Crowdfunding

We only need a few simple changes to enable Equity Crowdfunding in Australia – Paul Niederer CEO ASSOB

Crowdfunding, , , ,

paul-niedererAfter our post last night regarding Crowdfunding & The Submission of the CAMAC report on Crowdfunding Regulations, Paul Niederer, CEO of ASSOB wanted to throw some weight behind the discussion. He clearly outlines the actual legislative changes need to allow Equity Crowdfunding to operate in a meaningful way.

 

Most people haven’t heard of Crowdfunding let alone equity crowdfunding. What that means is that if regulatory change is required there isnt a lot of domain knowledge about to ensure that what gets implemented is practical and workable. Witness the U.S.A. The path taken is legislative change, then regulatory change then industry implementation.

Already most participants are saying what has resulted is unworkable.

The United Kingdom has taken a more measured approach. The regulators worked with industry participants like Crowdcube and Seedrs to test and refine methods so that eventual changes have been road tested.

Australian regulators are waiting on the outcome of CAMAC’s study of submissions and other countries findings before making a move in the equity crowdfunding space. Hopefully this wont mean a U.S. style implementation.

Legislation, then regulation, then implementation with feedback cycles from industry then updated legislation and regulations.

There is an easier path because Australia has 20 odd years of experience in managing investment from retail investors which has spawned ASSOB the oldest and longest running equity crowdfunding platform in the world.

Eight years, 300 Startup / Early stage raises and $138 million later we believe there is an easier path than the path most countries are taking.

At the end of the day most equity crowdfunding is about legitimising transactions that take place from money invested into the early stage space that comes from friends, family, fans and followers. High net worth investors are already covered by adequate legislation.

A recent article in Forbes stated “For the vast majority of people, money is raised from banks, from personal savings, and from family and friends.” The task of equity crowdfunding regulations is to properly legitimise this.

This is not a new area for Australian regulators as small scale offerings legislation has operated in this space for a long time.

So what is the suggested pathway forward?

Australian regulators are able to modify the fundraising provisions of the Act for ‘minor and technical relief’ without the need of a full parliamentary enquiry or indeed a report from CAMAC or any other government body.

Like the U.K. regulators they can sit down with industry participants and see what would work in practice.

Here are some of the changes that would enable Australia to embrace two huge trends that are driving crowdfunding. Technological Disruption and Meaningful Investing. For a more detailed discussion visit here.

  1. A new category of Equity Funding Portal be established for “Crowd Sourced Equity Funding” CSEF. Maximum $1 million per company per annum with a $2,500 max per investor.
  2. Small Scale Offerings 20 retail investors in a twelve month period should be lifted to 100 but there should be a cap of $25,000 per investor per annum. A maximum of $2 million can be raised per annum including the “CSEF” exclusion.
  3. Broaden the definition of Associates. This group is not fully handled sufficiently in existing legislation.
  4. Add category of “Experienced” investors. These could be for example people that have reached a certain level in Angel and Director organisations
  5. Recognise that consultants can accept shares for services rendered but cannot invest funds. This will assist cash-strapped companies in obtaining the corporate advice they need, without burdening operational cashflow requirements.
  6. Portals cannot give advice or have a pecuniary interest but can curate offerings.
  7. Registered Portals can disclose summaries of the offer information to the public but prospective investors need to log in to see full deal details. Promotions must follow rules as per small scale offerings regulations.

A graphic that summarises this is as follows:

NiedererCFregulatoryOverview.001
All the changes above can be implemented by the granting of relief from the relevant provisions of the Corporations Act, consistent with ASICs power under s741 (ASIC’s power to exempt and modify) and 1020F (Exemptions and modifications by ASIC) to modify the fundraising provisions of the Act for ‘minor and technical relief’ without the need of a full parliamentary enquiry.
Enhanced by Zemanta
Pozible.com

Pozible shifts focus to China – Industry appeals to the Federal Government to act now on Crowdfunding Reforms

Crowdfunding, , , , , ,

On the 28th of May 2014, the Corporations and Markets Advisory Commission (CAMAC) hands to government its policy opinion on Crowd Sourced Equity Funding (CSEF).

What happens next is likely to be nothing (but possibly interesting).

There are a few options from here.

  • The government takes the policy opinion as writ and starts the process of enacting legislation. However, given the current horse-trading and issues with the budgetary legislation the government is trying to get through, the swift introduction of new legislation seems unlikely.
  • The government takes the policy opinion as being in the “too hard” basket or “too risky” basket and shelves it. Essentially meaning nothing will happen.
  • The government takes the policy opinion as out-of-date, lacking industry consultation and therefore concludes that more consultation is required. The effect being that nothing happens.

So in all likelihood Equity Crowdfunding in Australia will not happen in the next 12 months.

Is this a problem? Yes.

Why? Well it’s a problem because we are missing out on the benefits of CSEF.

Australia is missing out on the benefits of releasing small amounts of money from large numbers of citizens to support causes, business, inventions, research and innovation.

At a time when the government has withdrawn money from Science, Innovation and Commercialization through various budget cuts to the CSIRO, IIF, Commercialisation Australia and the likes, having the citizens “fill the gap” makes inherent sense.

As an example, the recent budget has withdrawn many of the match-funding grants for the startup ecosystem. These grants meant government would help Series A stage startups with match-funding. That means whenever private funding contributed a dollar, so too would the government via Commercialisation Australia. Not anymore.

With CSEF legislation likely on ice, there isn’t another viable means of plugging that funding shortfall from within the ecosystem.

This is not good news for the startup ecosystem. This interview from Jonathon Barouch sums up brilliantly the state of play for the startup ecosystem post budget.

The second issue is the infant crowdfunding intermediaries (the ones that would be market-makers) in Australia are withering, dying or packing up for greener pastures.

The most successful non equity platform from Australia is Pozible with over $20 million in pledges. Pozible is also the most interesting case study. They have built and are ready to fire with equity-based crowdfunding platform under a separate brand, but have basically put their plans on ice.

Instead they have continued their rewards-based crowdfunding success by taking on new markets like China.

Yep, you heard it right.

Pozible will be the Kickstarter of China, not Kickstarter.

Much of this is credit to Rick Chen (originally from China) and Co-Founder of Pozible.

The withering intermediaries include the Australian Small Scale Offer Board (ASSOB). ASSOB claims to be the oldest Equity Crowdfunding platform in the world operating for nearly 12 years under an exemption in the Corporations Act.

They are not small by any means having raised $132m over 12 years via this exemption for companies using their board. But let’s assume a commission to the intermediary of 5% was in place, that’s still only a run rate of $500k per year. (Ed: Many of the sponsors make their money from consulting and preparing information memos)

The lack of clarity and legislation around CSEF is stopping ASSOB growing to levels approaching that of foreign contemporaries like Seed.rs or Crowdcube in the UK.

The “dying” intermediaries are those that launched with the expectation of CSEF legislation coming quickly, meaning they could benefit from rewards-based crowdfunding and equity-based crowdfunding and along the way pickup bigger deal size and deal flow that would make them sustainable.

