Even with $5.5M in funding, Ello's future looks unclear

So the Ello saga continues, and this time with $5.5 million more in the bank, and a new kumbaya-esque charter and legal status that’s leaving us with more questions than answers.

Yesterday, the hip alternative — and ad-free! — social network announced that it has raised a lot of new funding, and that in the name of staying true to its promise of keeping ads and data-brokering off its minimalist, black-and-white piece of the Web, it’s filing to become a public benefit corporation (PBC) in the state of Delaware.

And yet, there are still so many unclear parts of this story — despite the fresh documentation and investor blog posts to explain it all.

Making money

From the get-go, Ello said it would stay away from ads and selling users’ data to third-parties — basically, being the anti-Facebook. It’s also said the entire time that it would monetize through paid premium features, “for power users” or users that wants particular capabilities.

When Ello got all its initial buzz, it had only taken about $435,000 in funding. With that sum, we could all squint our eyes a bit and believe they could eventually generate a return for their investors without doing anything too flagrantly commercial.

Aral Balkan wrote a fiery post at the time, warning us and Ello that taking investors meant an exit was coming, some day. But let’s choose to believe Ello could get enough power users to make that initial investment turn into a valuation worth the risk.

But now it has an extra $5.5 million in funding — and that brings with it much, much larger expectations of a big payday somewhere down the line.

Are there really going to be enough of these “power users?” When we spoke to cofounder and chief executive Paul Budnitz early on, he said that the team built Ello for themselves and some friends. Getting the entire world connected — Facebook’s mission — is not their goal.

The math is a bit scary now.

With that said, Foundry Group partner Seth Levine told VentureBeat, “We’ve talked about paid features as one thing we will do.”

That implies that while it’s established what Ello won’t do, there’s still room for more revenue sources along with paid features. He also said that while connecting everyone is not the goal, “growing a large network” is.

And to be fair, there have been many successful “freemium” companies in the past. And the new money is to help give Ello time and space to finish building out its product, Levine said.

A public benefit… what?

As part of its new financial rejuvenation, Ello also filed for registration as a public benefit corporation in Delaware.

Delaware PBCs, which came into existence last year, are essentially for-profit companies that have a legal obligation to do social good. Their main characteristics include having a corporate purpose to create a positive impact. Directors’ duties include taking into consideration non-financial stakeholders. And PBCs need to report their performance using an independent, credible, and transparent third-party standard.

Ello has apparently written its charter, but as GigaOm has pointed out, this means a few additional things, such as the ability of shareholders to sue “if the directors of a corporation fail to uphold the public benefit that is described in its charter — just as shareholders of a regular corporation can sue if directors breach their financial duties.” And in order for someone to trigger one of these lawsuits, they must control two percent of total shares or $2 million if the company is public.

But if all the shares are held by investors and not Ello users or an independent party, who can use that legal check here?

VCs and LPs

Ello’s main institutional investors in this round, Foundry Group and Techstars’ Bullet Time Ventures, have both issued long blog posts explaining their investment in the startup.

They both clearly stated that they’re fully on board with Ello’s status as a PBC and support the pledges it has taken (no ads, no data selling). They both also write that they are backing the company as investors, not seeing this as “charity.”

To be honest, I believe them.

“Our belief is that we will make money on Ello,” Levine said. He also said that he believes that generating revenues and being true to a company’s ethics can “exist in harmony,” and that detractors of this possibility are shortsighted.

But what about their limited partners (LPs)?

When LPs put their piles of money into a VC fund, they trust that the managing partners will put it in places where eventually it will turn into much larger piles of money.

Did these limited partners sign up for this investment in a PBC with unproven ability to yield a whole lot of cash?

Levine says yes, sort of.

“We didn’t talk about B-corps or PBCs specifically when we were raising our fund,” he said. But he and his partners did invest in a B-corp with their previous fund, and Foundry Group’s LPs know Levine et al. and the things they believe in and are interested in. This shouldn’t be a surprise to them.

“At the end of the day, our investors have hired us to be good stewards of their money and we have some latitude to do that,” he added.

And then again, the old rule of thumb around Sand Hill Road is that nine out of ten VC investments will be duds, and that the tenth one will make it up for the rest. So even if doing well by doing good is a long shot, this might just be part of the overall portfolio.

Levine himself said, “The reality of my business is that a lot of businesses don’t work out.”

And, he said, he’d rather “fail than compromise [their] values.”