We're #5: Pa. start-ups are on the rise

Entrepreneurship is on the rise in Pennsylvania, cites a new report from Gust, a popular funding platform for the sourcing and management of early-stage investments. Hardly on their radar screen in 2015, Pennsylvania rose to fifth place on Gust's top 10 list of start-up fund seekers in the second half of 2016.

Still, local entrepreneurs caution that it's not time to start popping the champagne corks just yet.

For starters, a perusal of the top 10 list shows a huge gap between the front-running states — California and New York — and the rest of the pack.

Cali-Techsters claimed 20.6 percent of the bright-idea ventures posted on Gust (down from 22.1 percent in the first half of the year); New York brainstormers held firm with its 17.2 percent market share.

Florida came in third with 9.8 percent (up from 8.8), followed by Massachusetts with 4.5 percent, and then Pennsylvania with a 4.4 percentage share, up significantly from the prior, six-month representation of just 2.5 percent.

Also, being in the upper echelon of start-ups seeking funding (Gust's barometer in this report) should not be confused with those ventures that actually get funded. Gust helped fund more than 1,800 start-ups globally last year, but lists for free (and doesn't curate) tens of thousands of profiles on its website. With that kind of competition, it's easy to get lost in the crowd. And the deepest-pocketed venture-capital investors tend to hang out and throw darts where the heaviest action is, grumble local start-ups that haven't felt like favored targets. (Gust makes most of its money from participating "angels" annual licensing fees to use the site.)

Philly developer Gregor Hanuschak, with his start-up Smack Innovations, hasn't gotten any nibbles yet from his Gust-posted pitch for SafeConnect, a steering wheel clip-on module (boasting three patents) that brings hands-free calling and other "connected-car" features to older vehicles made in the pre-Bluetooth era, which could sell for $169.99.

"Gust sends me alerts when people look at my page, and one investor has asked for a term sheet," the developer said. But so far "no takers."

Hanuschak also is pitching the product on AngelList, the 800-pound gorilla of crowdfunding portals with more than three million companies in its database. And he did better, though not quite good enough, with a recent fund-raising campaign on Kickstarter that priced the device at $69. "I raised almost $25K but needed $35K, so I effectively raised nothing. You have to make your goal to keep it or everyone gets their money back." Working out of NextFab, he's "now considering other options."

Gust and AngelList are sometimes lumped in the same "crowdfunding" camp with the far more visible Kickstarter and Indiegogo, yet they are really different beasts, explained Bill Glaab, CEO of the Philadelphia-based fair trade soap maker Hand In Hand Soap LLC, who recently scrubbed away its profile posting from the Gust site. Hand In Hand is doing well enough with private investments, high-profile product placements (including Target stores), and with its social-activist agenda of giving away a bar for each one it sells (with 437,000 already distributed, mostly to orphanages in Haiti.)

"Gust is only open to qualified, accredited investors, mostly angel groups and venture-capital funds who have to meet certain asset minimums required by the 2012 JOBS (Jumpstart Our Business Start-ups) Act and the Securities and Exchange Commission. "Essentially, the funders first have to prove they can afford to lose money," Glaab noted.

Kickstarter, Indiegogo, and its ilk "figured out how to get around those rules by couching small investments as donations or purchases of products — so you're getting something back for advancing them money."

Just last week, the SEC issued an updated investor bulletin that touted a bar-lowering "new investing opportunity in the form of securities-based crowdfunding." While still underlining the high-risk gambles involved with this type of equity investing (actually available since 2016 but newly inflation-adjusted and now better explained), the SEC's rule changes now allow individuals with an annual income or net worth less than $107,000 to annually invest "up to the greater of either $2,200 or 5 percent of the lesser of your annual income or net worth" through one of the 21 SEC-registered funding portals (including the Indiegogo-associated DreamFunded Marketplace), which all belong to the Financial Industry Regulatory Authority. Those individuals earning more than $107,000 can invest up to 10 percent of their income.

Still, the rules of engagement remain stiff for start-ups that would like to sell equity through these portals, said Glaab. "You'll need a lawyer and lots of cash. The paperwork is intense and you can't just make up sky-high sales projections, as I've seen posted on some crowdfunding platforms."