The legislation hasn’t come (and probably won’t) and they’re essentially run out of runway. For example, iPledg, who’s CEO, Bryan Vadas states “iPledg continues to march on with its head above water, yet is denied the opportunity of generating substantial revenue by providing equity crowdfunding for creative, commercial, charitable and community spaces”.

Perhaps the most telling example is Australian crowdfunding platform Sproutback. Sproutback CEO Brett East says “because of a lack of equity crowdfunding within Australia, we are forced into licensing or selling our technology platform in order to be sustainable. There is no other viable way at this stage”.

Crowder, and events based crowdfunding platform has also disappeared from the local scene (and online) with key staff now residing in New York.

So there you have it. The delays, stalls and likely non-action of the government will mean that a promising line-up of intermediaries in Australia are “withering”, “dying” or heading “off to greener pastures”.

When (or if) Australia does engage like the rest of our trading partners in equity-crowdfunding there will be no home grown talent to make it work.

Perhaps this is why Malcolm Turnbull decided on the day that VentureCrowd launched its retail fund (VentureCrowd is operated by an Australian VC firm with access to the best of the Australian startup ecosystem), Malcolm was spruiking on behalf of Israeli equity-crowdfunding platform OurCrowd.

You may gather from this article a level of pessimism about the future of equity-crowdfunding here in Australia. But the author would like nothing more than to be proven wrong.

All is not lost. The government could;

 

  • Act swiftly to engage the willing known intermediaries like ASSOB and Pozible.
  • Enact new legislation (as we hope is suggested by CAMAC) that could remove the current barriers (like the 20/12 rule and non-solicitation rule) and encourage mum-and-dad investors (not just sophisticated investors) to join the crowd.
  • If such legislation were to be enacted, say before the end of this financial year the startup ecosystem would embrace it and it would take some of the sting out of the budget cuts.
  • In turn, this would encourage new intermediaries to establish quickly and drive capital flows from citizens to projects that inherently had the backing of the people from a financial and market sense.

 

Lets hope we see swift sensible action, but lets plan like there won’t be.

Andrew Ward CEO 3 Minute Angels

Andrew Ward CEO 3 Minute Angels

Andrew Ward is the CEO of 3 Minute AngelsAustralia’s largest massage company and one of my old fellow members of Entrepreneurs Organisation. +

Andrew is actively involved in shaping the debate on Crowdfunding and has created a community website www.csef-Australia.com.au to help stimulate discussion and formulate a submission for the Australian Crowdfunding Legislation review.

Enhanced by Zemanta

Australia’s Small Scale Offering Board has been Equity Crowdfunding for 8 years, here is what they learnt

VC/Advisors, , ,

 

Paul Niederer CEO ASSOB - Credit dagvandeinformal.nl

Paul Niederer CEO ASSOB – Credit dagvandeinformal.nl

One of our regular contributors David Drake visited Australia last year speaking at a number of events on crowdfunding and equity raising, he interviews Paul Niederer CEO of Australian Small Scale Offering Board about their experience over the last eight years.

 

Even before crowdfunding became a global phenomenon on the rise, investors in Australia had already been funding startups through equity investments that work a lot like crowdfunding.

And they’ve been doing it for almost eight years: long enough to learn quite a lot about what works.

ASSOB (Australia Small Scale Offering Board) has been funding startups through equity investments, limited to only 20 unaccredited investors. This may not be entirely the same as the equity crowdfunding that is now shaking the 80-year-old securities law in the U.S., but needless to say, ASSOB has made great and impressive strides in the last eight years since taking its approach to crowdfunding online.

I was down there early last year to speak in several conferences, and I have met with ASSOB to discuss developments in Australia. I was fortunate to catch up again this time with Paul Niederer, CEO of ASSOB. From years of offline equity funding to the digital leap made in 2005, we can learn lessons from the ASSOB experience that will be useful as the rest of the world maps out its road to equity crowdfunding success.

While you may dispute that Kylie Minogue is the best thing that ever happened to the Australian music industry, you will have to agree that the pioneering ASSOB is the best lesson that ever happened to equity-based crowdfunding.

The following interview with Paul provides rich insights on the keys to a successful equity crowdfunding platform. Experience is still the best teacher, and ASSOB has loads of it.

David Drake: You are the longest running crowdfunding for equity platform there is. What can you tell us about the history of ASSOB?

Paul Niederer: In 2005 we decided to take an offline unaccredited and accredited capital raising business online. Eight years later over 300 raises have been handled with over 2,500 investors having invested. Only equity transactions are handled, and nearly $140 million has been raised to date. The smallest raise is $55,000 and the largest $3.5 million.

David: What are three of the strengths of ASSOB?

Paul: 1) Internal legal monitors [for] people, entity and offering compliance. 2) Handholding through the process by ASSOB Partners and ASSOB. 3) Templated process to make it easier for capital raisers.

David: What were three of the weaknesses in the past?

Paul: 1) Not having oversight of the issuers share registry. 2) Thinking it could be all done online. 3) Expecting issuers could manage large parts of the process themselves.

David: How is ASSOB going to operate in the US now with your new investors, and what are the synergies you see?

Paul: ASSOB has licensed the platform to Offerboard.com. They will be using the ASSOB capital raising engine, but their implementation will be different than ASSOB’s — understandably so, as Title III (unaccredited investors) will not have access to the platform until part way through 2014

David: ASSOB platform exemption only allows 20 investors, so how do you engage the crowd and the crowdfunding in this limitation?

Paul: Every raising builds its own crowd. Some raises have hundreds in their crowd, others have thousands. In this respect it does not differ from the majority of reward crowdfunding platforms. Unlimited accredited and overseas investors can exist, but only 20 unaccredited investors per annum. This is strictly monitored. Issuers need to ensure that when they accept investment from unaccredited investors, they choose the 20 largest suitable applications and return the funds for the others.

David: What do the Aussies have that the U.S. doesn’t? You have been on this longer than we have.

Paul: There is more emphasis in the Australian legislation on putting the onus of responsibility on the investor. If they have acknowledged the warnings that they may very well lose all their money, then provided the offer has been marketed compliantly, the onus is on the investor.

David: Tell us about a success story — in your eyes — in one of the investments.

Paul: We have had mining companies go from an ASSOB raise to international stock exchanges. Other companies have exited through trade sales.

David: What are three things you advise investors to take away?

Paul: The relationship is always between the issuer and the investor. We purposely do not give advice. However, we do suggest they take independent advice. If they have doubts, they have 10 days to seek a refund, and they should thoroughly do their own research as there is a chance they could lose all their money.

David: What are three things you advise issuers to take away?

Paul: Teamwork is required to raise the capital you need. You need a good story, team, followers, and an aggregating platform that keeps your raise compliant and is proven to raise capital. Only make promises you can deliver on.

