Crowdfunding: Seedmatch is going where no Kickstarter has gone before
Kickstarter might be getting all the press, but Seedmatch, a German crowdfunding platform, is doing some very innovative things in the crowdfunding industry. This week, they are breaking through the psychological barrier of raising more than € 100 000 in equity based funding – that’s a first for Germany, and it’s not even yet possible in the US. The story of a legal high tech startup.
What you should know first: Seedmatch is no Kickstarter
First, you should know that Seedmatch is not at all like Kickstarter, says Tim Reinsch, head of operations at Seedmatch. Kickstarter is a “reward based” crowdfunding platform.
Tim Reinsch: “Kickstarter is like preselling. You pledge a certain amount, and in return you get a reward. Either the product or something else, like a t-shirt saying: I made this possible. It’s a one time transaction. On Seedmatch, you enter a long term investment contract for five to seven years.”
Seedmatch on the other hand allows people to invest in startups and get shares (equity) in the startup in return. In the US, this is still impossible today, although next year a law will come into effect that allows it (a few players are gearing up to offer equity based crowdfunding, but not Kickstarter).
Equity based crowdfunding is legal high tech, and allowing the crowd to invest in a startup online comes with “a order of magnitude greater challenges than supporting a Kickstarter campaign”, Reinsch says.
Reinsch: “On Kickstarter, people upload their project and Kickstarter provides them with a nice platform and a huge userbase. At Seedmatch, it’s functions differently: we only want to allow very promising startups on our platform, that present themselves in a very transparent way. We only get paid if the startup raises a certain funding goal. Basically, it’s just a lot more work - logistically, legally and in terms of marketing.”
Click, click, you now own a company
When founder Jens-Uwe Sauer started Seedmatch last year, he had to invent everything from scratch.
Reinsch: “To make it possible to have someone click a few buttons and end up with a legally binding investment contract, that was – challenging.”
But given the novelty and how young Seedmatch is, the company is already showing quite some traction already, especially in a country that is as risk averse as Germany.
“The German startup and VC scene is not as big as in the US or the UK, and investors are generally more risk averse. So, obviously, in the beginning he had to work a lot on raising awareness for what we do and how it works. The first two projects took some time to close, but now we regularly close projects in days, or even hours. I think we are starting to have a nice track record, and also, we try to be very transparent. We do our best to present every startup in a very thorough way, not only through their business plan, but also with video and private Q&A’s for investors.
Seedmatch raised equity based funding for 26 German startups to date. A week or two ago, Smarchive became the second startup to raise VC funding after it had successfully raised money on Seedmatch.
Today, Seedmatch has a user base of about 10 000 potential investors, of which 2000 have already made an investment, says Reinsch. Most of them are men between 20 and 45.
“The demographic is very diverse: we have students as well as managers. But with a minimum investment of 250 euro, we do want to make sure that we give the feeling that this is not a game, but a serious investment, and that you should do your homework on it.” The average amount invested per investor is about 600 €.
Breaking through the 100 000 euro barrier
To date, the maximum amount of money that Seedmatch could raise was 100 000 euros. It was more than a psychological barrier: it was a legal barrier. Or so they thought.
“The legal framework is different in each country, but in Germany, the general thinking was that we couldn’t offer this kind of funding for more than 100 000 € per company. Which, after a lot of legal research, turns out not to be the case.”
But tomorrow, for the first time, Seedmatch is raising more than 100 000 € online in equity based funding. The contract that makes this possible is very refined contract, explains Reinsch.
For the legal geeks among us: under the old contract, investors became a ‘silent partner’ (stille Beteiligung) in the startups. The new Seedmatch contract is based on a so called ‘partiarisches Darlehen’ or a profit participating loan. In human language: it’s debt that talks, walks and quacks like equity. And for those who worry: the German financial and banking authorities gave its blessing to allow this new contract called ‘partiarisches Darlehen’ to go through the 100k barrier, says Reinsch.
Life as a VC: 1000 pitches, 26 matches, and “show us the innovation”
Offering equity based crowdfunding is a delicate rope dance of potentially conflicting interests. On the one hand, Seedmatch needs enough dealflow to cover costs. On the other hand, it can’t expect to stay in business if it offers funding for all comers. So, while Seedmatch isn’t a VC, it does spend a lot of time looking at pitches. Reinsch: “Similar to VC’s, we’re only interested in innovative startups that offer a fair valuation to investors.”
“We want to start tracking this more explicitly, but let’s say that roughly, we had over a 1000 applications last year,” says Reinsch. “We looked at a few hundred of them, we looked hard at about 200 of them, invited a couple of dozens for a talk, and funded 26 of them.”
“I’d say our positioning in the finance landscape is somewhere between business angels and VC’s: we offer a platform to be able to provide and receive seed funding with total funding amounts above business angels but below VC’s. But of course we do want to offer our investors quality opportunities. We look for companies that are really worthy of seed funding – we need to see innovation, and we like first movers, with scaleable business models. So like anyone, we’re now looking at things like big data, cleantech, cloud as a service models and platforms.”
“I would say that having two of our startups already raising follow up funding is a clear sign that we do a thorough job,” says Reinsch.
In the US, equity based crowdfunding will become legal next year, but for the moment, Seedmatch is staying in Germany. “We think there are still a lot of possibilities here. Most of our startups need further funding, but it’s still early in the game. There is no reason why we couldn’t do follow up rounds later on, probably at higher valuations and for higher amounts, depending how the startups develop. I’d say for us the market is still in its infancy, but very promising.”
Note: Seedmatch only funds startups incorporated in Germany, and only investors with a German bank account and German tax ID can invest in Seedmatch startups.
Watch how Seedmatch works (in German):
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