Equity Crowdfunding

Daniel Isenberg, Professor of Management Practice at Babson Global has written a controversial article for the Harvard Business Review titled “The Road to Crowdfunding Hell”

He builds his article around 4 main points:

1. Equity Crowdfunding is based on inappropriate extrapolations from other similar-appearing activities, such as donation crowdfunding.
2. Purchasing equity (stock) in early stage ventures is too innately complex to standardize.
3. The conduct of due diligence in the ventures raising money will render crowdfunding prohibitively expensive and thus impractical.
4. Crowds are stupid as often as not, or worse.

1. Inappropriate extrapolations
If you know you are going to get a “prize” from say Kickstarter you are going to get fairly instant gratification for your “investment”. With equity investing it is all based on hope. You hope that the founders will accept your share application, process the funds responsibly, issue you a certificate … and then be truly responsible custodians of the funds and use them to deliver on the promise they made in the communications they proffered. Equity is totally different than pledge or lending. Upfront strong risk warnings are needed and these need to be mandated by legislation. We cant have a pecuniary interest nor offer advice. To ensure offers are “fair” to both parties we have evolved to having in-house legal and the costs associated with that. Also with “hope” rather than a “prize” 3 monthly updates are necessary so the investor isn’t left in the dark as the business evolves. So yes extrapolating from the near instant gratification of a new watch strap to the hope of an exit at least 3 years down the track is a big jump that most equity based crowdfundung sites seem to have done starting out with physical layouts that all look like Kickstarter.

2. Too complex to standardise
This is a constant battle. Entrepreneurs usually dont have much of a clue about governance and responsibly raising and respecting equity capital and Investors see the glint of a quick return. However we have found through having dedicated Case Managers for each raising and a string of standardised documents and processes the burden on the individual is a bit cumbersome but certainly not light. A combination of smart computer systems and trained people have standardised the process but it has taken years to get it to where it is at.

3. Prohibitively expensive
The figures to date show that around $500,000 upwards needs to be sought in order to make the raise feasible. Below that costs take too much of the raising to make it palatable. If legislation was widened to make it more than “personal offers” to people you or the platform has contact with this figure might drop lower. At the end of the day while our platform is entrepreneur friendly internal compliance standards are essential but costly to protect investors as well as we can in this high risk area. There is a significant lifetime cost of issuing and maintaining each share in an entity that precludes small investments.

4. Crowds are stupid
Robert Cialdini‘s “Social Proof” seems to play more than a small part in equity investing. People follow what other people are doing. For that reason rigour in compliance is required. However we havent found social proof to be as contagious as pledge based crowdfunding. The reason is that the convincer needs to be a lot stronger in equity as hope is the main ingredient. We prefer listings that are further down the track, making real money and requiring growth capital. However at least half of our listings are early stage and there are seldom figures one can bank on.

To raise capital there must be 5 things.

 1) A Convincing, Compelling Story

 2) A Balanced, Passionate, Likeable Team

 3) Impressive Credibility for the Team and Story

 4) Lots of Suitable People to tell the story too

 5) Lots of Compliant Ways and Means to tell the story.

If you are seeking say $1 million by the sale of equity capital even if you score 10 out of 10 for the 5 things above investment is not going to come in in $50 and $100 lots and reach your total. Hope peppered with compliance rigour will not fuel the momentum required so although the crowds can be stupid legislation and the fear of getting a bad reputation on the internet can lesson this stupidity. Of the 176 raisings we have had 152 are still operational several have listed on stock exchanges and many have exited through trade sale. I know this is the area where you want the stats as it is where the rubber meets the road but on studies so far we would be above the typical figures bandied around for Angel investment.

Related articles

• Ahead of the JOBS Act Rush, CircleUp Launches Crowdfunding Platform (allthingsd.com)
• The Road to Crowdfunding Hell (blogs.hbr.org)

Cropped transparent version of Image:Olympic flag.svg (Photo credit: Wikipedia)

Alistair Niederer writes about the first truly social olympics.

Last week marked the milestone that it is now 100 days to the Olympic games in London. These milestones are a little artificial as the 100-days-to-go mark really means nothing other than it’s getting close now, but as the people of London have been waiting for seven years I guess you could say that being in double-digit days until the start is worth celebrating.

I would like to draw your attention to something that I find really interesting about the London Olympic games – that it will be the first time there is a truly social online Olympic event, there is even an online hub connecting fans with athletes. I know that Beijing was in 2008and social networking was being used then, but it was not as common as it is now. Four years ago most people were only just getting started with Facebook - unless they really were early adopters.

And the biggest difference between then and now is the explosion of mobile computing – smart phones. The Apple iPhone has changed the world and yet it was only a year old at the time of the Beijing games. Now we are up to the fourth generation Apple device and Google have released Android - the smart phone with a built-in camera connected to the Internet is now ubiquitous.

So why does this matter?    ….. read more here …

Reading Bob Gottliebsen’s article on investing in shares in Business Spectator should have got you thinking.

To an investor what does”Investing Productively” mean?