David: Where is the scale of this industry? We see LendingClub hitting $2.1 billion and Kickstarter potentially doubling its $275 million last year. Crowdcube has done $30 million, and you have done 6 times more than them. So where do you see the scale for yourself in Australia?

Paul: At present the average investment per investor on our platform is around $30,000. With regulation change, we hope that the number of unaccredited investors per raise will move from around 20 to 100 or 200. This will allow platforms to scale. However, there is a difference between pledge crowdfunding and equity crowdfunding from an operational point of view. With “pledge crowdfunding,” the contributor is expecting a reward. A gratification. Probably instant gratification. Meaning if they contribute $100 for a watch, they are pretty sure they will get the watch within a few months.

However with “equity or investor crowdfunding,” there is uncertainty and hope. The investor hopes that when they invest they will get their money back or better, but it is uncertain as to when this will happen. Meaning if they contribute $20,000, they trust that the founders of the company will be good custodians of the money and will deliver on the promises they have made or the picture they have painted. Hope also must endure. From the time of the crowdfunding investment until its return, or not, communications need to be maintained with investors because they are still living on hope.

They hope that they will at least get their money back, and it should not be a surprise after three years if they don’t.

Ongoing communication is essential.

David: Where do you see the scale in the U.S. with your new investors?

Paul: Scale in the U.S. will come through lowering the cost structure of running raises. It is prudent to have some upfront costs to discourage the non-serious, but the majority of fee income should come from actually raising the funds.

David Drake

David Drake

David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, and The Soho Loft – The Voice of Capital Formation – a global financial media company with divisions in Corporate Communications, Publishing and Expos. You can reach him directly [email protected].

Related articles
Enhanced by Zemanta
JOBS Act Real Estate Crowdfunding

Regulation A+ opens the Floodgates of Real Estate Investing

Crowdfunding, , , , , , , ,

by David Drake

Regulation A+, which is also known as Direct Public Offering, will significantly bring down the cost of raising capital for businesses. Such incidences like paying $250,000 legal fees when you raise $5,000,000 will no longer exist. Regulation A+ is expected to greatly influence direct public funding and give people an opportunity to raise capital more affordably.

Many people have been unable to start businesses in the States due to the strict regulations that have been in existence especially as far as raising capital is concerned. People have been paying thousands of dollars as legal fees on every capital they raise. This has always been the biggest discouragement especially for startup businesses. Business experts have argued that this has been a big obstacle especially to people who wanted to do business but did not have access to sufficient capital on their own.As a result, operating business in the States has been left to the few lucky ones who can easily raise money and pay the legal fees.

With the new laws contained in Regulation A+, startups will be able to raise up to $50 million in capital per year. Unlike the previous years, startups can now sell securities to the public and raise capital even from more non-accredited financiers. Basically, this is aimed at giving equal opportunities to those interested in doing business, regardless of their capability to raise capital. As a matter of fact, more people will now be able to raise capital, start businesses and generate additional jobs.
One of the sectors that will benefit greatly from Regulation A+ is the real estate industry. The demand for real estate properties has always been strong in the States. Many people have showed interest in investing in this industry. With the Regulation A+ in place, startups will now be able to raise sufficient capital and develop real estate properties hassle free.

Experts have been making comparisons between Regulation A+ and Regulation D. Definitely, both Regulations have their advantages and disadvantages. But the fact that Regulation A+ enables businesses to raise capital from non-accredited investors makes it far better than Regulation D. In addition, the scrapped off legal fees and reduced compliance costs in Regulation A+ also make it affordable for startup businesses to raise capital and start operations immediately.

In general, the Jumpstart Our Business Startups Act, or JOBS Act, brings a different business climate in the States. From the time JOBS Act was signed into law by President Barack Obama in April 2012, there are great steps that have been made already. Currently, a lot of capital is being raised by startups through crowdfunding.

Regulation A+ is more advantageous than Regulation D, because with Regulation A+ startups can raise money from non-accredited investors.

There is high anticipation that Regulation A+ will be approved. This is because it is believed that the law will enable more people to participate in building wealth in the country. Before Regulation A+, only the rich investors have been dominating the real estate industry and giving no room for startups to get established.

But with Regulation A+, the many startups that have not been able to operationalize their business ideas for lack of funds can now do so. The business platform will be made neutral as every business will easily access the funds it requires. This means that there will be more competition, especially in the real estate sector, and this will lead to high quality products and services. Many people are also expected to shift from leasing to owning properties because nearly everybody will now be able to invest.

Regulation A+ gives the public an opportunity to participate in active business and thus, in building wealth. Previously, this was left to privately owned companies and individuals who were able to pay for the high costs of operating business in the States. Regulation A+ will connect the public directly with investors and their investments. Most importantly, transaction costs and fees will be sliced making it affordable for startups to get established and operate efficiently.

If you have been thinking and reflecting on making an investment, especially in the real estate sector, this is the best opportunity for you to explore. Regulation A+ provides a conducive environment to crowdfund capital from non-accredited investors and fund your startups, and for investors to gain wealth as well. Businesses are expected to be more competitive and manageable even by startups. Just make sure that you understand comprehensively Regulation A+ and then make the necessary steps to start your business.

David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, and The Soho Loft – The Voice of Capital Formation – a global financial media company with divisions in Corporate Communications, Publishing and Expos. You can reach him directly [email protected].

Related articles
Enhanced by Zemanta
Massively Oversubscribed on Indigogo

6 Steps to Get Your Crowdfunding Campaign to Take Off

Crowdfunding, ,

Crowdfunding is no longer a fringe concept, it’s a legitimate way to fund your growing business. Whether you’ve developed a service concept, a brand new app, or even an idea for a product you just know will be a hit, launching a crowdfunding campaign is a great way to get the ball rolling.

The question is, how do you garner support for a campaign no one even knows exists?

Here are six steps to getting your crowdfunding campaign to take off.

Start planning for social media way before you launch.

If you’re not already active on social media it’s going to be pretty much impossible to kick off crowdfunding and a social media presence at the same time.

You need to cultivate Facebook and Twitter presences, at the very least, for months before you launch your campaign and it’s smart to set up both business presences as well as personalized, “human” profiles as well.

During the planning phase it’s also smart to investigate other social sites (Instagram, Pinterest, etc.) you might want to us depending on your target market.

Make sure you choose the right platforms.

Freematics - Kickstarter Campaign

Freematics – Kickstarter Campaign

Not only is it important to choose the right social sites to market your campaign, you need to decide where your crowdfunding campaign should live.

There are literally hundreds of active crowdfunding sites, each with their own set of rules and features that appeal to different users.

You’ll want to consider everything from the fee the site charges to the activity it requires to keep your campaign alive.

Consider spending money to make it.

Sometimes it can be genuinely helpful to pay a PR or marketing firm to assist you in your efforts, especially if you want to raise a lot of capital.

It’s also a good idea to spend some cash creating an engaging, aesthetically pleasing campaign: photographs, mock-ups of the product, and even professional-produced videos. People will be more interested in contributing to a cause they think is professionally run and will manage their money well.

