Convertible Loans as a Band-Aid Solution to the Valuation Problem in Equity Crowdfunding

What’s happening: the industry wants equity

It’s ironic that crowdfunding makes it possible to set up companies that otherwise never would’ve come into existence, only to ruin them later by postponing the valuation issues that any start up will have to solve sooner or later. Might the positive start of crowdfunding come to a halt due to unsavoury developments, convertible Crowd Fans Audience Trafficloans specifically, within the equity-crowdfunding branch?

The good news first: crowdfunding continues to grow, especially equity crowdfunding is catching up. From the beginning of this year, equity crowdfunding has seen a delayed but sharp increase compared to the other forms of crowdfunding (donations, rewards, loans). A development that is projected to continue along with the funding volumes in this niche. The fact that (somewhat) complicated capital forms are being adopted means that entrepreneurs and investors are ‘reading up’ and that the industry is maturing. Reason for some platforms take their chances and claim they’re offering equity crowdfunding: without solving the valuation issue.

The sweet and sour of equity crowdfunding

During the last decades, Europe has been heavily hooked on bank loans much like the U.S. was in the ‘80’s. Since the financial downturn (and now its projected upturn) entrepreneurs have had to develop some creative financial income streams, one of them being crowdfunding.

Equity vs DebtEquity crowdfunding is a specific type of income generation that a lot of people have never learnt to control or deal with sufficiently. They’re simply not educated in this field, which explains why peer-to-peer lending has seen a major increase in the beginning of the crowdfunding era whereas equity has been a slow starter: people don’t understand so people don’t use it.

Now that equity is increasingly being adopted by investors and entrepreneurs, more platforms are eager to claim that they offer equity-crowdfunding. But the problem they run into is valuation. It’s hard to valuate a company that (often) hardly exists. And in contrary to traditional entrepreneur- investor settings, there is no discussion on how much a company is worth because.

The crowd often receives a certain valuation as a ‘take-it-or-leave-it’-offer, and investing means you agree with the valuation. Some platforms like CrowdCube offer the opportunity to ask for a “Alternative Offer” but 99% of the equity platforms isn’t that well developed. On top of that, even when the crowd does discuss a company’s worth, they often lack the knowledge to create a factual, calculated value.

So what do platforms like ReturnOnChange, Fundable, Seedrs or the Dutch platform Wekomenerwel (“We’ll-get-there”) do: they offer convertible debt as a way to delay the valuation issue.

Why are convertible loans bad for the crowdfunding industry?

Mark Suster, a two-times entrepreneur turned VC, has written extensively about the pros and cons of convertible debt in the traditional setting (not crowdfunding), explaining the difficulties in this form of equity instrument.

For those not informed, a convertible loan is a loan you get from a (potentially) future investor with oftentimes a very low interest rate, because the creditor belies that at a later stage he’ll be able to acquire part of the company for a relatively low price.

What’s so great about convertible loans?

If you don’t know exactly how equity investing works or what it might mean for your company (which unfortunately is the case more than we’d all like to admit) let alone cracking your head over a reasonable valuation, convertible loans sound pretty good. It’s a loan against fairly low interest rates. And when the creditor in a later stage becomes shareholder, he often doesn’t own voting rights.

The only catch: you don’t know what price you’re selling your company for, you’ll decide that later. I understand that in specific cases a convertible debt seems a good decision to make, especially for start-ups who often can’t (or don’t want to) spend a lot of time and money on the legal requirements of setting up the entry of a (direct) investor in the company (which is an invalid point in equity crowdfunding if you have the right legal structure). But in comparison you’d never agree to buy a car, put down a certain amount of money on forehand and find out later that you should’ve paid much less considering the milage. You’d run the risk of a scam.

Within the crowdfunding industry the tendency has arisen to do exactly that: expose your company to bad deal. The risks include not being able to pay back the loan or develop crucial parts of your company because you have a loan, unreasonable and/or unnecessary dilution and even losing control of the company. And all because we don’t want bust our balls over a valuation.Discounted Cash Flow Valuation Firm Value

Valuation is unfamiliar, complicated and expensive and it belongs in the financial department according to many starting entrepreneurs, not in the product/marketing department of which most start-ups are made up of. That still doesn’t mean taking up a loan now and hoping for the best (which is what convertible loans often seem to come down to), is how we should develop equity-crowdfunding. Convertible loans in the crowdfunding area are used as an excuse to delay the valuation problem: not to solve it.

The answer to the valuation problem? Do a valuation.

