This time last week, the crowdfunding world was abuzz about two projects surpassing $1 million raised: Elevation Dock and Double Fine Adventure. A mere week later, the investment crowdfunding community is in shock and mourning following ProFounder’s announcement that they are shutting down. What does it all mean?
First and foremost, interest in crowdfunding is strong — and growing. The story and analysis behind the two million dollars campaigns, who nearly simultaneously shattered the previous US-based crowdfunding record of $942,578 by TikTok+LunaTik from December, has been told often. Nonetheless, we can’t help but imagine how much greater consumer interest will be when they are able to invest in, not just donate towards, their favorite projects.
At the moment, the ProFounder story is less clear. ProFounder seemed to have several advantages in the investment crowdfunding space:
- An experienced team. Co-Founders Jessica Jackley and Dana Mauriello both graduated from Stanford University Graduate School of Business. Jessica was Chief Marketing Officer and co-founder of wildly successful microfinance platform kiva.org.
- They had a first mover advantage. On August 22, 2011, Wired reported ProFounder had raised “almost $500,000 from 304 investors for 18 companies” in their first six months. Six months later, most US-based investment crowdfunding platforms are still waiting to launch.
- ProFounder had $1.3 million in seed capital, as reported by CrunchBase.
ProFounder also faced challenges. Just after the Wired article was published, they received a “cease and desist order” from the California Department of Corporations for allegedly violating broker-dealer laws. Resulting legal costs, potentially layered on top of increased salary expense following their initial success, may have been a factor. Further, as tech entrepreneurs, facing the wrath of the State of California must have been seen as unfavorable.
Sadly, we also know that investment crowdfunding legislation has barely moved in the Senate since the winter recess. And the bills in discussion are significantly less favorable than H. R. 2930 that passed the House by an overwhelming majority in November. (See Funding Launchpad’s recommended investment crowdfunding bill).
Co-founder Jessica Jackley gave birth to twins in September. Last April, in response to VC Confession: I Have Doubts Once I Think Of Women Founders Having Kids And Being Distracted From Work”, Jessica (rightly) responded against this stereotype.
Combine incremental expenses, unsolicited governmental scrutiny, no timeline for the return of revenue, and changing life priorities, and the ProFounder team may have decided it’s time to pursue different interests. Fortunately, in their statement, Jessica and Dana say they remain committee to crowdfunding and entrepreneurs. Effective immediately they are joining forces with GOOD.
Funding Launchpad thanks ProFounder for pioneering investment crowdfunding in the US and wishes their entire team success in their future endeavors.
Kickstarter started a year earlier and is based in NY – I wonder if ProFounder was a little too late to the game already? Or did they lack the momentum to move somewhere where they could not be bogged down by bureaucracy?
Profounder was run by some yoga chicks. They really had no idea what they were doing.
Equity or Investor Crowdfunding is a complex and time consuming area with often little return. While Symbid and Crowdcube and others have chosen to create bridging investment entities or coops to enable smaller investments to comply with securities legislation Profounder chose to build a platform that attempted to comply state by state with the number of non-accredited investors allowed, straight-up within existing legislation.
From our experience with running the most successful equities based crowdfunding platform in the world I believe given existing legislation it was the right way to go. While it is cumbersome and costly to have your own internal legal department and a platform that ensures compliance with legislation anything short of that is high risk to both the entity, investors and those raising funds. ASSOB has raised over $120 million over the past 5 years from predominantly unaccredited investors who directly receive stock or shares in the company profiled on the ASSOB Capital Raising Platform. To do so we have needed to have our own legal department and a computer system and staff that are continually monitoring transactions and promotion to ensure compliance.
Equity funding is a whole different ball game than the likes of Kickstarter. There it is mostly project funding where people donate the money and have no ongoing relationship with the entity. With equity funding people are buying a share of a legal entity that is growing and developing and has responsibilities and obligations as well as the expectations expressed in the documents that sought the investment. Plus of course Securities legislation obligations to shareholders.
Those who have invested in equity must be recorded in a share registry, be communicated and updated according to securities legislation and if they find a buyer for their investment the company must be able to process the transfer of ownership. A big difference from a one off Kickstarter project.
Profouder approached these obligations responsibly. Not only did they have a system to monitor unaccredited investor limits state by state but also in the promotion of the opportunity they built an engine that enabled promotion in a manner that complied with pre-existing relationship requirements.
There aren’t many successful equities based crowdfunding platforms for a reason. They need to structured to ensure compliance not only for the operator but also for the promotor of the opportunity. Not easy or cheap under any securities legislation in any country worldwide. I have nothing but praise for the path the Profounder founders took and in their implementation. My guess is that at the end of the day unrealistic compliance costs and restrictions just made it not fun anymore.
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