Grace Leung Shing and Catherine Yushina were working for a venture capital fund in Silicon Valley, when they were both struck by a puzzle: why was it that venture investors were willing to shower funding on startups with no revenues or traction—sometimes little more than idea—while many perfectly solid businesses couldn’t get funding at all?
That question led them to create Startwise, the latest entrant into the investment crowdfunding market. The San Francisco-based platform is focused on Regulation Crowdfunding, which allows companies to raise up to $1.07 million and is open to all investors regardless of wealth. In a young but crowded market—Startwise is the 29th Reg CF crowdfunding portal to be approved by the SEC and FINRA— Shing and Yushina plan to focus on established businesses rather than startups, and revenue-sharing rather than equity or conventional loans.
“Despite having revenue and customers, small and medium size businesses have a hard time getting access to capital,” says Shing. Growing up in Mauritius, she watched her grandparents, owners of traditional businesses that made money but didn’t have the potential for a huge “10x” payoff that venture investors crave, struggle to raise money. “They had cash flow but could never get a bank loan.”
Shing and her cofounder Yushina, who grew up in Russia, hope to change those dynamics. “Startwise enables small and medium businesses to raise capital from their customers while building a community around their brand,” says Shing.
It’s been a long path. The pair started the company in December 2015, joining the MergeLane accelerator in Boulder, Co. They chose Colorado because the state had an intrastate crowdfunding exemption, and Regulation Crowdfunding, part of the JOBS Act, wouldn’t go into effect for more than a year.
But their plan to start with intrastate crowdfunding ran into trouble when they couldn’t find an escrow agent that met the law’s requirements (a common obstacle for many intrastate platforms).
So in September 2016 they made the “painful” decision, Shing says, to start over and use Regulation CF, which went into effect in May 2016. They filed to become a crowdfunding portal. But when the SEC shut down a rogue funding portal called UFunding, their application process slowed down as regulators intensified scrutiny of new applicants.
Startwise soft launched in late August. The first two offerings are for Nava Pets Inc., an all-natural pet care company based in Florida, and Sockwa Corp., a California maker of lightweight athletic footwear. Both are established businesses with revenues.
Startwise At a Glance
Based: San Francisco
Type: Regulation Crowdfunding
Funding Types: Revenue Sharing
Fees: 8% of money raised by businesses; 2% processing fee for investors
The platform charges issuers 8% of the amount raised, and investors a 2% processing fee, although the pricing might change.
Revenue sharing is a form of loan where, instead of a fixed interest rate, businesses pay lenders back a fixed percentage of their revenue on a quarterly or annual basis, until an agreed upon amount is reached (often 1.5 times the investment). That benefits the business by allowing them to pay less in down periods and more when business is brisk. And they don’t give up any ownership or control.
For investors, revenue share deals are less risky than equity, which will only pay off if the company goes public, is acquired, or buys back shares. And easier to understand than instruments such as SAFES, which give the investor a right to buy shares in the future and are popular on some crowdfunding sites.
Revenue sharing also has the potential to be lucrative, according to data from Crowdfund Capital Advisors. Companies that offered revenue sharing arrangements with a specified maturity periods averaged a 56% return over 3.83 years—equal to a projected 14.6% return a year.
Startwise is not the only platform to embrace revenue sharing. NextSeed, a crowdfunding portal based in Texas that does revenue share deals as well as conventional loans, has done several revenue share offerings, some of which have already paid back investors.
Shing and Yushina hope to help women and immigrant entrepreneurs like themselves overcome the significant obstacles they face when raising money. “Crowdfunding provides this great opportunity to create a more inclusive economy by allowing women and immigrants access to capital that they never had before,” says Shing. “It’s great that based on recent statistics women and immigrant founders are more successful in crowdfunding than their peers. Definitely, we are looking to help as many female-led companies as possible.”