In 2013, three Estonians with a long history in the financial sector founded a startup called Funderbeam. The firm set out to provide a subscription-based, data-intelligence service on global startups and investors.
But in April, the company took the bold step of opening a trading platform for startup investments. The new platform aims to bring early-stage startup investing to the masses by enabling anyone to participate in syndicates created by lead investors.
"A special-purpose vehicle, or SPV, is created, which will be the investor in the startup. Backing that SPV can be 10, 100, or 1,000 investors, but the startup has only one investor with whom to negotiate and expect signatures from," explains CEO Kaidi Ruusalepp, whose finance-sector experiences include having served as CEO of Nasdaq Tallinn.
"This is the major difference between us and other syndication-based platforms and also crowdfunding platforms."
Because all the startups participating have so far been local companies, their SPVs have been founded in Estonia. However, the company is working with other jurisdictions, focusing on UK, Finland, Germany, and Central Europe in the near future.
According to Ruusalepp, what marks out Funderbeam is the ability it gives participants to trade their investments in the marketplace, which makes an exit for early-stage investors much easier. As in a conventional stock market, investors can give buying and selling orders and see transactions and prices in the statistics.
"Let's say you want to invest €1,000. For each euro invested in the syndicate you receive a token. If you want to trade your investment, you can decide if you want to sell all your tokens or just a few of them in the marketplace," Ruusalepp says.
All the transactions on the platform are based on the blockchain distributed public ledger that underpins Bitcoin transactions.
To become a member, one has to satisfy strong background controls. Funderbeam is also planning to integrate ID-card authentication into the system, so all the Estonian ID-card holders, including Estonian e-residents, will find the sign-up process much easier, because they will no longer have to, for example, upload pictures of their documents.
By the end of May, two Estonian startups had already achieved their funding goals on the Funderbeam platform. The logistics startup Shipitwise reached its investment interest goal of €100,000 just a couple of weeks after its campaign launch, and Sport-ID, which aims to make employees more active, secured interest of €100,000 from 89 investors two weeks later.
Ruusalepp says the first foreign startups will join the platform very soon.
"We have a queue of startups at our door, but we've purposely waited to let the first ones have their run," she says.
At the end of May, about 80 percent of the investors were Estonians. The CEO of Funderbeam predicts that the proportion of foreign investors will grow rapidly as soon as the first foreign startups begin raising money on the platform.
She believes that the new market provides a long-awaited transparency for early investors and creates more realistic valuations for startups.
"As an investor, you have to keep yourself familiar with the doings of the company and be able to express your opinion through buying or selling shares of the company," Ruusalepp says.
"If we're looking at the bigger picture, then there's a prognosis that 80 percent of the $1bn startups are going to write down 80 percent of their valuation this year.
"It's better to play with open cards in an open market, rather than pump the air in the valuations during the funding rounds, as it inevitably leads, sooner or later, to a bursting of the bubble of the whole market. We'd like to be the mirror reflecting the reality."
The company earns money by taking a three-percent commission from the successful syndicates and might introduce some low trading fees in the future.
"Funderbeam has a large data platform with more than 150,000 startups and a lot of investors. In the near future it'll have a reporting environment, and users will have detailed portfolio views. Our value chain is quite long," she says.
Funderbeam itself has raised €1.75m ($2m) so far. Investors include Skype's co-founder Jaan Tallinn and 3TS Capital Partners, which is a member of Draper Venture Network. Tim Draper himself also seems excited about the new platform.
"I love what they're doing. The existing market is not working. The public markets just aren't working and Funderbeam is doing something about it. And boy, is this going to be exciting," he said in a video message congratulating Funderbeam on its launch at the end of April.
"We're going to have tradable [investments] in the private markets and I'm so proud of everyone at Funderbeam for making this thing happen. I love these Estonians. They're crazy."