Year in review: Following the crowd

Crowdfunding had a very good year.

In 2014, two notable companies that started out on crowdfunding sites went on to high-profile exits. Growth on the sites was exponential.

Although there remains plenty of VCs who say they don’t bother tracking the many startups launching via crowfunding, many others expect the online funding sites to continue to top 2014 in terms of deal flow and successful exits.

Venture funding to crowdfunded projects in 2014 is on pace to break 2013’s record with 19 deals already in the first seven months of the year. If the current run-rate continues through the end of the year, 2014 will see more than 30 companies, previously launched on Kickstarter or Indiegogo, go on to raise venture financing, according to a CB Insights study in August.

Among the largest 2014 VC deals to crowdfunded hardware projects was smart light bulb maker Lifx, which raised $12 million in a Series A round that Sequoia Capital led. The San Francisco-based company had previously raised $1.3 million on Kickstarter (see table of select crowdfunded projects).

Moreover, in 2013, the amount of dollars pledged to tech projects via Kickstarter jumped to $73.7 million compared to $27.3 million in 2012, according to Kickstarter spokesman Justin Kazmark. Since the site’s launch in 2009, tech projects have attracted some $220 million, or a little more than 15% of $1.43 billion pledged overall on the platform.

In 2013, at least two startups that launched via crowdfunding sites and later raised venture dollars, had successful exits.

One of the higher-profile examples lies in virtual reality company Oculus VR, which was acquired by Facebook for $2 billion in March 2014. The acquisition was a boon for investors, such as Andreessen Horowitz, which led a $75 million round of funding just months earlier.

Oculus had launched on Kickstarter in August 2013, offering Kickstarter donors an early version of its head-mounted, virtual reality goggles.

But Oculus wasn’t the only crowdfunded-launched company to achieve an exit in 2014. SmartThings, which also launched on Kickstarter in 2012, then raised $15.5 million in total funding from Greylock Partners, SV Angel, Lerer Ventures, Highland Capital Partners, CrunchFund and others. Samsung announced in August that it agreed to buy SmartThings, which provides platform to control IoT via a smartphone app, for $200 million.

CB Insights reported in its August 2014 study, which looked at only Kickstarter and Indiegogo, that 9.5 percent of crowdfunded hardware projects go on to raise venture funding.

Not surprisingly, transaction volume via New York-based SeedInvest’s national funding platform spiked more than 1,000 percent in 2014, compared to the year prior, according to Marc Nathan, managing director of SeedInvest Texas. As of early December 2014, $14 million had been invested online year-to-date via SeedInvest, which connects startups with investors.

Nathan said that about 25 companies successfully raised venture rounds following their launch on the site.

“There is no typical investor,” Nathan said, noting that SeedInvest’s core base includes more than 6,000 professionals with expertise in such fields as finance, law, business and technology.

“In addition to individual angels, our active base includes venture firms and family offices,” Nathan added.

Some VCs who were previously not interested in startups that initially raised money via crowdfunding seem to be now more open to it.

Martin Gedalin, a partner at San Francisco-based Lumia Capital, said his firm has not yet financed any company that started off on a crowdfunding site.

“But we certainly wouldn’t be opposed to it. Especially for consumer-oriented businesses, it can be a nice way to test early market validation,” he said.

Crowdfunding, Gedalin said, lets VCs gauge market demand for prospective portfolio companies products and services in a “unique” way “while potentially also leveraging these supporters’ capital in a non-dilutive way, at least via sites like Kickstarter.”

Jim Pettit, managing partner at Navitas Capital, is currently seeing a reverse trend, in which companies already backed by VC funding go to crowdfunding to seek more financing.

One of Navitas’ portfolio companies, Mountain View, Calif.-based Enmetric Systems Inc, is in the process of raising capital via crowdfunding to “top off” a previous financing.

“We look at it as finally democratizing the investment landscape and opening up opportunities for wealth creation.”

Marc Nathan

Managing Director

SeedInvest Texas

“Crowdfunding seems to have an interesting platform for connecting innovation, and presumably less visible startups, to qualified investors,” Pettit said.

He added that the firm is not proactively seeking deals via crowdfunding. He added that whether a company has raised money that way is not that important.

“At the end of the day, it’s more about their merit and growth opportunity, and how we can add value,” Pettit said.

Overall, while Pettit believes it’s too early to make any bold assertions on crowdfunding’s impact on venture capital, he acknowledges that it does give many entrepreneurs a chance at raising seed funding.

“It’s a chance that arguably would not have been there with traditional VC firms, many of which are moving away from seed and early-stage equity,” he said.

However, he noted that it remains to be seen how well many of these companies will do and equally important, if the typical crowdfunding investor has the patience and portfolio diversification to ride investment cycles.

“The real promise of crowdfunding is to create incremental opportunities for larger VCs to provide growth equity, opportunities that previously could have ‘died on the vine,’” he said.

Looking ahead, 2015 should be an eventful year for the world of crowdfunding.

The U.S. Securities and Exchange Commission is expected to finalize its rulemaking processes for Title III and Title IV of the JOBS Act, opening up investing in startups to more than just accredited investors, who are typically high net worth individuals.

“We look at it as finally democratizing the investment landscape and opening up opportunities for wealth creation that didn’t exist before the law was passed and implemented,” Nathan said.