Engage, thank, and reward your investors.

Atlas Campaign - Indigogo.com

Atlas Campaign – Indigogo.com

No one gives money to a crowdfunding campaign without getting something in return whether it’s a t-
shirt or a promise of a fantastic product in the future.

The more you interact with your fans (answering questions, providing follow-up information) as well as thank them both verbally and with free SWAG, the more traction you’re going to get as those fans tell others about their awesome experience.

Viral starts with engagement.

Consistently put out content surrounding your campaign.

The biggest mistake crowdfunders make is to create a fabulous campaign and…let it gather dust. Of course, the initial campaign blast is important but you can’t neglect the rest of the campaign as the first burst of excitement fades.

Consider a blog, a website, magazine interviews, or YouTube videos – anything to ensure people know you are still active, you are making progress and you’re ready to get to work.

Always follow through on your promises.

The worst thing you can do for your campaign is to sabotage yourself by failing to follow through.

Whether it’s a launch date, a ‘thank you’ gift, a prototype or even a charity donation, your campaign is only as good as the level of trust people have in your brand. Once you fail to live up to your promises you’re damaging that brand, sometimes irreversibly.

That’s bad business and it’s something you should to avoid at all cost.

Crowdfunding is a great way to attract small-time investors you otherwise wouldn’t have access to. And it offers more control than traditional money-raising options which is a particular bonus for creative minded startups. Success is in direct correlation to how much time and effort you put in!

Ryan Currie - Bizshark

Ryan Currie – Bizshark

Ryan Currie is a product manager at BizShark.com, with 5 years experience in online marketing and product development. In addition to web related businesses, he also enjoys the latest news and information on emerging technologies and open source projects.

Related articles

 

Enhanced by Zemanta

Syndicated Equity Crowdfunding for Startups takes off in UK & Europe

Crowdfunding, , , , , ,

David-Drake-CEO-LDJ-CapitalThe following guest post is by David Drake, founder and chairman of LDJ Capital, a New York City private equity firm, and The Soho Loft, a financial media company.

How does one become an angel investor?

There is no university where one can learn angel investing. However, crowdfunding is creating a unique path for learning through a system calledsyndicate funding. A growing trend in the U.K. and other parts of Europe, such as Belgium and Italy, this system allows professional business angels and crowd investors to participate on the same deals.

Syndicate Room (SR) and the Cambridge Capital Group (CCG) joined together third quarter of this year to leverage crowdfunding for the first time. CCG, an ultra-exclusive by-invitation business angel group of around 50 investors and private venture funds that annually invest £1-2 million each to its current portfolio of more than 30 high-tech start-up companies, became lead investors to Syndicate Room’s member investors.

Cambridge Capital Group

Cambridge Capital Group

“Membership in Syndicate Room is free,” says its founder and CEO Goncalo de Vasconcelos. As an SR investor, the member can invest as little as £500 ($800) directly into real business angel investments.

The site launched its online presence last August and recently closed its first deal with a £590,000 ($960,000) investment in Eagle Genomics. The lead investor, requesting anonymity, led the round with £300,000 ($480,000). Syndicate Room’s requirement is that a lead investor, or investors, puts in a minimum £50,000 ($80,000), or 25% of the company value, whichever is lower. Ideally, its focus are on firms in need of £500,000 to £1,000,000 ($800,000-$1,600,000).

While Syndicate Room investors will not be able to influence a startup company’s direction and strategy, they will get exactly the same economic deal, as well as make the same profit pound for pound, as the experienced and larger business angels of CCG.

Knowing that these angel investors only invest their own money into businesses they believe will give them a great return, it’s only smart for the crowd to follow where the angels lead. With their professional guidance, due diligence is done and deal quality is increased with proper valuations in place.

Angel networks benefit from this setup as this allows them to invest comfortably in a single deal while having a crowd of small investors to fill up the rest of the amount needed for seed funding.

The platform also allows the angel networks to find and train new angels from the crowd. Investors from the crowd will eventually learn the ropes, become angel investors themselves, and join the angel networks.

When angels get involved with crowdfunding platforms and in systems like syndicate funding, they take a proactive step in growing the angel network globally.
Are you joining to become one?

You can reach Drake directly at [email protected].

Enhanced by Zemanta

US Crowdfunding expands into Real Estate – Community rallies to save old San Francisco book store

Crowdfunding,

Community participation will help stabilize the neighborhood an insure the future of this landmark renowned for hosting many jazz and literary greats.

Crowdfunding is one of the latest methods of raising capital to start businesses, finance projects or fund causes. Ushered in by Internet technology and powered by online social networks, this new source of capital is significantly transforming the business landscape of the United States.

Marcus-Bookstores-SanFransicso-Crowdfunding - Credit http://iconoclastproductions.wordpress.com/

Marcus-Bookstores-SanFransicso-Crowdfunding – Credit http://iconoclastproductions.wordpress.com/

One such project is Marcus Books, the oldest family-owned African-American bookstore in the United States. Established in 1960 in the Jimbo’s Bop City Building at 1712 Fillmore Street in San Francisco’s Fillmore District, Marcus Books is a historic landmark renowned for hosting many jazz and literary greats. Above the commercial bookstore are two large Victorian-era flats.Unfortunately, one of the family members who had a majority ownership in the building went bankrupt and decided to sell. The present owner of the building is offering Marcus Books the chance to purchase the property or to vacate the premises.

Marcus Books is seeking help from the community offering the opportunity to purchase a stake in the property at its present market value of $2,600,000. This will make it a community-owned property, and therefore everybody is expected to benefit from it in it one way or the other.

According to the plan, Marcus Books is expanding into a 501(c) 3 non-profit cultural institution. This expansion is aimed at maintaining the legacy of Marcus Books in the community.

Community participation is needed to ensure that Marcus Books is maintained in the building and that the two residential flats upstairs are properly renovated so as to offer affordable housing to lower-income families.

Several community-based non-profit organizations have shown interest in purchasing the bookstore. A primary loan of $1,650,000 has already been approved by Westside Community Services, which is a local community-based non-profit organization. The shortfall of approximately $1,000,000 will be raised through Fundrise.com, a leading real estate crowdfunding platform, and should be in before the 28th February 2014, the deadline by which San Francisco Community Land Trust must have completed the purchase of the property.

Tracy Parent, the organization director of San Francisco Community Land Trust, said that this investment is going to yield a 4% annual return in the next two years. This is definitely something that is worth the community’s investment. Tracy, however, emphasized that there are still many things to be done for this project to be successful. The ultimate goal is to ensure that this highly valued cultural institution maintains its presence and popularity at the centre of Fillmore community.

The main effort behind the purchase of the old Marcus Books and the residential flats is to try to stabilize lower-income households within Fillmore Commercial District, where rising rents and rate of evictions are causing displacement of people. This has a general impact on the social, cultural and economic cohesion of the society. By stabilizing the housing industry, more lives will be impacted positively, and people’s lives will improve regardless of their income class.

