Over the last decade, all forms of crowdfunding – donations-based, rewards-based, debt-based or equity-based – have been embraced by early-stage startups that take extraordinary risks bringing new products to unproven markets. What we have rarely seen, however, is startups offering shares to early adopters of a product, or more specifically, startups offering shares to accelerate user adoption. This is what RocketClub, a startup headquartered in Sunnyvale, California, facilitates.
Founded by Erik Chan and Paul Chen, RocketClub is about ‘crowd ownership’. It can be seen as an offshoot of equity crowdfunding, except users aren’t required to invest large amounts of money into a company; they simply commit to using a product they’re genuinely interested in, refer other users to the product and provide feedback.
“It’s [conceptually] similar to crowdfunding; the the difference is, instead of a company trying to raise $6,000 via an online campaign, they’re seeking 6,000 early supporters and adopters who fit certain criteria and are willing to adopt a product, offer feedback and refer friends for some stake in the company,” said Chan.
“This is an alternative path to user acquisition. Traditional methods of acquiring users usually involve raising a bit of money by trading equity and using the money to market the product to people, hoping some of those users stick. We shortcut that process, allowing companies to give equity directly to users. In that sense, we’re very much like an accelerator for early-stage companies.”
Every ‘crowd ownership’ campaign, which lasts up to 60 days, starts with a startup signing up to RocketClub and indicating how many users (paid or unpaid) they are seeking to onboard and the percentage of the company they will be making available to those users. Once the campaign is live, users interested in getting involved must submit applications to become members, and upon approval by the startup, they receive a stake in the company for adopting the startup’s product, offering feedback, and helping with promotion, among other opportunities as determined by the startup.
There are two ways for startups to pay for the campaign: either $250 upfront or provide RocketClub a one percent stake in the company.
RocketClub was the first company to go through this process when it launched its ‘Earn Startup Shares trying Cool Products’ campaign in June. To receive shares in RocketClub, members were required to sign up and earn shares from another campaign on the platform, complete two feedback surveys, and refer three friends to RocketClub. By the time the campaign closed in July, more than 2,500 members had earned a two percent stake in RocketClub. The first 2,000 members earned a total one percent stake, meaning each recipient owns 0.0005 percent of the company. Given RocketClub’s current valuation sits between US$500,000 to $1.5 million, these members can expect to receive $250 to $750 upon exit or in the event of liquidation. This may look very small, but as the company’s valuation increases over the years, so does the reward.
After the successful completion of a campaign, RocketClub continues to act as the ‘middle person’, holding onto the shares earned by the users and paying them out when the company exits, liquidates, goes public or undergoes a change in control. A management fee is deducted from the final amount received by the shareholder to cover legal, auditing and other administration costs.
“The members, who earn the shares by completing different tasks, are essentially compensated in the form of sweat equity. All the tasks are actionable and measurable, such as referring a certain number of friends to an app or creating a certain number of posts on an app. We track the tasks to make sure all members fulfil their requirements – usually over a three-to-four month timeframe. What these members earn is stock appreciation rights – also called Phantom Stock – meaning they get a right to a cash proceed when there’s an exit, liquidation or change of control in a company,” said Chan.
It’s worth noting that in the strictest of terms, users don’t directly own the shares – RocketClub holds onto the shares on the user’s behalf. However, Chan explained that it’s been deliberately structured this way to eliminate complexity.
“The idea is to make it really simple for all parties. Our product helps companies distribute ownership to a lot of people. On the startup side, it’s a very simple standard agreement. On the other side, we let these members have stock appreciation rights,” said Chan.
“The user doesn’t technically own the shares, but then it also means it doesn’t get complicated and they don’t have tax liabilities.”
Also, it’s not always free for the end user to adopt a product. It could mean paying a monthly subscription fee for a certain number of months. At the moment, the average length of time the user must use the product, as determined by the startup, is three to four months. For products that operate on a similar model to Uber or Airbnb, users would be required to pay sporadically. However, for freemium products or apps like Snapchat or Instagram that require a high volume of users before they can be monetised (e.g. via advertising), early users wouldn’t be required to pay.
“These goals – what users are required to do to earn shares – are decided and determined by the startup itself. As a third party, we just make sure it’s reasonable. We’re here to facilitate that transaction and make sure that potential members don’t get turned off by a proposal that is lop-sided,” said Chan.
The implications of this entire process are quite profound. Firstly, investing stops being just a ‘rich man’s game’ – that is, you don’t need to be a high-net-worth individual to become a shareholder in a promising startup. If customers are the best investors, then RocketClub lets customers own the title. Secondly, RocketClub offers a compelling way to drive user growth. Given markets are saturated with products and consumers have an ever-growing number of options, RocketClub makes it easier for early-stage startups to stand out of the crowd, and subsequently grow its user base.