Which is very strange, considering a solution is already at hand. There are several alternatives at hand besides going to your accountant.

One example is EquityNet’s Calculator, extensively described in this article, which aims to create a quick scan valuation allowing the entrepreneur to have valuation within a few minutes straight into your e-mail inbox.

Stack of Coins MoneyAnother example that was started as a side project by SmartAsset, is Startup Economics. Though the tool is great for getting insight in the relation between raised funding amounts and share prices, for starting entrepreneurs it might be a little too much too soon, asking questions “the maximum pre-money valuation at which the notes may convert into equity”. It’s great to ‘play’ around with the figures and see the immediate feedback so that you can quickly get a grip on what is what in terms of numbers.

Another option is Equidam which has developed an entire company around online valuation. You won’t be done in two minutes, but based on a combination of your quantitative and qualitative input and five valuation methods; you’ll receive a 20-page report (paid) or the first free pages including your valuation for free.

These might not be the only solutions, but for now, they’re the best online start-up valuation methods I’ve seen. It offers an objective basis for supporting you valuation and for a lot of entrepreneurs (if the data is realistic) it’s a wake-up call as well as a good bottom-line for the valuation discussion. The DCF with DG, DF with multiples, Scorecard Method, Checklist Method and the VC method are all included and the report covers 20 pages of data and explanation to back up the start-up’s value.

Like I’ve argued before, the crowdfunding field can learn a lot of things from the traditional capital markets, with convertible loans as a beautiful example. Crowdfunding platforms should take responsibility for the products they help to sell and actively work towards a qualitative solution for valuation instead of adopting a ‘head-in-the-sand’-attitude. Instead of polluting the feeble and merely developed crowdfunding market with exotic investment vehicles that often don’t work in a traditional setting either, let’s focus on creating a real solution: a decent valuation method for start-ups.

Editors Note:  Symbid holds a small equity position in Equidam

This article was previously published on CrowdfundInsider

The Real Difference Between VC and Crowdfunding? Investment Marketing

A few weeks back the value of VC’s for the crowdfunding industry was extensively discussed. Why? Because there are lot of areas where crowdfunding and VC’s can connect. And though traditional funding and alternative funding are not as rigorously separated as many want to believe, there are some inherit differences that characterise crowdfunding as a different form of funding.

Tanya Prive in 2012 wrote an article on Forbes describing crowdfunding as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”. Rachel Chalmers refers to as VC money as “fuel for hypergrowth”. In addition, VC’s are in the business of making money for their own investors. Besides the target audience (crowd vs. VC) there doesn’t seem to be clear difference if we look at equity crowdfunding.

In both cases the investor profits financially, entrepreneurs are requested to deliver certain information and investors need to be convinced. Then why worry about the differences? Because, despite being marketed as the go-to Holy Grail of funding, most crowdfunding campaigns fail, only 1 in 10 succeeds on IndieGoGo (according to The Verge’s great article). And not because they were all bad investment opportunities. The problem was marketing.

Timing of the money

A first, very well visualised differenced can be found via Startup Guide: the timing. As you’ll see the type of funding for each phase varies a lot. Of course there’s some overlap but in general, VC’s won’t invest in anything that isn’t creating revenue yet. Crowdfunding on the other hand, has the reputation to be solely for start-ups. In my everyday job as Symbid‘s proposition manager where I coach the entrepreneurs in their funding, I see very different companies.

Small companies that have been in existence for quite a time (between 5-25 years); film funds that have a million dollar budget but want to do some form of inspiring marketing; individual entrepreneurs who still have to write down their business plan; growing start-ups that come back every year for another round and companies want fast forward their growth, using the money for “hypergrowth”.

Because crowdfunding lets the entrepreneur be in control of their own funding trajectory, it can be used any time they feel the time is right. Of course there are some exceptions (if you have no time for it, then don’t do it), but it is the entrepreneur that is fully responsible for the how and when of the funding process.

The reputation and differences in outcome

Crowdfunding was the first aid kit for capital when no one else will give you money. Crowdfunding is a necessary evil, having a VC is a luxury. But is that true?

Chalmers gives five very compelling reasons why you’d want to stay away from Venture Capitalists as an entrepreneur. In summary, a loss of control and narrowing down business development options. The idea that most successful companies raise money via a VC is a urban legend in Entrepreneurship Town; lots of companies succeed without that money.