Daniel Miller, the co-founder of Fundrise.com, said that this investment will stabilize a community property by providing affordable housing to tenants and also continue to host the historic Marcus Books, which is the oldest African American bookstore in the nation. Although the investment return is below the current rates in the real estate industry, he said that its great and lasting social impact to the community as a whole more than makes up for it.

When the project is completed, housing will become permanently affordable for families at a monthly rent of $2,400 per unit. Marcus Books stays for good, remaining an icon, an avenue for children and families to learn together, socialize and strengthen community life.

To learn how to participate in this campaign, please visit www.fundrise.com for more details.

David Drake - CEO - LDJ Capital - Credit Linkedin.com

David Drake – CEO – LDJ Capital – Credit Linkedin.com

David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, and The Soho Loft – The Voice of Capital Formation – a global financial media company with divisions in Corporate Communications, Publishing and Expos. Contact David at [email protected].

Enhanced by Zemanta
indiegogo-kite-patch

Why I don’t like Crowdfunding – Debate – Ian Maxwell, David Drake, Mike Nicholls & Andrew Ward

Crowdfunding, , , ,
indiegogo-kite-patch

indiegogo-kite-patch

This article is one of a collection of articles on Crowdsourcing published this week, you can find the others here – Crowdfunding Articles

Ian A. Maxwell is a veteran Technology Entrepreneur and Venture Capitalist. He is currently CEO of BT Imaging, Chair of Instrument Works and Co-Founder of Accordia IP as well as a partner at Zetta Research and an Adjunct Professor at RMIT. He has a PhD in Chemistry and has either founded or worked at Memtec, Allen & Buckeridge, Redfern Photonics, Sydney University Polymer Centre, James Hardie, Viva Blu, Enikos, Wriota, RPO and Instrument Works. You can connect with him on Linkedin au.linkedin.com/in/maxwellian

David Drake is a leading equity expert based in New York. He is the founder and chairman of LDJ Capital, a private equity advisory firm and founder of the Soho Loft an events company that produces and sponsors 150+ global events a year on topics such as Crowd Funding, Venture Capital and finance reform.

Mike Nicholls is a Director of a US based Investment Fund, has started and sold businesses and publishes Startup88.com

Andrew “Wardy” Ward is a Sydney based serial entrepreneur who has founded at least 5 businesses including the well-known “3 Minute Angels” and a technology outsourcing business based in the Philippines and is currently preparing a submission to the Corporations and Markets Advisory Committee on changes to the Australian Federal Corporations Act to facilitate Crowd Funding.

This article came about after Ian and Mike were discussing Crowdfunding over a beer, Ian arguing that he didn’t like it and me arguing it was a positive thing albeit with new risks, so we decided to flesh it out and got an International Perspective from David and a local perspective from Wardy.

Risks of Crowdfunding

Ian: There are two broad classes of crowdfunding for tech start-ups:

1. Product funding prior to product development and/or product release

2. Micro-equity funding

I am wary of crowd-funding but very interested in it as an experiment. Most modern tech start-ups are working in areas where the ideas are innovative, but not inventive under patent law. This means it is hard, if not impossible, to get patent protection for products. One issue with seeking crowdfunding prior to actually developing and/or releasing a product is that you give away the innovative idea to other entrepreneurs and corporations, who can then run with the same idea.

Mike: This is true, however the vast majority of startups are execution plays not IP plays, very few of the crowdfunded campaigns have created truly inventive products where a patent would be granted (the Kite Mosquito patch is an exception but this was in the Universities years before) . Patents take 3-5 years to be allowed and generally speaking they are not particularly effective as a weapon to defend a small startup.

Ian: I think we are saying the same thing here. The issue with publicizing your product concept before you have produced it is quite a risk, and the risk is that someone else might say ‘thanks for the idea’ and execute the idea better than you can. This is especially the case when you have no patent protection to fall back on, for either protection of product margin or market share, or to hold up your enterprise value in an M&A transaction.

Wardy: Clearly crowdfunding is telling people about your idea pre-money and pre-product. Yes anyone can then latch on to that idea and then develop it (if they have funds). But these same copiers will not have a crowd of supporters and if they are funded in a position to latch onto other people’s ideas, they would have copied anyway, so better to go to market with a fan base.

Aside from those startups that have intellectual property which may be patentable, (not that suitable for crowdfunding), in my opinion crowdfunding offers most tech plays an advantage on balance. Because crowdfunding’s popularity suggests there is abundance of ideas (ideas are possibly a commodity) and it is execution, marketshare, customer base and momentum that matter most to tech plays. These factors make tech plays that have originated from crowdfunding generally safer / better investments.

Ian: Agreed – many innovations are almost born as commodities – crowdfunding really only exists because so much product development can be outsourced these days, mostly all of it in fact. For example I have just bought a new bicycle seat of Infinity Bike seat off Kickstarter. I would say that if it has any merit that the incumbents will be copying this design very shortly. The bloke who formed the company has totally outsourced production, but he has a very small window of opportunity to develop a sustainable company. Its really a project and it might, just might become a company,

Debt vs Equity

Ian: I think that crowd-funding for future product development or delivery represents a ‘debt’ owed by the company. This represents a drag on future cash flows and also a restriction of strategic flexibility. There is a good reason why startups traditionally get funded through equity investment prior to product sales, and this is so they can spend all the money they have on accelerating their path to sales and achieving Cashflow positive status. In addition, once having taken cash for products the company is less free to change directions if it finds new competition, technology challenges or better opportunities.

Mike: Agreed, but if you have priced the product properly and the crowdfunds are released to you to complete and produce the product, there is no drag, quite the opposite. If you are launching a crowdfunding campaign without a prototyped product that is nearly ready to make then you have a major problem that could easily come off the rails. I understand Kickstarter has introduced a policy of requiring hardware prototypes to have been built prior to launching a new campaign which makes a lot of sense, Ian as you know better than anyone hardware is hard. A successful Kickstarter gives you your first 1000 or so customers who will most likely be more forgiving than someone buying in a shop.

Wardy: Using pledge-based or rewards-based crowdfunding pre-sold product business do create a ‘debt’, but where legislation is allowing CSEF then it is not a debt – its equity. It has the same economic advantage of direct equity investments by Angels or VC’s, but comes with additional practical benefits like the crowd of advocates.

Mike: I disagree, its a short term liability not equity regardless of the legislation there is no equity being issued (in some cases there is no legal entity, its an individual or a business name), however for all intents crowdfunding provides a very similar risk profile to equity for the startup without having to give up potentially valuable equity and I am fairly certain that most crowdfunding pledgers don’t expect to see their money if the campaign falls over nor is it likely they would ever take winding up action like a large debtor that has not been paid.

I am not aware of any major cases going through the courts in any jurisdiction as yet. Also there is no upside for the crowdfunder, in fact it is very biased to the entrepreneur but I think this is a good thing, if the product is popular, its a very cheap way to test the market to see if there is appetite without having to launch a business and build a product, factory etc. Content spruikers have been doing this for decades, describe a content product if enough people buy into it, produce the content. There have been many experiments with books as well, Stephen King was giving away the 1st chapter of new books and only completing the book if there was demand.