It’s worth noting that the practice of providing shares to users/customers is not new. In a Medium article, Chan presents three examples of companies offering shares to users: 1) Doximity, the LinkedIn for physicians, offers fellows ‘compensation in the form of equity and honorarium’ to increase adoption; 2) Reddit, after closing a $50 million round of funding, agreed with its investors to give 10 percent of its shares back to its users/community; and 3) Jet.com is offering 100,000 Shares of Common Stock to incentivise its early adopters to refer new users. What RocketClub is poised to do is popularise this process.
Although it just launched a few months ago, RocketClub’s humble beginnings date back to 2010. Both Chan and Chen, who met while studying at MIT, have a number of startups under their belts and have always searched for ways incentivise user adoption.
“At our previous startup companies, we’ve always wanted a way to incentivize our community and give them reason to believe. Its one thing to tell someone they are part of something special and it’s another thing to make them actually a part of it. Actions speak louder than words, there is no room for anything in between,” Chan wrote on Medium.
“Similarly, action is the ultimate validation for new products. All products are judged by its users and their engagement. User adoption is valued more highly than funds, brains, or influence. Every once in a while we forget the obvious, but people ultimately value their time. And with adoption, people are voting with their time.”
Chan and Chen realised they weren’t the only founders who would benefit from a solution like RocketClub. According to Chan, there are multiple ‘chicken and egg’ problems startup founders are faced with: many investors don’t want to invest in a product until it has substantial users/customers; customers don’t want to use a product until it’s fully developed and proven effective; journalists don’t want to write about a product until there’s a compelling story to tell. If RocketClub provides an effective way for startups to gain early users/customers, prove the value of their products to investors and customers, and help shape an interesting story, then it addresses all of these ‘chicken and egg’ problems.
RocketClub currently boasts over 30,000 members and has facilitated four successful campaigns (Spottly, Banter!, Food Moves and RocketClub), with six currently active and another nine launching soon.
“We’re seeing very good conversion on the different campaigns on our platform, so I think it’s worth mentioning that for us it’s not about our platform, it’s really about the companies that are on our platform. That’s why we wanted to list particular companies. It’s like Kickstarter in that sense. Kickstarter as a platform is not as interesting as the projects and project creators on Kickstarter. When you talk about Indiegogo and Kickstarter, you’re talking about a cool idea, cool project, or cool new tech that you want to keep an eye on. For us, it’s very similar,” said Chan.
Although the response to RocketClub has been predominantly positive, especially from founders who believe early adopters play a vital role in propelling companies forward, there have been questions around how an early-stage, pre-revenue company is valued. Chan’s response to this is “every company has a market valuation regardless of how big, how small or how early they are.”
While RocketClub has been self-funded to date – helped by the fact that both Chan and Chen are engineers and experienced in launching and growing technology business – it is highly likely that the founders will raise at least $1 million in upcoming months to assist with marketing and media relations.
Chan believes the key to RocketClub’s growth is getting more companies using the platform, and this requires increasing visibility through marketing and media.
“This incentivises companies to bring their network and their community to their campaign – we help them fulfil the transaction. If we just keep doing this over time, our community and user base grows and the value that we provide to startups will become even more apparent. That’s our strategy at the moment,” said Chan.
One of the biggest challenges for RocketClub going forward will be educating the market. Though distributing shares to early product adopters is not an entirely new concept, it has not yet been widely embraced by the tech industry – obviously, one reason for this is there was no platform simplifying and facilitating the process.
“We need to explain to entrepreneurs and potential investors why [Rocket Club] makes sense. For our platform to thrive, we need to have big case studies and share success stories. Until that happens, there will be people who don’t believe in it and that’s fine. But it’s more than just being about how we make revenue tomorrow. We have a much bigger vision. RocketClub is the only company that is working on such an idea and we’re making sure that we’re gradually going from zero to one,” said Chan, referring to Peter Thiel’s ‘zero to one’ theory that encourages entrepreneurs to develop a unique product, by uncovering something about a market or customer segment that nobody else does.
It’s not very often that we come across a startup that’s unique – at least as unique as it can be at a time when everything feels like it has been tried and tested. In many ways, RocketClub can be seen as a new shape created by the combination of existing shapes. By combining elements of existing models like crowdfunding, equity-based fundraising and user growth strategies, RocketClub has created an entirely new model: crowd ownership. If executed well, offering shares to early adopters will become common practice for startups in the years to come and investing in startups will become accessible to people of all economic statuses.
Image (L to R): COO Paul Chen and CEO Erik Chan at Hero City in San Mateo. Source: Provided.