Again, via crowdfunding the entrepreneur stays in control for the most part. Though a good VC investment can bring lots of good for a company, the company is a product that the VC needs to make money in. While in crowdfunding, there’s a sense of togetherness, sharing and support backed by money. Different ways of funding your company that have different results and different outcomes for you company. And with all the sustainable, social and consumers as “fans”, one might start to think equity crowdfunding is starting to become the epitome of involving your customer.

Self regulated fund raising as a basis for the process & dynamics

Entrepreneurs prepare a campaign when starting with crowdfunding, instead of a single pitch that appeals to all VC’s alike. This also means “one at a time” vs. a full blown marketing crusade: that’s a VC funding quest vs. a crowdfunding process. Whereas getting the right network and subscriptions to VC-networks gets the entrepreneur one appointment at a time, crowdfunding requires to think about ways to reach your audiences and target markets as successfully as possible.

Questions like: what am I selling to whom, who is my target audience, is my own network a seperate group, is there a difference between my customers and investors, where are they, how should I address them, should we send out a press release, and so forth are not at all uncommon during crowdfunding. Whereas a entrepreneur wouldn’t send out a press release about his appointment with a VC, nor would he continuously (almost obsessively) update his network about the progress.

Though the information used as a basis of communication (business plan, financial projections, etc.) is often the same, the ideas and literal message are very different. If an entrepreneur decides to root for VC, their business will be tailored for a specific payback. In crowdfunding, the campaign in itself, a small ROI and the opportunity to make something possible, are the expected outcomes.

Instead convincing the VC’s the entrepreneur engages; instead of saying “your investment makes ABC possible” and entrepreneur has to focus on “together we can..”; instead of talking to a superior or someone the entrepreneur is dependent on, they’ll talk to their peers. Crowdfunding is weeks of continued marketing efforts in order to gather funds bit by bit, while VC money are intermittent,  singular conversations that aim to get a large amount of money at once. These differences highlight the difference between the characterizing dynamics for each type of funding.

Investment marketing

In short, whereas VC’s money is hauled in by “closing the deal” and single selling moments, crowdfunding really is investment marketing. If we look at the dynamics during the campaign I could swap “the company” for any other product and it wouldn’t be called “crowdfunding” but “marketing”. Analysing and setting up various campaigns, the 4 (or 7) P’s are a great way to make entrepreneurs think about what they’re selling and how they’re attracting enough customers, emphasizing the strong marketing dynamics that really separate crowdfunding from VC funding raising.

 

McKinsey says ‘Business Needs More Women’: Crowdfunding Can Support This Goal

Why do we want more women in business? Practicing gender equality is usually not the reason one starts a company. Are men making a mess of our economies and companies? Is “the men’s world” not functioning or failing in creating sustainable growth within our economies? No, not really. The vast majority of men in companies are good people and devoted individuals. By no means are men the ‘wrong-doers’ and should be replaced because of such a (faulty) reason.Then why does this discussion matter?

Women make companies perform better

Numbers don’t lie, especially not when they’re provided by McKinsey & Company: companies with some 30% or more women in top level functions, perform better. A lot better actually, according to McKinsey & Company’s yearly report “Women Matter”. These companies have better return on equity, 11.4% vs. companies who have significant lower amounts of women in their top layer of the company. In addition, operating results are better (11.1% vs. 5.8%) and stock price growth is also significantly better (64% vs. 47%). Women like Marissa Mayer and Sheryl Sandberg are examples of what women could potentially contribute to a company.

In addition, in 2040 Europe is expected to need another 24 million people to tackle the workload, and women are already there. Another reason why we need more women on the work floor is that they’re usually the main decision unit in household purchases, and I’m not talking about groceries. Women spend 71% of the household budget. In Japan, 60% of the women are responsible for choosing a car (now there’s a man’s-world industry for you) and in Europe 47% of the PC’s are bought by women. Notice the “glam” redesigned notebooks that are now available? Notice the advertisers bragging about low weight PC’s? You know why. Then why is it that, according to the Boston Globe, a company pitched by men is 40% more likely to receive funding? And how can crowdfunding change that?

It’s Partially Women’s Own Fault

A lot of women simply approach things differently. If you ask women why a project was successful, about 70% will tell you they were lucky, they worked hard, etc. Men will tell you they’re awesome, says research. In addition, women tend to not discuss their success and attribute it to others (the team). Costa Rica’s first female president, Laura Chinchilla says women are seen as weak because of this: “We understand success not as the result of just one person but as the result of a team,” she told Forbes’ writer Jenna Goudrau. “[It’s a] different way of dealing with power [that] is misunderstood as a kind of weakness.”.