Wardy: As for crowdfunding making the business less nimble and able to respond to the evident changes required in their business plan – I can see how that could be true. My personal experience is that with polling and communication to the crowd you can assess the relative benefits of changes to strategy, which makes sense when its rapidly changing landscape such as tech. If the crowd thinks your change sucks it probably does or conversely if they think it’s a winner they will back that too.

Perhaps this is just my experience, but I have found Angel investors nail down the entrepreneur to a defined business plan that everyone buys into. The Angels I’ve had (I’ve never attracted VC money) are very reluctant to move (quickly) from the agreed business plan because it changes the management KPI’s and investment boundaries they committed to in the cool rational light of pre-money. I guess that is Investor specific.

Ian: I would agree that Angels are the lowest in my list of preferred investors. I invest in other people’s companies but only where I can take an active role in the operations of the business. I don’t see this as Angel investing.

Advantages of Crowdfunding

Marketing

Ian: One of the key benefits of product crowd-funding is its use as a form of marketing to geeks and early adopters when the product development is just about completed. Its a nice way to get your product noticed by a certain sort of person. But promoting a concept too early in it’s development phase is not always such a smart idea as I have mentioned above.

Mike: In the early days of Kickstarter it was about the funding to get something built, now most companies I talk to see it as much a marketing and product launch as raising the funding, in fact many of them often have Angel or VC funding, it has become an extremely effective way of getting a cool product market tested and in many cases where it is newsworthy major press coverage.

Crowdfunding Equity

Ian: I am unsure about micro-equity crowdfunding. Almost undoubtedly there will be a few winners under micro-equity crowdfunding schemes but many, many losers. I suspect that the return on investment (ROI) for investors will look like a very skewed Gaussian distribution with a small number of high returns, a handful of medium returns or ‘money back’ for investors, and a long tail of investors that lose all their micro-investments. (sounds like VC except there will be returns J ).

My guess is that this form of asset class will be loss making overall (negative ROI) simply because it is venture capital without the benefits of venture capital selection and mentoring (almost like Australian VC in fact, which has a long term negative ROI). This would mean that any committed investor would, the longer they invest, revert to the mean, i.e. have a loss making position. After a period of time any asset class which are loss-making (adjusted for risk) disappear.

Wardy: Did you say the Australian VC industry (my market) has a long term negative ROI? If that is true then crowdfunding should surely be used as tool to move this into positive for the VC’s by vetting and de-risking crappy deals so that the only ones they are exposed to is the medium and hot stocks. There is no reason a VC would come in a later stage and invest in an under-performing crowdfunded entity. Is it also true that the Silicon Valley VC industry has negative ROI, like the Australian one? Asked in genuine ignorance.

Ian: Australian VC historically has had a negative ROI. Tier 1 Silicon Valley VC is actually above the 20% ROI hurdle, i.e. profitable on economic basis. I have just written an article on the problem in Australian VC, but a quick summary is that the problems are people, fund scale, fund model and deal flow. My feeling is that equity crowd-funding would not solve these issues. But that is a guess only.

Mike: I also think that we have had such a small number of VCs In Australia with such small total funds and numbers of investments that it is statistically non valid, the sample size is too small.

Ian: I don’t know – the data I am looking at has 37 funds between 1985 and 2007, with a mean negative ROI for the lot of them.

David: Yet, we are seeing a lot of crowd funders and online VC structures replicating the single purpose vehicle structure that VCs have used for decades. OurCrowd, Seedinvest, Seeders.co.uk, and Funders club are the new players and more are coming. Some leading firms realize that there needs to be a lead investor.

Wardy: It’s my view that crowd-funding has a sweet spot between $50k-$100k and approaches limits (regulatory, practical and otherwise over $500k). This puts them in a different stage of funding to Angels and VC’s who enter on deals above that value. Equity crowdfunding is thus a feeder to established investment networks/channels. It sits further up the pipeline.

Mike: I don’t believe we should have purely crowd funded deals. I think we need a hybrid between a professional investor as the lead investor and crowdfunding to make up the volume of the round.

Venture Capital has been pretty broken in Australia for much of the 15 years I have been in around the startup scene. I believe that we will see Super Angels, who otherwise could have been Venture Fund managers, decide to start leading rounds with Crowdfunding taking the rest of the round.

In my opinion the following is an ideal scenario

  • Lead Investor leads $500k round, could be an individual or advisory firm but must put their money where their mouth is.

  • Lead Investor does the due diligence.

  • Crowd Funders follow with $500k-1m.

  • Lead Investor picks up a small capital raising fee for the funds raised

  • Lead Investor is the Director on the board representing the Crowd

  • Lead Investor picks up a similar MER to a VC for managing the Crowds money (this is reasonable in my opinion and is most likely thing to stop crowds being ripped off)

  • Lead Investor gets an extra % of carry for leading the round and sitting on the board.

  • If the lead investor is successful they will have more people willing to back them

This could in fact be a great way for smaller VCs to leverage their funds by allowing Crowdfunders to back them and to still earn income on the management fees.

Increasingly good entrepreneurs who have had successful exits will reject traditional 10 year VC Fund cycles and the pain of raising a fund (especially in Australia where many have failed to raise funding even when backed with Government IIF funds). The flexibility of a crowd model means not having to raise another fund, simply find a great deal, do the due diligence put it up on a crowdfunding platform, do a deal, if you have been successful then the crowd will back your judgment and put their money behind yours. You earn a higher management fee and carry for the work, potentially it could be similar to the management and carry structure of a traditional fund.

David: I have been advising angel networks for over 2 years to embrace crowd funding and become the lead investor of crowd funded campaigns. The UK has accomplished this with Syndicate Room that has now been operating for over a year. Business angels take a lead investment of at least 25 percent of the raise and crowd funders and other angels can co-invest under the same terms. They just closed a £590,000 investment.

Ian: It’s clearly early days and what you are describing is the start of an experiment. Micro-equity crowdfunding looks to me like venture capital with a few positive attributes removed For some its simply a source of cheaper and dumber money. If someone can come up with a mechanism to overcome some of the potential issues, as Mike has suggested (e.g. placing a ‘rating’ on entrepreneurs so the punters are making more informed bets) then maybe things might work out. Having said all that if the whole thing is promoted as a ‘gamble’ managed through the betting shops alongside the horses then maybe it will take off anyway. Compared to investors, gamblers subconsciously do expect to revert to the mean of a negative ROI.

Wardy: Through the lens of a VC there would be two types of deals, good ones and gambles. But through the eye’s of a CSEF-nut like me there are 2 types of experiences: the ones I have when i interact with other people’s businesses and the experience I have when it’s “my business” (no matter how small your equity stake or voting rights, the experience of “mine” is huge). Having more people buy in to an idea has a value in “network effect” that mysterious “network effect” must have value otherwise the prices paid for successful tech plays Tumblr, Twitter, Snapchat etc are a ruse.

