Who says crowdfunding will scare off follow-on investors? Quite the contrary, it seems. Businesses are finding that a successful investment crowdfunding campaign can pave the way for follow-on funding from angels, venture capitalists, banks and other institutional investors.
The latest—and largest—example to date: Beta Bionics, the maker of a “bionic pancreas” that was among the first companies to use Regulation Crowdfunding, recently secured $57.6M in a Series B round. The funding was led by the investment firm Eventide Asset Management, investment firm, and included RTW Investments, Novo Nordisk, and Zealand Pharm.
The Boston-based public benefit corporation (PBC) was also recently awarded a $2 million SBIR grant by a unit of the U.S. National Institutes of Health (NIH) to commercialize its iLetTM Bionic Pancreas System, a pocket-sized, wearable medical device that controls blood-sugar levels in people with diabetes and is currently undergoing clinical trials. That brings the company’s total funding to $68.6M, including its WeFunder campaign.
Beta Bionics was among the first batch of companies to use Regulation Crowdfunding when the law went live in June 2016. It’s technology and compelling story —it was founded by a biomedical engineer whose son has Type 1 diabetes— helped it become the first business to raise $1M through Regulation Crowdfunding back in August 2016.
While there have been no crowdfunding “exits” yet, Beta Bionics joins a growing roster of highly successful companies that have followed their crowdfunding with substantial investments from professional investors.
Another notable example is the Santa Fe arts collective Meow Wolf, which like BetaBionics is a public benefit corp. Meow Wolf’s July 2017 WeFunder campaign went viral. Within 48 hours, more than 600 people snapped up more than $1.07 million in common stock, the maximum allowed under Regulation CF.
Of the People
The crowdfunding campaign was part of a roughly $18 million raised by Meow Wolf in 2017 from various investors, includingGame of Thrones author George R. R. Martin. But for Meow Wolf, it was symbolic. “The democratization of capital fits in with Meow’s Wolf’s personality and history of being of the people,” says Drew Tulchin, Meow Wolf CFO. “To have people who care about us be able to invest in us was a logical step.”
To fuel an expansion into Denver and Las Vegas, Meow Wolf this past June raised another $17.5 million from investors including San Francisco venture capital firm Alsop Louie Partners, Santa Fe-based Sun Mountain Capital, and French digital production firm MK2 as well as existing investors. That brings it’s total investment to date to at least $35 million.
In addition, Everipedia, a blockchain-based Wikipedia rival that raised $30 million from venture investors earlier this year—at the time the largest follow-on financing among Regulation Crowdfunding issuers to date. Two years ago, the company raised roughly $130,000 from 201 investors via a SAFE (simple agreement for future equity) on WeFunder.
Messy Cap Tables
The main knock against investment crowdfunding has been that companies that offer equity shares end up with a “messy cap table”—essentially a lot of small investors holding ownership shares. Regulation Crowdfunding does not allow investors to be pooled into a single entity, or special purpose vehicle (although that is under consideration by Congress).
But crowdfunding portals have created various twists on the SAFE—a convertible note-type instrument that may convert to equity shares down the road—to get around that issue. Investors in a ‘crowd safe’ offering are treated like debt holders and do not appear on a business’s cap table until the securities convert to equity.
New York-based Bellhop offers a recent example. The startup raised over $350,000 via a crowdsafe earlier this year on Republic to launch its all-in-one ride-hailing app, which lets users choose between Lyft, Uber, Juno and other transportation options. More than 600 people invested in two back-to-back crowdfunding campaigns.
“We had a great idea, a product that was working, and users, but we were still not at an inflection point where a more traditional financing entity would make an investment,” says Payam Safa, founder & CEO of Bellhop. “Crowdfunding made logical sense. And from there we raised some more money and are raising more.”
The crowdsafe, Safa adds, is “very startup friendly.”
Like other companies that have used crowdfunding, Safa says it’s about more than the money. “You’re building a base of followers that will help you, a community that helps spread the word. The more individuals you have the stronger your community,” he says. “A VC will add value in other ways, but you’re not going to get that level of community through traditional funding.”
A 2016 study published by the Small Business Association adds weight to the case for crowdfunding. The study concluded that a successful crowdfunding campaign can increase follow-on funding by as much as 70 percent. It also found that crowdfunding campaigns can help attract more business partnerships, publicity, a stronger customer base and talented employees.
While the study relied mostly on rewards-based crowdfunding campaigns, which have been around longer that investment crowdfunding, the researchers believe true for investment CF as well.
Photo at top: Detail from Becoming Human, a sculpture by Christian Ristow at Meow Wolf headquarters in Santa Fe (WikiCommons).