On top of that, women deal with “double trouble”. First, it’s difficult to what Sandberg (and McKinsey & Company) to the “double workload”: raising a family and developing your career. Reports show that in the case were equal companies pitched by either a man or a woman, the man was more likely to receive funding. The reason? Maybe a story sounds more familiar to man when it’s told to him by another man, we don’t like what’s unfamiliar. Much the same way society might prefer a female child care taker instead of male childcare worker, a.k.a. “Manny”..

The Solution is Part of the Problem

If we want more women in business, what’s stopping us? Well, the women are actually. They stick together in Women’s Clubs, Women’s Awards, etc. Personally, if someone ever handed me the award for “Best company with a female CEO”, I’m not sure I’d appreciate it: “Here’s your consolidation prize, now go play with the other kids”, or, “You’re not bad at all.. for a woman”. It sucks to be considered a second rank “leader”, or cheerleader, as was Sarah Palin.

Then why do women do this? Because men do it too. The (in)famous “old boys network” didn’t spontaneously come into existence. Men-only business and networking clubs (as insightfully described by The Guardian)  have existed for over hundred years, plenty of time to establish the beginning of the just as infamous glass ceiling. And even though “Women-only clubs” aren’t going to completely solve the problem, I can definitely imagine that it’s easier to pack some punch when somebody has your back. And why desperately try to build that back up framework with a group of people that need some serious convincing (men), when you have another group of people that is very willing and open to support you: women. And though I have some serious doubts about this form of separatism, there is one specific area in business where women might actually help each other conquer the business: online investing.

Women Investing in Women: online

In order to get more women in (offline) businesses we need to activate women to pick up projects or start up companies. Tough when you’re faced with the barriers above but much easier when you create an environment where those barriers are minimized. Women have the tendency to fund a larger part of their company themselves as it’s harder for them to come by via men, according to USA Today. The result? A company that has fewer resources to fully develop its potential. The solution? Ask a woman to crowdfund the initiative instead of raising funds in the traditional way.

First, the chances of raising funds via a lot better. 42% of Indiegogo’s successful projects are run by women, says Geri Stengel’s Forbes contributor. These crowdfunding campaigns are often mostly funded by other women, according to. They also raise some 11% more money than men, and according to USA Today, women make better investors because: 1) they focus on long-term, non-monetary goals; 2) they are less prone to take unnecessary risks and do quality research; and 3) that men trade 45% more than women, leading to a loss of 2.65% on men’s net returns. And women lead campaigns get 1.3 more followers than men lead companies, according to CrowdExpert.

How does crowdfunding success get more women in business?

Women get a fair chance. No (or less) bias, more access to more investors, both men and women that, in contrary to the established funding industry, are willing to take chance in a woman lead company. There is more money flowing in women’s initiatives, giving women the chance to prove their potential. In establishing great cases, more women like Sandberg and Mayer earn a place in the spotlight, increasing the society broad idea that women can actually achieve something. That way, more and more people (men and women) get the live demonstration of what already has been proven: women make business better.

Final note of the authorI’ve never been much of “we need more women”-person. I believe in hiring the best and if that’s not a woman, I’m fine with that. As a result I was totally unaware of the fact that companies with a certain amount of women perform better, before writing this article. In addition, doing my research for this article I’ve noticed this discussion is very extensive (and quite interesting really) and I haven’t addressed all the related points on purpose. If you have any subjects you’d like to touch, feel free to share them in the comments.

Developing your brand identity? Think about your favourite band!

Composing a great brand strategy is like composing a great piece of music. Brands and music have a lot in common: tastes vary to a great extend, they underlie or confirm our values, they evoke emotions, they are used to identify ourselves and create frames of reference.

Music is an amazing phenomenon. Tastes vary widely, from classical music to dub-step and from hip-hip to JPop. What they all do is engage their listeners in a way very few other tools can do. People are inspired to pick up an instrument and spend hours practising, pay money to go to concerts and feel betrayed when “their” band quits. Rivalry over music has been immense from both a business perspective and on a personal level (“This is my songs!”). Indicators of ultimate happiness (weddings) and extreme sadness (funerals): music articulate in an intangible way what keeps us busy.

