Crowdfunding: Nomad Skips VC Funding, Goes Straight to the Public
When Nomad CEO Noah Dentzel first launched his startup, an early-stage company that makes portable smartphone accessories, he turned to crowdfunding to get it off the ground. Over the course of a year or so, he ran two successful campaigns—one on Kickstarter, one on Indiegogo—and raised more than $300,000 from about 11,000 backers.
Now, the company that started in Dentzel’s grandmother’s basement is already shipping its wares, which so far include NomadKey, a tiny USB cable for Android, iPhone, and others, but needs to raise more money to grow its operations. Instead of knocking on the doors of venture capitalists in Silicon Valley for funding, the San Francisco-based company is taking advantage of changes in federal legislation that will allow it to go directly to the public to raise funds—not to mention the 11,000 people who gave money to help start Nomad. “I’m sure a good portion of those people would have loved to buy a piece of this company,” he says.
During the Great Depression, the federal government passed legislation preventing private companies from publicly seeking investment. Eight decades later, the JOBS Act put forth two new provisions to help the public to get in the game. Title II of the law allows companies to advertise for investment and accept funds from members of the public who are accredited investors, defined as individuals who make more than $200,000 per year, couples who make more than $300,000, and people who have a net worth of more than $1 million, excluding the value of their primary residence. It was implemented by the SEC in September of last year.
Title III would allow non-accredited investors to purchase equity in private companies, but the SEC has yet to finalize the rules behind it.
To Dentzel, allowing members of the public to invest in the same companies they’re supporting on Kickstarter only makes sense. “Serial VC funds are reaping benefits in ways that other people aren’t allowed to,” he says. “Publicly traded companies have already been through so many stages of growth, the chances of them hundred X-ing in a few years is slim to none.”
A couple weeks ago, Nomad opened its fundraising up to accredited investors on the equity-based crowdfunding site CircleUp.
I talked with Dentzel about the advantages of crowdfunded equity, the exclusivity of funding networks, and how it’s going so far. Here is a lightly edited version of our conversation.
Xconomy: Why does crowdfunded equity appeal to you as a CEO?
Noah Dentzel: It’s a question a lot of people ask. We’re a small team. We’re very resource-strapped, but we’re doing everything that a big company would do. We’re boots on the ground doing manufacturing, building out a brand, a team, and we have to do all the financial, legal, and accounting work. You name it, and it’s a vertical that we’re doing. It’s hard to hack your way into that as a small team. Why should I take my hands off the helm and leave my team here to fight to be successful when I know my value here is where I’m best suited? That’s how I got where I am now. Not by going on a roadshow before I had a product to show off. We started from nothing. Why should we stop and focus on something else when these new reforms are allowing us to use all the knowledge we’ve learned about running campaigns online and working with people remotely? Why should we not take advantage of that?
I’m really excited. As a company that launched on Kickstarter, we got [our initial funding] from 5,500 people. At the time, we were one of the most-backed companies. We have all these people from all over the world. It was how we started. From the get-go, people asked if they could invest. People were always writing in, and we reluctantly had to say no. It’s annoying when you’re trying to start a company and people want to invest and they’re not allowed to.
That part of the law hasn’t been approved just yet. It just needs to be approved and adopted by the SEC. But now we can send an email to everyone in our email list and say hey, you are all early supporters of our company, interested in investing? That would have been illegal in July . And now you can.
X: Why not just go the traditional route?
ND: It takes a tremendous amount of time and energy to go the traditional route. And I’ve been talking with investors. They get this herd mentality, especially in Silicon Valley, where it’s all about one thing, then all about the next thing. They want you to share your financials, and then they’re not interested. If you’re trying to move forward with a company like us, we’re trying to move fast. What we want to do is hit our goals on our timeline using our efforts. We don’t want to get dragged along. We’re taking the investment reins into our own hand and saying, “We’re flipping this and making it about who we are and what we’re offering.” We don’t have to rely on the buddy-buddy who’s-who system. We can rely on people who already believe in us and believe in our product. We can find who we want to find. The problem with the old network system, if you happen to be there right in the know with the right people, great. But if you don’t, you don’t.
X: Do you have any reservations about it?
ND: Absolutely. What if you get a really bad apple? A bad investor whose sole purpose is to cause problems? But any time you take on investment you’re opened up to that. Using these platforms, you still get to choose who you take money from. It just gives you the option to take it. You still need to do your due diligence. I wouldn’t recommend anyone take just whatever they can get. And even when you use the old system, you take a risk. Even with friends and family, it can turn sour. The old system is riddled with as many of its own concerns and problems as the new system. There’s definitely a level of vetting involved. I think these platforms will do a better and better job. How do they vet investors? How do they showcase them?
One of the things people say is investors can add a lot of value. That’s true. But we shouldn’t sell investors around the country short because they’re not from Silicon Valley. People from all over the place have money to add. We’ve had tremendous inbound interest from the Middle East. I’m talking to an American living and working in Dubai. I took a call from this guy in the investor network. He started adding value immediately. All of a sudden I realized we have a guy on the ground who can figure out who to partner with in terms of distributors and retailers. He’s already getting back to me.
You can take on these unknown bad apples but that can happen anytime. But you can also open yourself up to people you don’t know who can add value to your company. A lot of these people are successful. They’ve done this before.
Will there be hiccoughs? Absolutely. There’s going to be cases of wild success and failures, but over time things will solidify. There will be misunderstanding of rules. Anytime you’re on the forefront of something you’re definitely going to be part of that Wild West. But this is going to be a great thing for startups and for investors.
X: If crowdfunded equity had been a possibility during your campaigns, would you have offered it to your backers?
ND: If there was a solid working system of crowd-based equity at that time—one that still doesn’t exist yet—I think we absolutely would have. It’s hard to say in retrospect. Once they have the opportunity to do it, there will be a huge number of companies that do. Personally, I’m really excited. There are probably 10 different companies I’ve backed. I would love to be part of that.
That’s the power of the crowd. Even small investments at an early stage can have a meaningful impact. Take the example of Pebble, the big success story from Kickstarter. They tried to raise money from VCs and they couldn’t. So they took their idea to Kickstarter to raise $100,000 and they raised $10 million. Then the VCs came flocking back. They had to learn from the crowd to back these guys. Who is to say who is right all the time? I’m wearing a Pebble right now. They’ve jumpstarted this whole product segment. And it was really the crowd who backed them. But they didn’t get anything more, even though they did invest early; even though they did give feedback. Do those people deserve to own something? Absolutely.
X: How are things going on CircleUp so far?
ND: We launched about two weeks ago. Things are going great. We already have committed $20,000—$10,000 from two people—and another $15,000 is pending. We have up to a year to close a round, but we plan on closing it this summer. In two weeks, to have already raised a small but meaningful portion of our overall target is exciting. We’ve had tremendous outreach and all sorts of people writing in. We have a conference call next Tuesday, and people are signing up. We have a ways to go, for sure, but in terms of other companies that have had successful raises, we’re right on target and we’re doing very well. We’re hoping to raise $1 million.