Bob picked up the theme of my talk based on a blog post on capitalunderdogs which was that investing by individuals today is predominantly driven by charts, numbers, spreadsheets and stock picking software but he went further and likened it to a casino.

“Investing Productively” can mean many things but in the context of an investors money being put to good use it means that the money an investor invests …

• Creates jobs
• Grows businesses
• Fosters innovation

• Creates jobs
• Grows businesses
• Fosters innovation

At present this $63 Billion only represents 4.7% of all the funds invested. In the “good old days” if you wanted to say build the Princess Theatre in Melbourne you would raise the funds by issuing shares. The investors would be investing their money in a project that …

• Creates jobs
• Grows businesses
• Fosters innovation

Today an investors funds are more likely to be passed to another investor who has chosen to sell out of a stock or share and invest in another.

 

If an investor invests in stocks or shares for a company raising investment via ASSOB, Wholesale Investor, AIN, Angels Networks and Private Equity and Venture Capital firms, 100 percent of the funds invested go into the entity raising capital.

 

While these organisations and affiliations continue to primarily reinforce the opportunity that shares and stocks were originally issued for this is not so for the majority of shares transacted through stock exchanges.As Bob said  ”For the last century or so stock exchanges have conducted that capital raising function, but these days stock exchanges have been turned into massive casino-style trading houses where capital raising is less than 5 per cent of what they do.”

 

Stock exchanges need to re-evaluate their place in the business development value chain as with the way the Internet has changed the paradigms for industries that were “going to last forever” they may find the need for their services in the future being grouped and legislated within the category of gambling and speculation.

 

Stock exchanges evolved due to the inability to easily connect investors that wanted to buy or sell. Same with 78′s, LP’s, CD’s and DVD’s. People needed to physically visit an outlet to obtain there latest release. Not any more. Music aficionados can now buy direct from the artist.

Friday morning there were around 100 investors that fronted up for the ASSOB Breakfast Pitch Event in Melbourne to listen to nine  companies that were raising capital.

There are still two events left in the series.

One in Brisbane.

One in Sydney.

There is a good article about the event in the Business Spectator. Thanks to Bob Gottliebsen.

The main message was that when you invest via the ASSOB Capital Raising Platform 100% of the funds raised go into the entity raising funds so that they can employ staff, grow their business and create new products. With ASX listed companies only 4.7% of the funds investors purchase shares with each year end up in being used for productive purposes like  employing staff, growing their business and create new products.

In the “good old days” if a railway was needed investors invested directly into the railway project. With ASSOB listing this approach lives on for SME’s looking to raise between $300,000 and $5 million.

It was refreshing to see nine companies pitch their investment opportunity to investors and get the opportunity afterwards to talk to the companies they were interested in to see if there was any common ground. Each company had around 5 to 10 powerpoint slides that they used for their pitch that followed the following basic format …

• INTRODUCTION SLIDE to Introduce Yourself, your Company and your Big Idea.
• PROBLEM SLIDE or what they are solving and the prize for those you choose to be involved in the journey.  Describe the pain the product or service alleviates.  Reading it should get people nodding and saying … wow … I could be interested in a solution for this.
• GENERIC SOLUTION SLIDE or how competitors are solving at the moment and who the competition is.
• SOLUTION SLIDE and how it works.  Explain how the solution alleviates the pain.  Make sure your value proposition is clearly articulated.
• MAGIC SLIDE which clearly communicates the unique selling or value proposition. What is the magic in this solution?
• STATUS SLIDE covering Project Status / Milestones Summary / Marketing and Sales Strategies – to give context and put the investors feet on the ground.  How will you reach your customers and what are your leverage points?
• TEAM SLIDE name the management team and the contribution they make – very briefly!
• PROJECTIONS SLIDE covering projections ,sales to date, profits, customer growth and whatever else they have
• TIMELINE SLIDE with funds required including scarcity and time constraint with rounds and red squares (with the sponsors input)
• ACTION SLIDE with how to contact you and follow the matter on ASSOB

Image via Wikipedia

Had a glance at the Apple product timeline and on reflection Apple products have been a big part of my life.

Apple computer products owned 

1979 – NZ – Apple II- used for VISICALC (first spreadsheet) and games sold to Hamilton Jet family

1985 – SING – Apple IIc Plus – Mostly used for games

1989 – SWE – Apple SE/30 – Stopped off in California and bought on way to Sweden – Used for accounting, Compuserve and AOL.

1992 – SWE – PowerBook Duo 210 – Mostly used for Accounting software as well as Mosaic then Netscape the forst WWW browsers.