Brands, though often not as engaging, evoke the same responses. Nike or adidas, Mercedes or BMW, KFC or Burger Kind: our choices in brand define our identity (high quality or laid back), our lifestyle (adventurous or stable) and our ambitions (family oriented or global). There’s an entire website dedicated to describing “the Walmart person”, showing to what extend brands help us create a feeling not only products or services, but frames of references which we use for testing our life’s values, understandings, ambitions, and so forth. Orchestra1

The similarities are quite surprising and the lack of a (decent amount) of research between music and branding is remarkable. If anyone has found any interesting views or research on this topic, let me know in the comments. One explanation is the intangible nature of branding (and music). Sure, you have your brand document, cooperation with the marketing department, visual management guidelines and so forth, but if you’re asked to point out the one KPI that’ll make or break your brand, you won’t be able to.

Why not? Because a brand is greater than the sum of its parts. Put differently, synergy drives brand perception. What are the parts that drive this brand perception?

Different departments have different pieces to play

Just like an orchestra (or band, whatever you prefer) performing a single piece of music, it takes different departments to realize a united, fully performing outcome. Strings, brass, percussion, flutes: everything has to be aligned, timed and properly tuned. Every department has a different role to play (literally): base, effect or lead melody. The departments need to understand who’s doing what, and why. In addition, the departments have to have an overview of the full picture, but also have to know when to “tune in” (this analogy is perfect for word play). They have to work together as well as having their internal organisation up and running.

Different departments need different instruments, too. Marketing needs a combination between analytics, creativity and a commercial mindset. The financial department needs secure and reliable accounting software and IT needs an in-house programmer in order to immediately deal with problems when they arise. Once they have the tools, they need the knowledge and right mindset to operate accordingly to one or a few values. Orchestra_hall

If the CEO publicly announces to target a niche market of high-cost/ high-performance customers, the marketing department releases ads featuring a average income family, and the customer support department explicitly mentions that the (reasonable) request of high-performance customer X cannot be personalized due to cost aspects, the company has problem. Playing out of tune ruins the brand image like it ruins a musical performance.

Equity Crowdfunding Needs Educated Investors

Crowdfunding is hopelessly dependent on traditional funding sectors to educate a new generation of investors and fully develop the industry.

Locke Education 1693

The alternative funding industry values its’ own innovative and somewhat ‘rebellious’ character – two characteristics the traditional financial industry isn’t well known for. On top of that, “the wisdom of the crowd” is going to guide crowdfunding towards full development. I wonder what “wisdom” is referred to, as most crowd-investors are not at all educated enough to estimate company success rates.

Larger investors, with whom I’ve spoken a lot as a campaign manager for Symbid, often consider crowdfunding a drop in an ocean, or simply “fun”.  And large investors are right in saying so. According to The Economist, after 2008 USD 2.2 trillion less has been lent then in the previous years. While the traditional industry is capable of experiencing such enormous losses, the alternative sector still has to develop the size, which should have accumulated around USD 5 billion in 2013. 

The lack of recognition of crowdfunding as a serious industry often tempts the crowdfunding industry to emphasize their assets as “real” industry, featuring bold headlines proving crowdfunding matters and basking in the glory of growth percentages like 81%. Though it might be true that the traditional industry is not featuring, banks, VC’s, investment clubs, Angels and Angel Networks and online investment platforms have a lot more experience of funding trajectories, knowledge about specific industries, risk calculation, the meaning of (startup) KPI’s in company development and startup survival rates(which are pretty low, only 50% is still existing after year 5).

This is knowledge the crowdfunding industry desperately needs if it want to develop into the grown up industry it claims to be. So what can we learn from these financial giants and how can we create a hybrid funding process where both investors and entrepreneurs gain maximum benefits?

The crowd is not accredited for a reason

Stop Reckless Gambling Now Wall Street

Though accreditation of investors is admittedly holding back the (U.S.) equity-industry, making accreditation of investors a frustration for many, there’s a reason this legislation exists: to protect investors. Though money limits are no way to ensure the investor has enough knowledge, some form of protection is needed. Society was outraged when we found out what ‘banks had done to us’, by selling us flawed financial products without properly informing their customers. The crowdfunding industry is doing exactly the same thing.

The industry hasn’t fully developed yet and we’re not sure about the exact rules of the playing field, yet we ask investors for money without giving them the proper education to make informed decisions. Investors trust that their money is well spent via crowdfundingplatforms. The attitude of some platforms stating they are in no way responsible for failed campaigns is at least partially untrue and most certainly an easy way to let down end endanger investors. Platforms and crowdfunding experts have the obligation to educate new crowd-investors about the risk they’re taking.

