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May 11, 2014

You want to “Crowdfund?” Start with a Crowd; or What Used to be called Friends and Family

Screenshot 2014-05-11 at 8.15.32 AM

Crowds and the effect they can have on our society has been an important part of my life for many years. Both my parents have been (and still are, thank God) active politically, organizers of “crowds,” of groups of people coming together to effect positive positive change. That crowd bug passed to me, and for 45 years have lived most of the time on the edge of the crowd, helping pull and push in this direction or another (some might say that at times I fall off the edge…).

For 18 years my  “professional career” has been start-up guy. As co-founder, CEO, board member, investor, you name it, I’ve done it.When I first started as an entrepreneur I was bewildered how to raise money — how does one “start” if your bank account is at zero or close to…when I read up on it I discovered the phrase “friends and family.” Back then, the recommendation was first go to your inner circle, your friends and family, and try and get them to back you (with cash or in-kind…housing/food/etc.). The theory was, these folks were essentially helping to contribute to your success — they were not savvy financial investors — but rather kindly backers.

Now, I don’t know if you ever mixed family and money — but usually not a good combination, or for that matter with friends. Oh sure, if desperate and need to crash somewhere, get some food, even emergency money for an operation, family and friends can be there for you and nobody will ever look back. But as a healthy well educated person, to ask family and friends to give you (ok, “invest”) money in your dream of a ____________(fill in blank with appropriate business dream) is an entirely different matter.

On top of that, my parents were public servants most of their careers, and the honest kind, so they didn’t have a spare $1 million to help bankroll my start-up (back then was much more expensive to start, no Google App Engine or Amazon Web Services). So what to do? I looked to my friends. Well, at the time they were a bunch of 20-somethings, either still in school/army/unemployed. None of them had any loose change of $ that was needed to create new software.

So where was this mythical “friends and family” round going to come from? I needed to go out there and get new friends (family is family!). Not to replace to my old ones, but to supplement the ones I already had (this was pre-facebook, we are talking a handful of existing friends).

Through a lot of luck, and somewhat smooth talking, I gained some friends who did have spare cash looking to take a ride on the start-up roller coaster. But it took endless meetings, presentations, wild-eyed pontificating on paradigm shifts. And making new friends. And for the past 18 years, has remained a challenge. Never “easy” to raise money, even if now I have some friends with loose change..

Which brings me to what today we call “crowd-funding.”

Let me clearly state — I am a huge fan of OurCrowd, Indiegogo, Kickstarter, and all other crowd-funding initiatives, and a direct participant in Our Crowd (who kicked off off the seed round for  Zula and currently raising follow-on) and Indiegogo (where winery I co-founded, Jezreel Valley Winery, is currently running “Wine for Life” campaign). I am an angel investor in Mosaic Solar, bringing crowd funding to renewable energy porjects.

But there are clear differences between the different platforms.

First, left me put OurCrowd aside, as they have done an incredible job, led by Jon Medved and the rest of his amazing team. Jon uses the term crowd funding, but he has gamed the system. OurCrowd has curated, and is constantly expanding, it’s built in crowd. In other words, OurCrowd has signed up thousands (more than 4,000 to date) angel investors who have spent the time to register on the site and receive deal flow. The friends I didn’t have 18 years ago…OurCrowd management screens and selects a handful of start-ups every month to expose to their growing investor community. From the numbers I have heard, maybe 2-3% of the deals that approach OurCrowd make it on to their platform. In this way, OurCrowd is similar to the classic VC model. What OurCrowd has done is reshape the economics behind

At Indiegogo and Kickstarter, and many other crowdfunding platforms you will NOT get seen if they do not feature you. And they will not feature you if they don’t see momentum. And you will not have momentum if you do not show up with your own crowd. Yup, back to the friends and family. Your “inner circle.” By all accounts, these people are supposed to make up at least 20-30% of your target raise — and only then will “strangers” even think to support you, or get featured by the editors of the platform’s front pages. These types of platforms are more egalitarian and deal neutral than OurCrowd —  anyone can create a project to fund. There is almost no screening. From Indiegogo I recently heard that they have over 7000 campaigns live on the site right now (campaigns can run for maximum of 60 days, so annually its a big number, easily tens of thousands of projects jostling to be seen).

Yes, there is some mix of the above models. When we went live last May (2013) on OurCrowd site for Zula, we spread the word. Many friends joined OurCrowd because they were interested in Zula, and this allowed them to invest a relatively small amount ($10,000 is the OurCrowd minimum) which we as a company could not handle. Thus the relationship between company and platform does become symbiotic, if everyone does what they should  — the “crowdfundee” can help bring more traffic to the platform, which can spill over into other projects seeking a crowd (and funding).

Bottom line: In the 18 years since I was first told I needed to raise money from friends and family, a lot has changed but much is the same. Just now it’s called a crowd — and if you don’t have one (or the right one) don’t expect to succeed at “crowdfunding.”

– Jacob Ner-David, CEO