SeedInvest Aims to Fix 'Broken' Startup Funding Process

Angel: an attendant, agent or messenger of God. It seems an oddly spiritual way to describe a class of investor. But for entrepreneurs trying to catch a break, the word may feel apt. According to Investopedia, angel investors, who fund early stage startups, give more favorable terms than other lenders. "They are focused on helping the business succeed, rather than reaping a huge profit from their investment. Angel investors are essentially the exact opposite of a venture capitalist."

SeedInvest, an early stage startup itself, has built an online platform designed to make angel investors' work easier and help them find the types of startups that match their interests and ideals. It aims to make investing in a startup as easy as buying a stock on E-Trade.

SeedInvest is not a direct competitor to banks, since most financial institutions don't lend to such young companies. But it is part of the increasingly powerful phalanx of online lenders and crowdfunders that do present an alternative to traditional financial services firms.

SeedInvest also has a technology platform it rents out to investment banks and others to automate all the paperwork and compliance chores involved in funding investment deals.

Co-founders Ryan Feit and James Han formerly worked at private equity firms, realized they wanted to start a company, and went back to business school.

"We both separately realized at Wharton that the early stage fund-raising process was incredibly broken and inefficient relative to later stage investing," says Feit. "I saw a lot of friends at school who had promising ventures. Many of them threw in the towel after six months," after spending thousands of dollars and hours driving around Pennsylvania, New York and New Jersey, trying to figure out where the capital sources were.

"It was eye-opening for me. I couldn't understand why there wasn't a streamlined process and why people were still driving across the state trying to figure out who would be investors," Feit says. "It was shocking that the internet wasn't being used to streamline the process."

While there are dozens of sites designed for donating money to startups, such as Kickstarter, in 2011 there were no crowdfunding sites for investing in young companies.

Last year, CircleUp and SeedInvest stepped in to fill this void. Both companies hope to take advantage of HR 2930, the Jumpstart Our Business Startups Act, under which certain securities - such as fundraises of less than $1 million - would no longer need to be registered with the Securities and Exchange Commission. [http://www.americanbanker.com/issues/178_20/circleup-partners-with-proctor-and-gamble-1056242-1.html]

Both companies hark back, in concept at least, to a simpler time on Wall Street, when people invested in companies and leaders they believed in, rather than trying to make a quick buck on a fluctuation in a stock's value.

SeedInvest works closely with angel investment groups of 50-100 members to facilitate deals. It vets startups before presenting them to the groups — it accepts fewer than 2% of companies that apply. "Sometimes companies apply that are not far enough along — they have to have at least a working prototype," Feit says. "We look at their products, their competition, their differentiation, their financials and projections. We want to make sure we're showing investors the right opportunities."

SeedInvest began doing live deals a few months ago. In May, 130 companies applied. So far, three companies have successfully raised capital on the site: DietBet, a "social dieting" app; StearClear, a smartphone app for finding a designated driver; and LISNR, a music app. SeedInvest is looking to close two deals a month; each is typically $100,000 to $1 million in size.

At the heart of SeedInvest is a technology platform its founders created called SeedInvest Groups that automates the startup investment process. It's being offered to others, such as investment bankers, on a white-label basis.

"If you think about a small investment bank or broker/dealer that's raising $100,000 to $10 million for a company, often those are individual investors," Feit points out. "The way that's been done for 100 years is all offline. People sign hard copies of legal documents, they send in checks and wires, all the Know Your Customer compliance is done offline. Companies are going on road shows across the country to meet with people to pitch them and do due diligence sessions."

SeedInvest Groups lets individual investors do all of the above online. They can view data about startups and deals. They can watch videotaped pitches by the startups' founders and conduct due diligence sessions, taking live questions from the audience. They can do virtual road shows. They can view and sign legal documents and fund the investment through the site. Once a deal is funded, investors in a company can join a virtual board room hosted on SeedInvest.

"Since we're affiliated with a broker/dealer ourselves, we've automated a lot of the very onerous compliance restrictions you have to meet under FDIC and Finra rules," Feit says. The software automates identity checks, anti-money laundering checks and Office of Foreign Assets Control checks. Payments are handled by an ACH payment provider with whom SeedInvest has integrated its site. Another partner handles escrow accounts.

Douglas Aguililla, director of investment banking at ViewTrade Securities, says his firm plans to white-label the SeedInvest Groups platform so its investors can view information about deals and invest in private companies. "This will give ViewTrade the opportunity to have wider distribution and access to accredited investors," he says. "We'll hopefully be able to increase the amount of projects we engage and be able to close more transactions."

He likes the platform's simplicity and ease of use. "Once an investor is approved and the correct compliance steps are taken, they can make an investment without speaking to a broker or banker — they can gather information, make a decision, and make the investment online. The investor's funds are automatically deposited into an escrow account. It's a very elegant solution."

SeedInvest Groups will automate some of the procedures involved in the private placement process. This should help position ViewTrade to take advantage of forthcoming rules regarding general solicitation for private placements and crowdfunding for broker/dealers.

SeedInvest itself recently received $1 million in a round of funding led by Jumpstart New Jersey Angel Network. It plans to use the money to hire a few people to help grow the company from its current staff of five.

Why didn't SeedInvest use its own site to raise funds? "Next time around we might very well do that, but for this round wanted to make sure that we were focusing our platform on other companies," Feit says.