The Changing Landscape of Startup Funding

Apple co-founders Steve Jobs, Steve Wozniak and Ronald Wayne set up shop in Jobs’ parents garage. Is that even possible anymore? Is the ‘tech tinkerer’ or garage inventor a phenomena of the past? Not necessarily. Would-be inventors face a much more robust funding landscape today then they did in the 70s.

Crowdfunder says there has “never been a better time to be an entrepreneur” because it is easy to raise capital. In 2000, it cost about $1 million to start a company. Now it costs less than $5,000, and startups and small businesses account for over 50 percent of the GDP.

However, most new startups, almost 90 percent, are software based, according to Line/Shape/Space. For nearly three decades, software was kind when it came to building a startup. And software is still receiving heavy investments. In July, Fortune reported that Slack's venture arm and and its VC cronies backed 11 software startups complementary to Slack’s business messaging app. In December, Slack and investors created an $80 million Slack fund, and the investments were made with it.

But hardware is receiving investor attention more and more these days. Opportunities for investing in hardware are possible today because startups can get off the ground for a lower upfront cost, Line/Shape/Space reported. Venture capital investment in hardware startups increased by over 30 times since 2010, reported Techcrunch. And a few companies proved that investing in hardware is profitable. GoPro and Fit are two of those companies.

Founded in 2007 by James Park and Eric Friedman, Fitbit produces wearable devices that track physical activity. Last year, the company filed an IPO worth $358 million on the New York Stock Exchange. For the first quarter of 2016, Fitbit reported revenue of $505.4 million.

Founded in 2002, GoPro makes a line of action cameras. The company only reported $150,000 worth of sales in its first year. But four years later, the GoPro Digital Hero, its first digital camera, had $800,000 in sales. A year later, GoPro revenues reached $3.4 million, and in 2014 the company filed an IPO on the NASDAQ valued at $2.95 billion. GoPro reported $221 million in revenue for the second quarter of 2016, a 20 percent increase.

There’s one way for startups to really make it these days: get acquired by a big gun like Google or Facebook. Take Google, which paid $3.2 billion for smart-thermostat manufacturer Nest Labs in 2014. Founded in 2010 by two former Apple engineers, the company released the acclaimed Nest Learning Thermostat a year later. By 2012, it had 130 employees. And through Nest Labs, Google bought two startups for about $500 million apiece: DropCam, which makes Wi-Fi video streaming cameras, and the satellite company Skybox Imaging. DropCam secured $12 million in VC funding from Menlo Ventures in 2012 and $30 million from Felicis Ventures. But the company really hit the mother lode when Google bought it.

Is crowdfunding a game-changer for startups?

Facebook’s acquisition of the virtual-reality startup Oculus in 2014 for $2 billion brings up an interesting way for startups to raise money. In 2012, the two founders of Oculus raised $2.4 million on the crowdfunding site Kickstarter. As of January, there were 500 technology projects on Kickstarter,  PCMag reported. And crowdfunding has become popular for hardware and software startups alike. 

Crowdfunding site Indiegogo proclaims that crowdfunding can help founders validate their ideas and raise funds for prototypes and distribution. And some startups are able to raise big bucks through crowdfunding sites. Here are a few outstanding technology crowdfunding campaigns from last year: 

• Sondors Electric Bike: $5 million


• Micro Drone 3.0: $3 million


• Jibo Social Robot: $2.2 million


• Oomi Smart Home System: $1.7 million


• Neptune Suite: $1.1 million


• Opal Nugget Ice Maker: $2.5 million

Crowdfunding consultant Matt Ward conducted over 80 interviews with crowdfunding product creators, and found that “crowdfunding is the culmination of the lean startup.” So, why are startups trying to raise funds through crowdfunding rather than seed rounds? Most of the people he interviewed said that their biggest takeaway from crowdfunding was the backers because their feedback can define the product. And crowdfunding campaigns both shift and shape the direction of a company, Ward says.

In this space, equity crowdfunding may prove to be the real game changer. A few months ago, new rules allowed companies to offer and sell securities through crowdfunding. The new rules are part of a law President Barack Obama signed in 2013 called the Jumpstart Our Business Startups (JOBS) Act. Under the rules that went into effect on May 16, investors can buy shares of a company through an equity crowdfunding site. Prior to the rule going into effect, only accredited investors with a net worth of $1 million could buy shares through equity crowdfunding. Now, investors earning $100,000 can invest up to $2,000 a year. The JOBS Act will create $50 billion in available capital by 2020, according to Crowdfunder.

Since the rules went into effect, over $5 million has been raised for startups through equity crowdfunding, Entrepreneur reported. And Indiegogo plans to launch an equity crowdfunding site in the next few months. Indiegogo's 7 million backers of 650,000 campaigns have collectively raised almost $1 billion over eight years, so it just might be the catalyst to help really launch equity crowdfunding. 

Image credit: Pixabay