Anyone can invest in a startup
What is Crowdfunding (Distributed Investing)
Crowdfunding became popular in the late 2000’s with websites like GoFundMe, Kickstarter, and IndieGoGo. A large number of users donate small amounts, which can add up to become massive funds overall. The convenience of fundraising remotely means that companies, people, and causes can receive contributions from all over the world.
WeFunder is the most popular crowdfunding site for startups. According to We Funder founder Nick Tommarello, the company’s goal is to “fill the funding gap between angel investors and that first major round of capital.” Before 2012, all investors were legally required to be accredited and donate at least $1,000 to receive equity in a business. The US Government’s Jumpstart Our Business Startup Act (JOBS Act) lifted many of these restrictions, clearing the way for startups to raise money through crowdfunding. Current US law sets $100 as the new minimum investment for equity, with no accreditation requirements. Now doctors, teachers, bus drivers, lawyers, and even hair stylists can all become investors in a startup.
Investing – The Seed Round
Many startups seek crowdfunding during their “seed round”. This is the final stage a startup enters before a formal series A, B, C, or D round with venture capital (VC) firms. At this point, they may be close to testing a product, but they haven’t started generating revenue. The major advantage of investing in a startup before they receive major fundraising from a venture capital firm is the opportunity to receive steeply discounted stock.
The Perks of Joining Early
Crowdfunding investors usually receive a Simple Agreement for Future Equity (SAFE). A SAFE is a legal agreement made popular by the startup incubator Y-Combinator in 2013. This document is quickly becoming the standard way for new businesses to raise money in seed rounds. Essentially, a SAFE is a promise to early investors that they will receive equity (otherwise known as ownership or stock) when certain conditions called “triggering events” are met. If the triggering events don’t happen, early investors are not eligible to receive benefits.
The triggering event is when an early investment in a startup pays off. The two most common triggering events are qualified financing from a venture capital firm (otherwise known as a Series A round), or the sale of the company. The specific terms of SAFEs vary from startup to startup, and some SAFEs may be triggered if a company is acquired or merges with another business. Any triggering event releases equity to early investors, and the equity that an investor receives is based on the valuation cap.
What is a Valuation Cap?
A valuation cap is the most important term of a SAFE agreement. It is a rough estimate of a company’s worth, calculated before Series A funding. Valuation caps protect early investors from the risk of having their shares “watered down” by future financing. The lower the valuation cap, the more an early investor will gain. Most valuation caps for startups range from $2 million to $20 million.
Lower Valuation Caps Are Good For Investors
A lower valuation cap combined with a higher VC round valuation is the best deal for early investors. For example, consider a seed investor who spends $10,000 to enter into a SAFE with a company whose valuation cap is $5 million. A few months later, in a series A round, a VC firm sets the valuation of the company at $10 million. This funding round qualifies as a “triggering event”, and the early investor receives equity that is now worth twice what they originally paid. The venture capital firm would have to spend $20,000 to own as many shares of preferred stock as the early investor.
Valuation in Future Rounds
A valuation cap is only the temporary value of the company. Venture Capital firms that fund ByteNite in series A, B, or C rounds will assess ByteNite and assign it a valuation. Common methods VC firms use to estimate the value of a start up are:
- Scorecard Valuation Methodology
- Venture Capital Valuation Method
- Dave Berkus Valuation Method
- The Risk-Factor Summation Model
As a startup goes through rounds of funding and its valuation potentially increases, early investors continue to benefit from the initial valuation cap. The more a startup grows, the more valuable the early stock becomes.
Room for Growth
ByteNite plans to move on with Graphics Rendering (a current market size of $2.6B) and Computer Vision ($12B) as soon as they’ve reached a product market fit with Video Transcoding. They’re not going after niche customers – indeed, the joint valuation of the global video transcoding, 3D rendering and computer vision markets is currently $16.38B (2022) and is set to grow 17% year over year. If only 5% of customers are open to switch cloud providers, they’ll be serving a billionaire market by 2027.