Dana Mauriello: Community Funding not Crowd Funding!

Transcript follows and video below

Could you tell me briefly what your motivation was to set up ProFounder & possibly a little bit about the site?

Sure, We started Profounder in August 2009 & we both overlapped @Stanford Graduate School Business. Actually that summer after I graduated we were sharing some office space with a few other classmates who were starting businesses. One of the classmates had this company called WikiMart & there was this great spirit of cumbaya around graduation with everybody saying ‘Let’s stay in touch! We’re going to miss each other.’ It was in this spirit that these 2 classmates said ‘Well wouldn’t it be great if any of our classmates wanted to invest in us we gave them the opportunity to do so.’ So it wasn’t out of desperation, they’d already got their angel funding. Just wouldn’t it be nice if more people could get involved. So they sent an email out to our classmates. There were about 300 of us & we were all quite close & said if anyone wants to invest just let us know, no pressures, just wanted to let you know about the opportunity. In 24 hours they had gotten 60 people who had responded & said they wanted to put in $1,000 each. That should have been the end of a beautiful story that we could celebrate. But that’s when the hard part started. Because as soon as that was over it was not all roses. It was them going to lawyers saying ok what are we going to do with this? The lawyers saying Woooh, woooh, wooh these folks who want to invest in you are up to their ears in student debt. They’re far, far from what the SEC would call accredited investors, people with $1m net worth they’re making over $250k a year. They’re students, they can’t invest. Who are you kidding, they have to be able to invest? So they spent some time & this team took about $20k & spent a couple of months with their lawyers trying to figure out how to make this happen. They finally did & at the end of the day they were able to get $35k invested. They’d already spent almost that much just trying to get the deal done. It certainly was not an efficient process at all. So Jessica & I started looking at ‘Oh my goodness how can we help our classmates & ourselves in similar situations to make this more efficient?’ It seems crazy, you could have people over here doing something amazing & people over here who want to support them & they just can’t get together. What is that about? So as we dug into it as a kind of side & night project we learned wait a second this is more than something that is for us, this has huge, big applications. We started to see the one stat that really blew us away was that $144b of friends & family funding happens every year. That’s how much money is moving in this informal investment circle. So 87% of all funding for private businesses is coming from this informal circle of friends & family etc. We said ‘Oh my goodness this is the white elephant in the room. Nobody ever talks about it but it’s huge & there’s no innovation ever. Nothing new is happening to move this space forward for all these dollars that are moving. Let’s be the ones to do that. If we do do that think about the applications, we could create more access to capital for more people. If people saw new access to capital they had, entrepreneurship would seem more accessible to them because they could see the clear path to how they could get to where they are going. I grew up in New Jersey, Jessica grew up in Pittsburgh, PA & we’re both very cognizant of how lucky we were to be in Silicon Valley where resources were abundant & there’s very clear paths forward to start your business with these great systems in place. We knew the other side to the coin, how if you’re not lucky enough to be in that environment, it’s not a clear path & you don’t have those resources available to you. But we said you know what everybody can develop a supportive community around them. So great, everybody can do that. So now what we can do is give them the tools so that supportive community can also be a source of access to capital for you. That’s what we’ve been able to do.

Dana Mauriello

Wow that’s a brllliant story, fantastic. Having been based in London for 5 years trying to raise capital, I can agree with you that if you’re not in the right place, you can almost forget it.

Absolutely it’s hard.

Dana Mauriello

So this is really making it possible for anyone, anywhere in the world really. Could you describe the business model behind ProFounder & how it works?

Sure so I’ll give you an example of a specific customer & how they would walk through our system. Raja is a customer whose business is Bucket Feet. He had this great business where he & his partner Aaron were on a college campus. They were students & they started taking their white vans, their sneakers & they were drawing on them & making these great designs. People would stop them on campus & say I want a pair of those, they are the greatest! They said well maybe we should make this a business, if so many people like these. They said well now we need funding for that business, where should we turn. Wouldn’t it be cool if those same people who said they liked our shoes were the people who could actually help us start this business. Because that is truly the proof of the pudding is if those people who liked them, like it so much that they’re willing to invest, great then we should really do this. So they came onto our platform to facilitate this process. The first thing they did was create their pitch. So we really believe that if you’re going to a community for investment capital, it’s not about giving them reams & reams of data,having them pore through numbers. It’s about telling them your story & trying to understand why are you doing this & getting them engaged. All of the investors we’ve talked to, money is never the primary motivation. Someone is not investing in someone they know to make a quick buck. They’re investing in someone they know to be part of the story because they find that to be rewarding. They want to be treated fairly & they wanted to be treated with respect in a way that makes sense. But they also just want to be a part of something, right. So we have them create a story in that way with a video etc.
The next step is creating your term sheet. So we have term sheet templates that you customize. Here’s where we also save you a lot of money because you’re getting the term sheet fed to you that you can then customize. The primary term sheet we have is revenue sharing. They chose a percentage of revenue, say it’s 2% of revenue that they would share over 5 years with their pool of investors. Every individual investor would get their pro-rata percentage of that. Now last week we launched a new term sheet, an equity term sheet that is non voting common shares that you could also offer. So now you have two choices on Profounder. Once you have your pitch & term sheet those things go onto a private fund raising website that we create for you & that website becomes the destination for all of your fundraising. For Raja & Aaron at Bucket Feet they were able to invite their friends & family, their classmates, other people in their community who they wanted to invest. They invited them to view the opportunity. They saw the site & said ok thumbs up yep I want to be involved. They were able to transact directly online by investing in the opportunity. Now after all the investment money was received they raised about $60k. They, Raj & Aaron then signed their term sheet electronically online through the Profounder platform. The investors then got the term sheets to also sign electronically so now they’re duly executed & stored on our platform for everyone to use. We also walked Raj & Aaron through the Compliance. We have a very intense Compliance Engine that’s part of our platform that we’re really proud of that automates & serves up the legal compliance in every one of the 50 states as well as the Federal Government that makes it possible to raise with unaccredited investors. So we served up that information & walked them through this filing process.

