When the U.S. House of Representatives voted in January to allow its members to carry iPads on the floor, Marci Harris, founder and CEO of PopVox in Washington, D.C., had just the app in mind for that.
She envisioned that House members—with her app and iPad in hand—would be able take the pulse of the public on bills under debate in real time.
However, to find the cash needed to realize her dream, Harris side-stepped angel investors and VCs for a different source of money.
She turned to appbackr, which matches developers working on iPhone and iPad apps with investors, or what the site calls “backers.”
However, backers don’t invest in a business, they invest in the apps. They purchase blocks at wholesale prices, and then sell them when the apps go on sale, such as in the iTunes Store.
Launched in October by serial entrepreneurs Trevor Cornwell, Robert Clegg and Sam Zappas, appbackr provides what it describes as “a digital wholesale marketplace” for developers with iPhone and iPad apps on the drawing board. They say a similar market for Android apps is coming soon.
Palo Alto, Calif.-based appbackr takes a cut of the wholesale transaction, as well as a slice of the retail sales.
The mechanism is based on the concept of “crowd funding” or “crowd sourced capital,” which has been around for a few years. The model is sometimes referred to as a “funding platform.” (VCJ previously wrote about the rise in crowd funding in an article entitled “Meet Your New Competition,” published in the July 2010 issue.)
Appbackr’s site lists about 100 apps for sale at any time, including an “app of the week” posted prominently on the home page. Developers behind some of the featured apps have sold $25,000 worth of product in 48 hours, creating an instant source of cash, or “flash funding,” according to Cornwall, who serves as CEO.
Cornwall explains that developers get paid immediately for apps they’ve created, or in the process of creating, and the investors, or who he calls backers, receive the profit when those apps sell.
“The developer’s given up no equity. He’s only sold the income on the units he chooses to sell,” Cornwall says. “After that, the developer goes back to receiving 100 percent of what he or she would normally make.”
“For backers, it’s a chance to pick an app he thinks is promising, put a little money in it, and get a pretty decent IRR” he says. “You can be wrong, 10, 20, 30 percent of the time, and still have a positive return.”
Developers accept a discounted price of 15% to 25% for the apps. Backers earn 27% to 54% when apps are sold.
Unlike appbackr, which focuses on the $3 billion-plus app market, many crowd sourcing sites are designed to raise funds for creative projects, such as independent movies and music CDs.
These sites include VC-backed Kickstarter Inc., which connects supporters with artists pursuing their pet projects and IndieGoGo.com, which connects supporters with those involved in the performing arts.
The developer’s given up no equity. He’s only sold the income on the units he chooses to sell.”
Kickstarter has received $10 million in funding from Union Square Ventures and from a number of high-profile individuals and angels, including Twitter co-founder Jack Dorsey and Flickr co-founder Caterina Fake, among other investors, according to published reports.
Similarly, Berkeley, Calif.-based IndieGoGo has received an undisclosed seed round amount from Eliot Durbin, managing director of Penny Black, a private investment company in New York.
To date, appbackr has raised $725,000 in seed funding from Cambridge West Partners, Hall Financial Group, the Silicon Valley Association of Startup Entrepreneurs and the Zenith Group, plus another $50,000 for winning a PayPal developers challenge in 2010.
Investor Craig Hall, chair of the Frisco, Texas-based Hall Financial Group, says the site represents another way for developers to finance their projects.
“You can look at it as a digital warehouse” he says. “It is a new way of getting together in a more efficient manner people looking for deals with people who have capital.”
“It is an area that has a lot of growth potential,” he adds.
Hall was an investor in Skyjet, a passenger reservation system for business jets that Cornwall built and sold to Canadian aerospace concern Bombardier in 2000.
Cornwall, who comes from a family of authors, says his latest startup is something akin to a literary agent brokering deals between writers and publishers.
And it appears to be working, with some eye-popping success stories already under appbackr’s belt.
In March, French developer Chugulu Games sold 72,500 copies of “Trivia Tunes” in just four days during the Mobile World Congress in Barcelona, Spain. By late March, the company had sold more than 500,000 French copies of the game.
Anton Soeharyo, a Tokyo mobile-based game developer, raised $6,000 for Sushi Chain, an app that had already sold more than 1 million copies at the iTunes Store. Cornwall says Soeharyo used the $6,000 to more widely market his app on social media sites to boost sales.
Soeharyo’s now raising money to help for the development of Sushi Chain 2, a second generation of the wildly popular game.
Still, some are not convinced appbackr and others are the next big thing in venture funding, though they agree it might find a place in the financing eco-system.
Tim Chang, a partner at Norwest Venture Partners in Palo Alto, Calif., says the appearance of “funding platforms” like appbackr is a logical extension of what’s happened as the bar has been lowered for financing a business or project, especially for startups in the mobile app development community, which most often are looking for less several thousand dollars worth of funding.
“You’ve got a lot of options now. You can finance with a credit card, or you could raise the money from angels, or friends or family, or you can crowd source it,” Chang says. “That’s what appbackr represents. It’s very logical for certain types of apps that don’t require big budgets or complicated projects.”
That’s what appbackr represents. It’s very logical for certain types of apps that don’t require big budgets or complicated projects.”
Tim ChangPartnerNorwest Venture Partners
He says there are a number of reasons why backers put up the cash, from wanting to help friends to small-time investors who are interested in making a bit of money.
“I don’t think this type of investor is an extremely savvy professional, but people who are interested in being involved in a kind of a quickie project,” he says.
Chang says that SEC regulations restricting who can invest in startups limit the growth of funding platforms as investment vehicles. That’s why appbackr steers away from using the word “investing.”
But he says that the barriers to investing online are changing, which could open up the model to more serious money.
Cornwall says that he’s already tweaked the site to allow backers with serious money to make larger bets. For example, he says a single backer can purchase a developer’s entire inventory for a 1-year period, an investment that could run into the thousands of dollars.
He also says that seed and traditional VCs have approached him about how to make bigger bets.
Brandon Zeuner, managing partner at venture51, an early stage investment firm in Phoenix, Ariz., says that crowd funding platforms such as appbackr have the potential to point to those entrepreneurs who are on the right tract in pursuing successful new businesses.
“Crowd funding is creating more opportunity upstream for angels and early stage VCs,” he says.
These platforms can give angels and early stage VCs the opportunity to look at more promising companies in the eco-system, those that have already raised early seed or friends of family money,” Zeuner says. “It’s no different than what the music industry is doing right now at some of these sites. They’re vetting bands to see if some of these bands are going to be successful.”
Zeuner adds: “Crowd funding in the early stages of any creative concept is definitely here to stay.”
Nevertheless, Chang says that he believes that funding platforms won’t muscle out professional investors anytime soon, or even provide much competition.
“The big home run projects that are very risky and take professional teams will still require venture capital,” Chang says. “And for smaller projects of a few hundred thousand, that’s perfect for super angels. But if you just want to build a lightweight app for $5,000 bucks maybe you use a site like appbackr.”
Meanwhile, Harris of PopVox says appbackr helped her find a developer, as well as setting a price for her app. As of mid-April, Harris had raised about three-fourths of the $40,000 required to build her app.
“I don’t know if they do this for everyone, but it was much more than a funding experience,” Harris says.
“The value-add of not only the financing mechanism, but the advice and assistance, makes this model even more attractive for an entrepreneur,” Harris says. “If you are doing an app, this is definitely the way to go.”