Ian: I get that – if the primary intention is have fun and be recognised as part of the ‘club’ then I think this model will be a roaring success. I also recall it took a few cycles, 3 or 4, for the current VC model to settle down into something worked. All the negative scenarios had to be understood and then factored out – this is what you see in standard deal docs. It might take a few cycles for crowdfunding to get sorted too.

Crowdfunding vs VC

Ian: Good VC in Silicon Valley has very special due diligence and supervisory skills. One, a very defined means to select investment based on years of partner specialization in a market segment where they know all the corporations that are buying companies, where they have worked themselves in both corporate and start-up CEO roles. Two, ability to mentor company including finding valued co-investors, new CEO’s and other management, board overview and strategic input, and exit guidance, introductions, and execution. Three, VC’s solve problems with excess capital (in the US).

Mike: Yes this value add is what is expected of the VC, I am not certain this happens in real life.

Ian: I expect to see a lot of micro-equity crowdfunding pop-up, especially where there are tax incentives for investor/gamblers (as in the UK). Remember it takes ten years or so to assess the value of a new financial asset class, and even longer if there is a macro-economic event (like a GFC) to confuse the results. I honestly hope that a sensible model does emerge for micro-equity crowdfunding, but you have to remember that there is already too much VC money in the market. Adding micro-equity crowdfunding to the mix will simply depress financial returns for all investors because what doesn’t change is the M&A/listing value of the sum of all the exits – you simply can’t make quality exits by pumping money into the front end creation of start-ups (because quality deals rely on a fixed quantity of quality entrepreneurs). Just for clarification here – across the whole market for start-ups the amount of money going into the sector simply has to be less than the total value of all start-up exits, or else the asset class is loss-making.

Wardy: Is the whole asset class of tech start-ups (incubated, funded and matured the way they are) loss making?

Ian: For the last decade, yes, VC globally has been loss making simply because too much capital was committed to VC early in noughties when LP’s got a little over excited. We are still working through this overhang of excess VC capital and excess availability of new technologies.

Wardy: Also, I’d make the point that the destiny for many crowdfunded business (unlike tech startups) is not to be listed or trade-sold in 3-5 years. Many crowdfunded ventures will be products of a tangible nature, niche servicing businesses and local businesses that are sourcing equity and customers concurrently.

Ian: None of the key VC characteristics will available for micro-equity crowdfunded deals so one would expect a much lower quality of return on investment. In fact it could be worse than expected since the deals that go to micro-equity crowdfunding might in fact be the deals that are sensibly rejected by VC. Another by-product of not having VC mentoring is that entrepreneurs will not learn much by failure, and hence the current rule that ‘5 failures of a founder will lead to the sixth success’ will be broken.

Wardy: Might be just me, but if the Australian VC industry has negative ROI, the average Silicon Valley VC has negative ROI and the whole asset class of tech start ups is loss-making, then the business model for finding and funding of these businesses isn’t economic and the VC’s are either not adding the value they believe they are or tech startups is not a good investment with or without crowdfunding playing a role.

Surely Ian can’t be saying VC’s do a good job of vetting, funding and accelerating ventures if my understanding of what he has said (negative ROI for the asset class) is correct?

Ian: Tier 1 VC is good. The overall problems in the sector is that Tier 3 in the US and VC in Australia isn’t anywhere near as good. So one can’t paint the whole asset class with the same brush.

Mike: I agree deal quality and due diligence is a big issue in a crowdfunded deal (as it is in any deal) which is why I think we need a Lead Investor with crowdfunding backing him up.

Ian: Yeah the problem here is that I, for one, as a lead investor don’t want to deal with a bunch of micro-equity crowdfunding punters as co-investors and shareholders. I would prefer to deal with one or a small handful of professional investors that I know and trust.

Mike: What if there was a reward for this which provided a similar financial result for you as running a VC fund (ie carry and management fee) without the pain of trying to raise a fund. It would certainly be more flexible and nimble. At some point this would make financial sense and for you it would lead to leverage you can’t get on your own.

Angellist is running a similar concept called Syndicates

Angellist Syndicates

Angellist Syndicates

Ian: I would have to trial it first before I answer that, or better still watch someone else trial it!

Ian: There may be a disconnect between entrepreneurs and their source of capital. It is human nature to take more care of capital if one knows the individuals representing that capital personally and they are sitting on your board. I expect micro-equity crowdfunded companies to be looser with their fiscal or operational responsibilities.

Wardy: The counter argument is that the crowd minimises the risk of a person being fiscally irresponsible because it is shared with many people if they are. I’ve known many mates who don’t talk about being ripped off in deals where only a small number of people are players because they feel personally embarrassed at having been swindled. A crowd thats embarrassed feels rage not shame. Pity the repeat crowdfunders that are fiscally irresponsible.

Mike: These are reasonable concerns, again having a known lead investor with their own money invested should resolve some of these issues. Also if there is a platform to facilitate the management and corporate Governance of investees companies will be forced by the platform to adhere to the funding rules.

I see a crowdfunding platform which does the following

  • Allows a business to create a fund raising IM (in a standardized template so that they can all be benchmarked)

  • Allows Lead Investors to sponsor a deal (somewhat like a Broker/Underwriter) does for an ASX listing, these would be their mentors and then board directors as well as representing the crowd in critical business matters.

  • Allows comments, questions, ratings by crowdfunders on each deal with funding commitments locked in once committed

  • Perhaps a Lead Investor could have two director seats, one for himself and one for the Crowd

  • The crowd could vote to remove a Lead Investor if they lost confidence (as normal shareholders do now)

  • The platform could have a messaging facility for each company being required to file updates and financials monthly to the investors via the program

  • The platform and the Lead Investor could develop KPIs an investee company and those are reported on in the monthly update

  • All critical business matters which can be delegated to the Lead Investor will be

  • For Critical Business matters that cannot be delegated, the platform can manage the process of calling a meeting.

  • Potentially this could also handle digital proxy voting and digital voting

Wardy: In relation to the CSEF legislation that Australia is considering chief concern is the way intermediaries can provide processes for Issuers that support governance concerns of Investors. This has yet to be tested in Australia, but I would be interested in the UK experience of governance, disclosure, transparency and Investor confidence in deals. David?

Ian: With many small investors micro-equity crowdfunded companies will have a large administrative burden associated with keeping their investors informed and any process that requires shareholder approval (and there are many of these) will be a logistics nightmare and very expensive. And worse still it will be slow.

Wardy: In most cases the funds and rights of the crowd are pooled to special purpose vehicles that then deal with the crowd-derived investors as a single group.

Mike: I take your point however these can be circumvented by passing a critical business matters provision which the lead investor can exercise for matters such as capital raising, sale of business etc. Again if a crowdfunding platform incorporated a lot of this it would go a long way to solving these issues.