Dana Mauriello

Wow absolutely incredible, it’s really an awesome platform by the sound of it. Thank you. I was wondering how many women are on Profounder? Do you know how many female startups or female business owners?

In terms of the customers who are using our platform I don’t have a specific number. We haven’t noted a gender bias one way or the other.

Dana Mauriello

Well that’s good, that means there is nothing that is limiting women from getting on there & going for it. By the sounds of it, everything is provided really to actually raise that capital. Are there any issues or challenges that have come up since you’ve been running the platform for entrepreneurs on the platform?

Yeah when we first launched we talked about crowd funding, crowd funding. We had in mind this definition of everyone can contribute in small amounts. You can get a lot of people engaged etc. When our entrepreneurs hear the world crowd funding, they say oh crowd funding great, I’m going to post my opportunity on the site, I’m going to go on vacation & when I get back here’s my mailing address to send my cash to. We said no,no, no that is not how it’s going to work. You have to put in the effort to engage your community. Because really we are not claiming that it is easy. There is an engagement task that you have in front of you. So we really like to say crowd funding is a misnomer. It’s not crowd funding, it’s community funding. So get that right! The biggest challenge for entrepreneurs is overcoming that hurdle. Often that emotional hurdle of asking. We really tell people you’re not asking for money, you’re offering an opportunity. You should be confident in your business & so confident that you really believe you are offering this great investment opportunity to people. What’s been really interesting to observe is sometimes, & in fact oftentimes people find that they’re not that confident & it’s a real moment of reflection for them to say wow why am I hesitating at this point? What am I not confident about? Did I jump the gun? Is this really not a good time for me to be fund raising? I should actually come back when I am more confident & do believe this is a great opportunity for people to get involved in. So we’ve seen that happen as well.

Dana Mauriello

This is one of the issues that people have fed back to me during the course of all these interviews is that women have trouble asking for money. So a lot of us put our hands up for that one. And also have difficulty as far as confidence goes. So what you’re saying is that it’s a great exercise in actually challenging those 2 core pieces if you want to go for it on Profounder. That you could actually work through it or make the decision to actually wait until you’ve built those 2 pieces up.

And we’ve seen it from men & women alike. It’s a very common issue that people face. So we try to make it as easy as possible. We’ve really put a lot of thought into best practices etc. So for instance, its scary to pick up the phone & call someone you may not have spoken to in a while & say hey do you want to invest? What we do is create a platform where you can send out an email invitation to all of these people so already the mode of communication might be something you’re more familiar with to get them to start by emailing & then do follow up phone calls, if you like. We also often encourage people to offer multiple things so there’s no opportunity to say no. So if you just say will you invest, there’s a yes or no answer. But if you say will you be part of my community & a way to do so that would be really meaningful to me is through investment but I’m also really excited about your advocacy. I’d be really excited if you’d lend your marketing expertise. We’ve found that that’s also a very effective way.

Dana Mauriello

So really what they’re doing then is building up a community of mentors & support systems. Not just getting money.

Exactly, we found that over & over again. We had some entrepreneurs who’ve come to us & said you know I could have gotten a bank loan. I could have done this but then it would just have been about the cash. I know with Profounder it’s not about the cash, people are actively involved. We have many amazing cases, for instance our very first customer Bronson Chang, he has The House of Pure Aloha, which is a shaved ice business in Hawaii. He had his investors voting on what new flavors of shaved ice he could offer. They were tweeting like crazy about what he was doing, because they were so proud to be part of this community. People involved in this venture, they felt the sense of ownership, the sense of involvement that made them want to be active.

Dana Mauriello

That’s fantastic.

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