Series Tea

September 16, 2021

Nick Tommarello:
Learn to Crowdfund Like Wefunder

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This week we’re having tea with Nick Tommarello, founder and CEO at Wefunder, a crowdfunding platform that allows anyone—customers, users, fans—to invest as little as $100 in companies they love. Nick is an alumni of Y Combinator (W13) and Techstars (Boston '10).

Highlights from Series Tea with Nick Tommarello

This interview has been lightly edited for length and clarity.

  • 00:43

    How Wefunder was started

  • 09:54

    Which companies do well on Wefunder

  • 23:10

    If the distinction between public and private companies is getting blurred

How did you start Wefunder?

NICK (Wefunder): I started paying attention [to crowdfunding] about 10 years ago when Congress was debating whether to change the law to allow unaccredited investors to invest. At the time, it wasn't like I was going to start a company around it. I just wanted it to exist.

I flew down to Washington, D.C. with a few friends and got involved in that final push to get the bill passed in the Senate. It was signed into law in April 2012 by Obama.

We were young and naive. We didn't realize that this was the start of a very long journey. The bill passed and we started our company. We thought our launch was nine months away. But it took another four years for the SEC to write the rules for it, and another four for the SEC to fix those rules. It was a grueling eight-year wait.

Our vision was that companies would want their customers to invest alongside their venture capital (VC) investors. But the law was so flawed that between 2016 and 2020 the best companies weren't taking advantage of these laws because of the regulations. That's what changed this year.

Editor’s note: Here are some things that changed in 2021: The amount that companies can raise through crowdfunding increased from ~$1 million to $5 million. Regulation A+ crowdfunding, which allows small companies to sell their shares to the public, increased from $50 million to $75 million.

What were the hardest parts of crowdfunding?

IMMAD (Mercury): Before I went through this, I wondered—what would the VCs say? Would they say this is just a really bad idea? Or would our corporate lawyers ask what we were doing?

Surprisingly, our corporate lawyers were like ‘hey, that's fine. Go do it.’ And the VCs were also cool with it. But they did ask if we were sure if we wanted to do an audit.

Truthfully, the audit wasn’t that bad. It cost us about $35,000 for the audit of the two years, and then maybe another $5,000-$10,000 for the bookkeepers. And then internally about 10 to 20 hours of work to collect the invoices, receipts, all of that stuff.

NICK (Wefunder): It was pretty similar for us. So Wefunder raised $5 million on Wefunder. It cost us $15,000 for the audit, probably because it was less complicated than for Mercury. It also cost us about 20 hours of our VP of operations looking at transactions from 18 months ago and providing some documentation for it.

IMMAD (Mercury): The big thing founders bring up is whether they are okay disclosing their 2019 and 2020 financials.

I’d say: It's just top-line financials, so it's not your nitty-gritty. I like being transparent. When we announced our Series B, we said we have 40,000 customers and $4 billion in deposits and details like that. And if you're a startup, you're probably growing fast enough.

NICK (Wefunder): It helps that the P&L is collapsed. You're basically disclosing your revenue, your expenses, and your net profit or net loss. Then you have some balance sheet items.

The only thing that some funders might be concerned with is showing a weaker cash position compared to their competitors. But in most cases, when I ask a founder what they are concerned about, they don't really have good answers.

What types of companies use Wefunder?

NICK (Wefunder): Companies that use Wefunder include:

  • Companies that have customers who really love them. It’s a very fast way to raise money from people you don't need to convince because they are already users. They understand the problem already. And they're excited to invest very, very quickly.
  • Some founders use it in parallel with VC fundraising as a way to get better terms. We had one VC give our companies an inferior term sheet and the founder raised $10 million on Wefunder instead.
  • The third class of founders has a hard time raising money—period. Wefunder is very diverse. We do tech companies, we do coffee shops. Outside of Silicon Valley, New York, and maybe a couple of other cities, the local fundraising climate is utter desolation. We've seen founders raise money on Wefunder that can outcompete local angel investors that are giving very bad terms in certain cities.
  • The fourth class of founders uses Wefunder in parallel with angel investors in Silicon Valley. Maybe they want to raise $2 million. They're not the top of the class in YC, so they're not going to get $2 million in a day, but by using some of their users to crowdfund on Wefunder alongside traditional angel investors during demo day, they can play one side off the other to raise money a little bit faster.

IMMAD (Mercury): For us, the decision to crowdfund wasn’t based on money. It was about getting our customers and community to be a part of Mercury.

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What are the legal risks involved?