Crowd-investors cannot perform due-diligence

Even if crowd-investors want to double check their investment, this is often hard. Most investors understand their money is put into a high risk- high return project, they don’t know what makes a company flawed and when they do, they don’t have the tools to do so. Where VC’s have financial officers that can do a check, or are generally well informed about success rates in a certain industry, crowdfunders generally don’t have this information or a decent financial background. They have to make a decision based on a digital business plan, a pitch video and some financial projections that could be true, or not.

They don’t have a financial background

Discounted Cash Flow Valuation Firm ValueBefore you drive a car, you have a decent intake process which leads to you understanding what all the buttons you press actually do. You gain insight in traffic behaviour and learn to read the signs. Likewise, VC’s, banks and Angels make sure they understand business finance before they invest money. They understand not only the differences between debt and equity, several liability, securities etcetera, but also how internal financial developments influence the success rates of companies in different life cycle stages. Not something most crowd-investors are fluent in.

Crowd-investors have wrong expectations 

They expect money fast. Investing is not like lending money, the payback takes somewhere between 3 to 7 years at least. Instead of a quick win, portfolio management requires patience and resisting the urge to dive in deep when mass hysterics spread (“I want to sell my shares nów”). Speaking of portfolio management and spreading risks: most crowd-investors only invest in one or two propositions without giving prior thought how to make the most profit on the money they have available.

Deutsche Fotothek‎ Climb Rock Climber Hard Challenge 

A good exit is hard

Currently investors are locked into their investment most of the time. This doesn’t have to be bad as an investor will have to wait for his exit quite some years anyway. However, when the time is there, it’s hard to sell the shares in equity-funded companies unless there is one large investor taking over all the shares at once. The other problem about exits is that most crowd-investors haven’t even thought about that. In the years working for Symbid, I’ve only seen this question a few times, which is a really serious issue because it indicates investors don’t know how to make money on their shares, how a good exit is defined and when they indeed should sell their shares to optimize their benefit.

There’s no industry knowledge 

Generally crowd-investors have industry knowledge about the industries they’ve worked in themselves but it’s reasonable to expect investors not to stick to only those industries. In addition, even when they do, they usually have no idea about starting a business in that industry. Most of the crowd-investors are employed and don’t usually industry performance KPI’s (how many members within what period of time, etc.) at hand. Of course the business plan should rule out the most important questions, but investors have to assume that data is correct or depend on knowledgeable investors to share their questions with entrepreneurs and other investors.

Crowdfunders invest in products, not in teams

As Rags Srinisavan from Iterative Path has correctly pointed out, VC’s don’t invest in products but in teams. And though “the team” might produce a great pitch video, there is hardly ever a face-to-face meeting unless the investments are substantial. This can be often successfully devised via pitch events and the like, but most of the crowdfunders invest in a pitch based on the pitch presented, the ROI and whether or not they judge the product or industry to be interesting to them. However, no matter well the business plan has been developed or how stringently the financial test, if the founders end up fighting or the team breaks down, all the plans are worthless.

So what do we need from traditional funders? 

In one word: guidance. Crowdfunders have the right to make well informed investments. There will always be a difference between the ways traditional and alternative funders decide to invest: it’s what makes the two funding strategies inherently different.

AngelGuidance from Angels, Angel Networks, banks, VC’s and other consists of sharing knowledge, for example, explaining the reasons why they did or did not invest in specific companies. Or better, make an investment in a crowdfunding proposition and share what they liked about it and what not, and what chances of success they think the startup has.

Another way traditional funders can help crowd-investors is by performing a (first) due diligence. Though a VC might not want to take it all out for a proposition he won’t invest in anyway, a handout in terms of focus points that investors should try to aim at is very achievable. Asking a traditional funder to give a pitch a “Go/ No Go” and publishing it (“This startup received a “Go” from our VC/ Angel team”), is a sign for crowd-investors a professional with the same interests as they have, increasing the investors’ security and the chances of success for the entrepreneurs.

More options are an educative forum or program for crowd-investors and professional investors, to professionally track crowdfunding developments (e.g. how many crowdfunded companies still exist after x years?, is the crowdfunded money used to its intended goal?, etc.), creating affiliate programs between crowdfundingplatforms and traditional institutes (like crowdfunding as a first phase towards debt funding via the bank) and integrating the overall crowdfunding industry as part of a hybrid funding trajectory.

