Close to a thousand entrepreneurial teams competed for ten spots in the winter startup camp at the Plug and Play accelerator in Sunnyvale, CA this year. One young company got in because it offered a possible solution to a major problem facing 90 percent of all tech startups, says Plug and Play managing director Alireza Masrour.
San Francisco-based RocketClub was proposing a novel crowdfunding platform that would not ask the public to contribute money to any of the startups listed on its site. Instead, it would ask for their time.
In the eyes of many startup founders with an app ready to go public, the most valuable contribution the crowd can make is to use the product and spread the word, says RocketClub CEO Erik Chan (pictured above.) But thousands of new apps are always competing for the attention of users. “How do you overcome the cold start?” was the question Chan wanted to answer.
Chan’s idea was to attract active and loyal users on behalf of startups by giving those users a stake in the possible future financial success of the small companies they chose to support with their time and effort. That sounds like it might mean “shares in the startup company,” and in fact RocketClub recently opened its crowdsourcing platform to users with banner messages such as “Earn Startup Shares for Promoting Cool New Products.”
But the users RocketClub recruits for startups will not actually earn shares—as they can find out if they click around and read the fine print on the site. As RocketClub’s chief operating officer Paul Chen explained it to me, the company has cobbled together a more roundabout way to give users a chance to profit if the small companies they help do well. In an attempt to reduce the regulatory burdens connected with issuing shares, RocketClub proposes to reward users instead with “stock appreciation rights.”
Whether or not RocketClub succeeds, its incentive plan for users is a telltale sign of saturation in the market for the consumer-facing tech offerings that have sprouted in Silicon Valley’s fertile field of entrepreneurial teams and eager investors.
The boom has given rise to a further layer of new support companies, such as incubators and social media marketing firms, which promote upcoming generations of startups or otherwise serve their needs. An additional wave of startups has swept in to help consumers cope with the deluge of information from the apps that already clutter their smartphone screens.
That market saturation also extends to the crowdfunding sector itself, where new entries have tried to carve out fresh niches by specializing in crowdfunding for particular fields such as health care, education, and philanthropy.
RocketClub is also trying to create a new crowdfunding niche by addressing a question that quickly emerged as early crowdfunding platforms attracted support: why couldn’t startups reward their more substantial donors with shares in the company, rather than mere “perks” such as T-shirts or DVDs?
The answer is that such transactions, dubbed “equity crowdfunding” would plunge the startups—and possibly the crowdfunding sites—into a thicket of securities regulations.
Issuing shares in private companies is heavily regulated to protect investors of modest means who can’t afford to lose their nest eggs on companies that are not publicly traded and obliged to disclose their financial performance. Traditionally, the Securities and Exchange Commission has allowed private companies to raise money from individuals only if they are “accredited” investors, who have earnings of at least $200,000 a year or a net worth of $1 million or more. That’s the reason why startups that campaigned on early crowdfunding sites such as Indiegogo weren’t able to reward their donors with ownership shares—the mechanism called equity crowdfunding.
Lately, state and federal agencies have taken steps to legalize equity crowdfunding, but the new regulations are still bolstered with protections for investors who don’t have wealth to spare.
The crowdfunding model RocketClub has devised, however, asks consumers to contribute their labor rather than invest their money—a sort of “sweat equity crowdfunding.” But will that model be exempt from many securities regulations, such as those being developed for equity crowdfunding by the SEC and state regulatory agencies?
Chen says RocketClub worked out a complex legal structure for its user incentives with the help of a law firm, in the hope that RocketClub won’t be subject to an array of regulatory burdens. Whether the model would pass muster with regulators was still an open question as RocketClub launched its site in June and began inviting users to sign up. Chan and Chen, RocketClub’s sole staffers so far, plan to start conversations with regulators once they solidify their practices and gain some traction for RocketClub online.
In addition to satisfying regulators, RocketClub will also need to convince users that the financial stake they’ll get from participating will be worth more than the T-shirt or other perk awarded by traditional crowdfunding campaigns.
In brief, here’s how RocketClub works:
On the company site, visitors can pick a startup they find interesting, use its product, and pitch in on social media to make it better known. Each startup campaign posts the specific tasks users must complete to qualify for potential financial rewards through Rocket Club. For example, the nightlife mapping app Banter directs users to post photos from bars,