Ian: There are restrictions under corporate law which make many critical business matters subject to shareholder approvals. You can’t get around this at all. And if you try, and the company ever ends up being worth something, you will find yourself in court for ever. Spurious or otherwise, this will happen.

Mike: How about if the platform provided a digitally signed proxy vote?

Ian: One interesting class of finance is Venture Debt. It represents about 10% of start-up funding in the US. This is repayable loan finance to start-ups with high interest. 10% is about the right level since it represents the ceiling of equity to debt levels that mean debt can be repaid with appropriate risk factors and interest rates. Today all venture debt is by managed funds – I think that in the US that micro-equity crowdfunding could be an alternative and cheaper means to raise Venture Debt. I am sure this benefit wouldn’t passed onto start-ups, but in a competitive market you never know. Cheaper venture debt would be a good thing.

Final Words

Andrew Ward: I’ve found the above fascinating. I’ve drunk the “kool aid” (I’m a convert to CSEF) as it were and think that CSEF is a great economic activity because it creates real businesses (often with markets ready to sell and refer), it un-taps investment classes and far from being a gamble reduces risks of investment.

This discussion is focused on tech rather than product businesses and definitely more than local infrastructure projects where I believe the sweet spot for CSEF is.

There appears to be no science to picking winners and exits are few and disproportionate when they come. Voyeuristically watching tech plays and the funding avenues at a entrepreneurs disposal is akin to Survivor. When those entrepreneurs have a high profile its like watching Celebrity Survivor.

If I understood all of the above comments from Ian correctly, this game of Survivor is being played for negative ROI!

If CSEF isn’t embraced by the tech community as a source of good deals and later recognised as a great start to businesses going from “idea to operational”, then I’d be surprised.

However, CSEF is not just a tech play, its about small business, niche business, local business and the experience of “my business”. Crowdfunding businesses not tech start ups is the future for crowdfunding.

The internet, social media and collaboration pieces merely enabled the human or social desire of people to do with their money something of meaning that has instant and delayed gratification in it for them. Hence why crowdfunding will sustain and why so many platforms are springing up.

Investing in crowdfunding platforms is a gamble for instance because of the thousands that have popped up there will be only a few in a couple of years time. If I were a VC looking at platforms to invest in, then I’d be nervous if their core marketing plan didn’t have clearly stated focus to help create real revenue generating business from day 1, like those that sell tangible products or those in the community space (local economics) where the same business model would be rolled out across many geographies. In essence where people would locally crowdfund and locally consume the services provided by that crowdfunded business.

Taking that dimension of tech plays – high rate of failure and applying it to the high rate of platforms that will fail in the next 24 months is not a fair comparison to how crowdfunding will perform as an investment class over the next 10 years. Being a bit uppity, I’d say CSEF has as much reason to be buoyant about its future in the real world investment space than has the tech space. The tech space though I think needs to have a good hard look at itself. So much talent, energy and creativity going to waste. Such a weird sales funnel, subject to Zapfs law, Moores law and eroding financial models. Tech investments are a gamble for VC’s.

So back to how can crowdfunding help tech investors?

Well, in my world I see crowdfunding being pre-seed and seed investment (usually $50k-$100k). The very top of the sales funnel. Crowdfunding sorts the wheat from the chaff.

Usually that money is pre Angel rounds and definitely pre VC. Its where Friends Fools and Family operate if the entrepreneur is lucky.

By definition if a deal has been successful at gathering a crowd of investors it now has advocates for customers and that de-risks these now seed-funded ventures when compared with seed-funded ideas that may be pre-revenue and yet to have a database of customers or advocates.

The crowd weeds out ideas that just aren’t that good and delivers a better quality idea.

But the process also weeds out bad entrepreneurs, they have to make a compelling pitch for a start that convinces people they can execute this good idea (at least to the next stage). They are (country specific) vetted and unable to commit fraud or disclosure breeches – which reduces DD costs for Angel or VC funders. And you have real time evidence of their ability to continue to manage their crowd of investors and show you how they will manage your money and expectations. Finally there is social pressure to perform above and beyond with increased shareholders. Far from being nameless and faceless these shareholders are a community able and willing to talk and so the entrepreneur is going to be “on game”

The risk of enterprise is smaller with crowdfunding being there at the birth of an idea as it becomes real. The risk of entrepreneur is also diminished.

There was mention of the concern about shareholder numbers. But my understanding is that most tech ventures that are crowdfunded don’t take the crowd directly onto their shareholder register and these class of shareholders (the crowd) are pooled for the purpose of keeping the share register friendly for Angel and VC investment down the track.

If that pooled group of shareholders are represented at board level or not would be a decision on a deal by deal basis. But the risk of that representative being a moron is not higher than the risk of an entrepreneur thats had to put his uncle on the books when his uncle gave him his first $50k-$100k seed funding.

Angels and VC’s can then further improve their odds of backing winners by having lead Angels and syndication alongside the crowd. That seems to give investors in the tech space greater confidence.

Ian: What I have learnt from this discussion is that crowdfunding in one scenario might be a funnel for VC, but that it might be more useful for the funding of small niche companies that might never need or want VC funding. These companies are pretty much about great design and they use off the shelf technology & service providers to both design and build their products. If the models for crowd-funding are focused on these latter types of companies then the whole thing makes a lot more sense. The role of crowd-funding is then to help turn projects into SME’s, by the use of financial commitment (to the company or their products) of the pre-converted. Surely the internet, if it has done anything for us, has enabled small companies that are totally ‘outsourced’ to efficiently compete with the large global incumbents and, if so, maybe crowdfunding is their natural source of seed capital.

Mike: The one comment (and this is for you Malcolm Turnbull) I think Australia is too much of a nanny state to provide a functioning Crowdfunding regime. (except if you are in WA, then its ok to sink tens of millions of dollars into Mining Exploration Non Limited’s that sink and get re-listed as Tech companies)

Over the last 10 years Australian politics has become increasingly focused on taking responsibility for every dimension of society and incessant rule-making.

I think we will have trouble with this as a country, I believe we will struggle to pass legislation which provides a real crowdfunding framework and I think the Government will try to enforce some form of adherence to the Financial Services Licensing regime and I think the end result will be a watered down sophisticated investor regime where only accredited advisors can help companies get crowdfunded by a small pool of investors.

In my opinion Equity Crowdfunding will probably have to happen in some other country like Singapore that is trying to encourage startups and other means to promote growth companies.

It is my prediction that Singapore is going to become the Silicon Valley of Asia, the programs being offered by Singapore’s Economic Development Bureau are miles ahead of Australia in creating a climate that encourages startups and large tech companies to move to Singapore, they also offer a very easy visa program for your family, submit a valid business plan and they will allow you to enter and leave the country as needed for as long as the business is valid. Frankly they also have a very attractive tax regime and apparently are offering very attractive financial incentives to relocate or startup a business there.

If Australia wants to be competitive on a global basis, they should look to beat Singapore.

As always we encourage your comments. Tell us what you think of Equity and Project Crowdfunding in the comments section below

 

ents.

Enhanced by Zemanta