2003 – AUS – PowerBook G4 Aluminium (17″) – Used for everything including seminars etc through data projectors (still going strong! – PowerPC)

2007 – AUS – iMac (Intel-based) 24 inch 2.0 GHz (T7300) Intel Core 2 Duo (still going strong) – Dwsktopm used for day to day work

2009 – AUS – MacBook Pro (Unibody) 15″ – Used for portable computing (still going strong) – used when travelling but retired

2010 – AUS – Apple iPad (Wi-Fi) (still going strong) – used to read books

2011 – AUS – MacBookAir 4,2 (13″)  256 GB 1x Thunderbolt port (still going strong) – used when travelling and is an awesome computer

Related articles

• Steve Jobs: A timeline (news.cnet.com)
• Steve Jobs: The Products (businessweek.com)

If any of you have attended my capital raising seminars over the years you will have experienced the strong shift towards obtaining investors through people discovered during “Discovery Sessions”.

Discovery sessions are intensive sessions where followers of the business, founders or technology can be uncovered. Crowdfunding is leading the way here and in effect ASSOB Capital Raisings are successfully because they gather, engage and count followers of the business, founders or technology very successfully.

Read more here: Followers: Raising Capital of $1.5m through 304 followers worth $4804

While some businesses seeking funds get a lucky break and one investor may take out the first round of say $300,000 in one go normally it is a more measured process. Usually it is friends, fans and followers of the business that take the first few parcels, then as time goes on the more professional investors enter the fray.

Loved this article from StartupSmart

Six degrees of investor separation

That fringe moment at the end of each meeting. Maybe as you open the car door to go. “Look I’ll get back to you” they say…. but “You should really meet X”.

Recognising that signal is worth gold!

OK so maybe they feel guilty that they cant invest in your business. You are probably best to swallow and mumble “Some will, Some won’t, So what” (then amplify your hearing and wait). That fringe comment, usually coming from guilt, as you say your goodbyes, could lead to your next investor.

“Look I’ll get back to you” they say…. but “You should really meet X”.

Thats why I like this article, it has chosen a moment most people miss. Uncovering these moments is an integral part of every ASSOB “Discovery Session”.

Today’s startups look to …

• have a shorter life
• require less funds than previously
• be more transparent with google, as past and future stakeholders can be checked out
• have found that private equity from platforms like ASSOB and Angelsoft are often a better match than venture capitalists
• will have more rather than fewer individual investors.

More details on startups at the Capital Underdogs blog.

Related articles

• Angel Investors and the Golden Rules, Part I of V (briancorkhumancapital.com)

Image by OZinOH via Flickr

Spent a few days last week at the Australian Angel’s annual conference In Newcastle City Hall, NSW Australia.

It was inspiring to be among some many people that really care about early stage companies requiring funding.

Also they are networked worldwide and share deals, contacts and expertise. It showed that no matter what country attendees were from similar problems and opportunities exist worldwide.

One powerful role “Angels” provide is that of mentorship. They are often actively involved in the growth phases of the business.

If a business doesnt have strong mentors then it may not have the capabilities to succeed.

I’ve written a blog post about this over at Capital Underdogs.

Enjoy!

In April 2010 I tried an experiment for a week working from a place called Huay Yang in Thailand.

With wireless internet, Skype and the occasional mobile call it worked perfectly. That set the stage for a larger endeavour. Heading off to Thailand for a month at Xmas time with the last two weeks being working weeks. That is from the 10th to the 21st of January.

Set up was an iPad for web work and the occassional email from out on the verandah, a Thai mobile SIM card in a cheap mobile, a MacBook Pro with a cloned copy of my office hard drive, my iPhone with roaming turned off but SMS still receiving and a Polycom Skype Communicator.

Working virtually from Huay Yang or Huai Yang worked briliantly and for those wanting to do so you are welcome to contact me or take advantage of the info below.

Firstly … Where is it. About 5 hours south of Bangkok by taxi

Secondly … How to get there. From Bangkok Airport two recommended ways to get to Huay Yang

By Bus. Other than taxi the most comfortable way to HUAY YANG is by air-conditioned bus.  From Bangkok’s southern bus terminal (or Sai Tai Mai in Thai), you can catch the bus of BANGSAPHAN TOUR company  from 07.30 a.m. to 23.00 p.m. daily (almost every two hours from Bangkok). The ticket costs about 315 Baht per person. The journey takes about 5 hours to HUAY YANG and the bus will stop 20 minutes for lunch/dinner. They should know Huay Yang but if not the nearest large town is Prachuap Khirikhan.TO KNOW YOU ARE ON THE RIGHT BUS LINEAs long as it goes through the following major towns … Bangkok, Hua Hin, Prachuap Khiri Khan and Huay Yang. Other busses not with BangSaphan  Tour Co will go through Bangkok – Hua Hin – Prachuap Khiri Khan – Huay Yang  but this is the one the local bus station recommends. When you get to Prachuap Khiri Khan it is about 30kms left so ask the bus driver to let you know when to get off at Huay Yang

TO KNOW YOU ARE ON THE RIGHT BUS LINEAs long as it goes through the following major towns …
BangkokHua HinPrachuap Khiri KhanHuay Yang

By Taxi. There are many different Taxi Drivers that specialise in this route. They will meet you at the airport at any time 24/7 and transport you to Huay Yang. It takes around 5 hours but boy is it worth it. They will also transport you back to the airport or to Bangkok if you want to stay a couple of nights. The taxi service we use is