david2 i suspect you’re going against the grain to define crowdfunding as something that can only be donation-based.
@danvers we’ll be publishing a “how to” guide covering all the legal aspects we had to work out so other entrepreneurs don’t need to. believe me, the fsa regulations make it complicated.
@fletch those definitions of high net worth individual and sophisticated investor are the fsa’s. we will require copies of the certificates from everyone who invests.
Looking forward to more of the legal details – I have plans to provide equity to 1000s of customers