When Gil Penchina decided to invest $25,000 in Beepi Inc., a
two-year-old online buyer and seller of used cars, he fired off an email asking
other people if they wanted to get in on the deal. Within a day, he rounded up
a total of $2.8 million from nearly 100 investors—and rejected 300 more. The
45-year-old Mr. Penchina isn’t a big-time venture capitalist. He is part of an
emerging group of investors who negotiate with upstart companies to buy equity
stakes that are sold through so-called crowdfunding on websites such as
AngelList. The other investors rely on his due diligence, and he gets 15% of
any investment profits eventually earned by the groups, known as syndicates, that he leads.
The move to widen startup investing worries some venture
capitalists and consumer groups. They say making it easier for small investors
to bet on young tech companies is reminiscent of the dot-com boom’s euphoria,
which ended when the tech-stock bubble burst in 2000. Crowdfunding through
syndicates encourages a “spray and pray” strategy, or spreading bets among as
many companies as possible with the hope that one or two will be stars, according
to some venture capitalists.
The practice is made possible by the Jumpstart Our Business
Startups Act of 2012, which allows companies to advertise broadly in search of
funds. AngelList is open to “accredited” investors who have earned at least
$200,000 in each of the past two years, or $300,000 with a spouse, or have a
net worth of at least $1 million. That bar could get lower under rules proposed
by the Securities and Exchange Commission that could be finished by October.
The proposal would allow people who make $100,000 or more to invest 10% of
their annual income or net worth over a 12-month period.
A Harvard Business School study in 2012 concluded that about
three-quarters of venture-capital-backed firms in the U.S. don’t return
investors’ capital. Companies that pitch themselves to potential investors on
AngelList and other investment websites usually are in their infancy. Last
year, 243 startup firms raised more than $104 million on AngelList, up from $16
million a year earlier.
As crowdfunding opens up to more small investors, few people
stand to gain as much as Mr. Penchina. He has assembled about 2,000 backers on
AngelList who have agreed to invest alongside him through funds earmarked for
areas ranging from advertising technology to the digital currency bitcoin.
While any investor who meets AngelList’s requirements can
invest through the website, Mr. Penchina uses his contacts to line up companies
that he believes will be especially attractive to investors. He previously was
an eBay Inc. manager and CEO of wiki-hosting site Wikia Inc. Mr. Penchina is
friends with Mr. Ravikant and an investor in AngelList.
Unlike typical venture-capital funds, no management fee is
charged. If the target company is acquired or has an initial public offering,
Uprising gets a 15% carry, or percentage of the investment profit, on each
success. In contrast, venture-capital funds only collect carry if a total fund
returns money.
Rodney Samaan, a cardiologist in Mission Hills, Calif., who
hasn’t participated in Mr. Penchina’s funds but made separate investments using
AngelList, says newcomers should heed the risks. Dr. Samaan thought his 2013
investment in Outbox, a company that digitizes mail, was an easy home run. Last
year, Outbox shut down the service and relaunched as a peer-to-peer lending
service.
Mr. Penchina hopes to add 25 to 50 new syndicates this year
to the dozen already running. He is eyeing unorthodox categories such as
venture debt and plans to pick partners who will help him find new deals and
split the carry with him.
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