Dana Mauriello and Kiva co-founder Jessica Jackley were sharing an office space in 2009 when they realized they also shared a frustrating problem. Both MBAs from the Stanford Graduate School of Business, Mauriello and Jackley, along with their peers, were working on businesses and wanted to invest in each other.
But when they approached lawyers to help them structure the investment deals, the plan was over before it launched. “It was almost impossible for us as students who were up to our ears in student debt… to be able to invest small amounts of money in each other,” Mauriello said in a recent interview.
Frustrated, Mauriello and Jackley decided to start a business that would push past the red tape. In December, they launched ProFounder, a website that helps entrepreneurs and small businesses solicit and receive investments from their own network. Call it “community-based crowdfunding.”
While similar websites focus on donations, Mauriello said ProFounder is unique in its focus on crowdfunding investments for for-profit businesses.
Here’s how Mauriello explained ProFounder’s process:
- An incorporated business -- whether it’s a new startup or has been operating for awhile -- starts planning. Since investments are raised from a business’s own community, the entrepreneur is tasked with identifying potential investors. These could be old college buddies, members of a local church group, loyal customers, or others. With the list of potential investors in hand, ProFounder gets all of the paperwork and legal compliance in order.
- Using an interview format with short-answer questions -- Why are you so passionate about this business? How did you get to this point? -- the business owner then describes his or her story. ProFounder turns the answers into a pitch for the business’ private fundraising website.
- Also on the business' private Profounder website is a list of investment terms for potential investors to review. The term sheet outlines how much revenue the business will share and over what time period it will be shared.
- When the site is complete, it’s time for the business to reach out. An e-mail message asks potential investors to view the fundraising site and make investments online. From there, ProFounder handles additional background work, including getting e-signatures, book keeping, and money transfers.
What’s the bottom line? It costs $100 to publish a private fundraising site, Mauriello said, and an additional flat fee of $1,000 for ProFounder to service the investment contract. “To put this in perspective,” she said, “you can raise up to $1 million on our site for $1,100.”
Despite the cost, Mauriello said ProFounder has benefits over the do-it-yourself method of scoring investments. “Traditional friends and family funding includes having one really awkward conversation with a wealthy uncle who is probably going to pass you a check that’s too large for his bank account,” she said.
Not only is that “ask” uncomfortable, Mauriello said, but going through a lawyer to set up the investment terms can be an expensive undertaking. “We’re taking all the admin from you,” Mauriello said of ProFounder, “which allows you to spend your time where it should be: running your business.”