This article is not at all meant to describe crowdfunding investors as a bunch of uneducated people who should keep their hands off crowdfunding and investing. On the contrary; it’s a great development that people now have the freedom on how to invest their money. But alternative funding experts should definitely work towards a more professionalised, better informed and safer version of the current crowdfunding landscape if we want to create sustainable value creation for our companies, investors and our economies. The best way of doing that is looking at sectors who’ve already built up an immense industry: the traditional funding industry.

This article was previously published on CrowdfundInsider

Legislating Crowdfunding & Industry Accreditation

The recent commotion concerning crowdfunding legislation is easy to understand considering Europe’s seemingly passive attitude concerning crowdfunding (J.D. Alois) and the discussion on open or closed crowdfunding markets. Accreditation can help to speed up the development of industry-fit regulation, but it requires companies to play ball and be vulnerable. A difficult requirement in a fiercely competitive market.

The situation calls for accreditation

What situation has created the cut-throat environment that crowdfundingplatforms face? Alex Feldman, initiator of CrowdsUnite (a great crowdfunding-filtering database), says on CrowdCrux that approximately over a 1,000 crowdfunding platforms exist. In addition, the success rate of crowdfunding campaigns leaves room for major improvements. On top of that, crowdfunding guides are ringing the alarm about crowdfunding scams, the most well- know probably being Kobe Red Beef Jerky. It’s clear the industry is in need of guidance, which is most likely to be found within the industry itself, and implemented via accreditation.

watching searching  industry

Accreditation in itself is a valuable tool in order to prevent fear, scams and the proliferation of low-quality sites which could lower the value of crowdfunding for the economically valuably ventures that we need to rebuild our economies. Fear from the side of governments, traditional funding institutes, investors and entrepreneurs can be reduced as a crowdfunding platform is publicly accountable via accreditation. Being accredited also shows stakeholders that a crowdfunding platform is involved in continuous improvement and reviews its quality to independent quality supervisors on a regular basis.

In relation to actual governmental legislation, there are several reasons why accreditation can serve as a pre-assessment of the regulations that will be implemented later on. Creating accreditation helps to create a forum where the industry can voice their expectations, needs and demands in combination with a sense of what are reasonable requirements. They have a chance to shape legislation instead of being fully dependent. Accreditation can also relieve local and international governments if they don’t feel the need to develop full scale regulations. When full scale regulations are a next step, accreditation is good way to test the practicality of possible supervisions. Finally, it might be faster than waiting for (international) regulation to be developed, giving the crowdfunding industry a chance to quickly increase the overall quality of the industry.

What should be in an Accreditation Program

scam

At Symbid, we’ve helped to develop the only accreditation program for crowdfunding in existence, the CAPS program. Yes, there is already accreditation in place. What’s in there? Crowdsourcing.org’s CAPS program focuses on Operational Transparency (a clear outline of the platform’s activities); Security of Information and Payments (personal and payment data are secured); Platform Functionality (the platform should work properly); and Operational Procedures (working with standard processes).

But that’s not enough. It’s to easy to meet these requirements as the scams show. Currently, the program is meant for the entire crowdfunding industry, mixing donation models and equity models as they are apples and oranges. If a platform meets all these requirements, there is still no guarantee that the project is real, the person behind it is really who (s)he says (s)he is, the money is used for it’s intended goal, what the chances of success are for a campaign and what the risk is that an investor will loose his money. A guarantee will never be provided, but accreditation allows to streamline the conformity of platforms to a certain set of standards.

A practical requirement would be make a list of cooperating partners obligatory. For example, making sure there is always a third, platform independent party involved that holds the money in its bank account. Another useful addition would require platforms to set up a step-by-step plan in case something goes wrong. Creating standard procedures allows customers to compare service and security levels of a platform. The platform should also be held accountable in the case of a scam and to do everything to prevent it, like arranging personal meetings or make identification via passports or governmental identification numbers obligatory.

In order to create an accreditation program that can be used as a first draft for possible legislation, the industry should openly discuss topics like platform operations, user privacy concerns, money transaction safety, separate legal status for crowdfunding platforms, the amount of risk involved in losing money, the chances of success for a campaign, etcetera. Understandably, platforms are being fuzzy about this type of information, but right now, other authors, media, institutes and crowdfunding information platforms such as CrowdsUnite are drawing their own conclusions. Information that might help shape the ideas that policy makers have about crowdfunding.

industry quality award trophy

It would be stupid not to create an accreditation program

CAPS is a great program, already in place, but no one is talking about it. How come? There has not yet been an industry full (media) debate that has created international attention concerning accreditation. Platforms should clearly mention their CAPS accreditation and express the need for qualification. In addition, there should be more types of accreditation for different types of platform, in order to prevent e.g. donation based platform to also easily offer loans or equity once they have the pass. It also protects donation based platform from having to meet heavy requirements not tailored for their business.