NICK (Wefunder): Obviously, with this kind of raise, if you are misleading people, the danger of being slapped for that by the SEC is much higher. Founders who are used to being a little loose with the facts should definitely not do that with crowdfunding.

Taking extra care to make sure the things you are saying are objectively true is very important. Otherwise, you're opening yourself up to a charge of misleading investors, which is not a good thing.

We just avoided saying any forward-looking statements. Is that your general advice?

NICK (Wefunder): Yeah. And if you do say something about the future, just ground it with very clear assumptions of what needs to happen for it to be true. You can paint a picture of the vision, but saying you're going to be worth a billion dollars next year with nothing behind it is misleading.

What’s the future of Wefunder and crowdfunding?

NICK (Wefunder): For every good company that chooses to use crowdfunding, like Mercury, it paves the way for other founders to realize crowdfunding is a viable option.

From 2016 to 2020, there was a bit of a stigma that if you decided to use crowdfunding, it must mean that you were more desperate and therefore you were not as good. And that stigma is slowly fading.

If we do another five or six Mercury's over this year, that stigma will be completely gone. That's the next spurt of growth that we'll see.

Let’s say crowdfunding gets destigmatized. What’s your dream for Wefunder?

NICK (Wefunder): The dream behind Wefunder has always been that you have this army of people who really care about what you're doing: your customers, your users, your fans. They'll feel like they're actually involved in your company, and want to help you in small ways, like recruit an engineer, get connections at Whole Foods. There's a different kind of value that the crowd can offer than a VC.

Having a full product team focused entirely on that product challenge is what I am most interested in. Wefunder is not only about raising money but raising money that is valuable in a different way than a VC would.

How will Wefunder evolve to encompass the emerging public-private middle space?

NICK (Wefunder): Five years ago, you were private or public. It was very binary. It's like you had 22 rich investors and some VCs, or you're actually on the NASDAQ.

Congress has passed these new laws like regulation crowdfunding and Regulation A+, which is legally a private offering. It’s obviously not private because people are publicly seeing these companies investing. Legally private, actually public.

I see Wefunder evolving to be a secondary market that facilitates both primary and secondary offerings for this emerging space. The path that I see in (the next five to ten years) is that it becomes normal for companies to raise $100 million on Wefunder.

That’s roughly what IPOs used to be in the ‘90s, like serious amounts of money from a lot of people in the public. But it's less constrained by the regulations that have caused companies to not want to go public (because of the Sarbanes-Oxley Act and other burdens.)

Investors will be only allowed to invest a certain part of their net worth or income, not their entire life savings. And it's known to be a longer-term investment. So you can't buy and sell on the same day. Maybe it's like—there's a trading period once a year, which again encourages founders to also think long-term.

Hopefully, most companies raise a seed round, use Wefunder up to $100 million, get some liquidities, find early investors, then further delay the day they have to go public for real.

How would someone raise $100 million?

NICK (Wefunder): Using Regulation A+, we can do a hundred million dollars now. $25 million through reg D, and $75 million through Regulation A+. We’ll probably be advocating for a few reforms for Regulation A+ to make it as appealing to regulation crowdfunding as it is, but that's conceivable to happen in the next five years or so.

What’s more interesting is designing the secondary trading differently. Then, the expectation for an investor is that at some point in the company's life cycle, maybe the company is doing its series D, and there might be trading windows every nine to 18 months. That lines up with traditional fundraising.

The first time this will happen in practice is when there's a unicorn on Wefunder.

Do you have advice for other companies raising on Wefunder?

IMMAD (Mercury): Do it when you think you’re ready. We felt ready for it because a lot of companies were asking to invest in us. And we'd just done this round where we'd been priced and it was much easier to go to people and say: ‘Hey, this is the price that's around. Let's raise some money.’

I wouldn't do it too early. If I'm doing a seed company, I'd want to have product-market fit first.

There are obviously people who do it for slightly different reasons, but if you're doing so your customers can be a part of your success, then it makes sense to wait until you’re sure you can do it successfully.

The biggest factor for us was that almost all our growth—about 60-70%—comes from our customers telling other people about Mercury. If we can kind of supercharge that and make them feel like they've got some skin in the game, that's a really powerful effect for us.

NICK (Wefunder): There’s one other sweet spot: Some companies are working on something a bit harder and more aspirational. Venture investors aren't as willing to invest in curing cancer in dogs or fusion reactor research, where people understand these things as risky, but still want to invest in them.

IMMAD (Mercury): Yeah, the true moon shots.

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Thanks,

The Mercury Team