Accreditation should be treated as the next step for legislation: serious and open discussion within the industry is necessary if crowdfunding wants to be a real playing in the capital raising market. Demands for the entire financial sector just went up, but crowdfunding platforms are still playing by their own rules. Crowdfunding is no longer about “cute” initiatives but about real businesses and substantial amounts of capital. Reason enough for crowdfunding platforms to act like a real industry players and create a substantial first step in legislation: accreditation.

 

This article was previously published on CrowdfundInsider

Startup Hubs in Europe: What’s Their Added Value for Your Startup?

Forbes already knows: smart startups start in Europe. But why? Startups are a thriving resource of jobs and competitive advantage through innovation, and what they need are great startup ecologies. Europe is well on its way to develop several entrepreneurship hubs, and the lists with the top hubs can be found all over the internet (WiredThe Atlanic Cities,VentureBeat).

Avid Larizadeh

While Sillicon Valley often seems to be the sole benchmark indicating the strength of a cities capacity to successfully develop startups, Avid Larizadeh, investor at Accel Partners London and a Kauffman Fellow, says starting your business in the U.S. is no longer “an obvious decision anymore, as it used to be ten years ago”. Though it’s indeed valuable to take a good look at successful centers like the Valley, there are more qualifications than the amount of funding available that allow a city to rise on the startup culture ranking. Here are the most important qualities you should compare.

SONY DSC

Context of a startup company

It’s great that Sillicon Valley or Tel Aviv are major players for tech startups, but if you’re about to scale your import of traditional Japanese candy into Europe, you might better develop your startup in a city that allows for great logistics and that functions as a gateway to the European transport system. Think Antwerp, Rotterdam or Hamburg. And even if you’re in the tech business, software products (the Valley) are different from innovative solar solutions (Tel Aviv). Think about it: what product or startup today doesn’t require some form of “technology”?

Pick a hub that allows you to extensively test, gain knowledge about your product and customers, and contact your partners and customers in the industry you’re working in. Having an Italian cook prepare an authentic Thai dish doesn’t make sense, even if it both involves food.

Funding types and company stage

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Global consulting and research agency McKinsey recogninses Berlin as a promising centre for entrepreneurship. With a problem of delayed or hard to get by follow up capital raises (i.e. A/B rounds).  And while Berlin might not be the best environment to get a high score on your B-round, London, despite its higher than average first year raise compared to Berlin and the Valley, seems to reach an all time low on a raise during the fourth year, says The London School of Economics.

Does that mean you have to move your company from city to city with each raise? Of course not. Just think about when you need the money the most. For developing an initial prototype or for scaling up? It’s great a hub has the most VC capital raises, but if you’re not yet creating revenue, it’s no use trying. The same goes FFF-raises: the city best suited for your seed-capital raise is the city where your family is most easily contacted, not where the biggest amount of seed capital is being gathered.

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Funding amounts, and investors’ ROI’s

Funding amounts can be tricky. True, the Valley raises the highest amounts of money. It’s a self fulfilling prophecy: successful entrepreneurs have money to invest in startup companies. Startup companies know there’s money, so they ask for more. In addition, until a short while ago, Europe largely depended on bank loans. It remains a major drawback that European startup centers still have to develop a private funding structure that can match the U.S. equivalent (though equity crowdfunding is well on its way to change this).

Yet, according to Ernst & Young, European VC’s have increased in profitability in the last years, while that of U.S. counterparts has dwindled, showing the success of the company is not guaranteed with a bigger investment. In addition a shift from traditionally popular VC countries to upcoming countries is taking place, fueling European startup centers. There’s just more money to spend. In addition, the Kauffman Institute says that bigger VC’s do not necessarily make more profitable VC’s.

Accelerator opportunities

The value of the hyped contest that incubators and accelerators organise, is over rated. Most investors simply don’t know about them, and only if you win you get some money. The real value for a startup is in the fact that they’re competing and thus pushing their limits in terms of performance and presentation. In addition, accelerators and incubators help you to apply some time pressure (there’s no procrastinating), to network (event calendar, other services), several services are centred and you have a coach that you discuss with.

Knowledge and knowledge sharing

sharingOne of the reasons Berlin is often mentionedas the place to be to let your company “grow up”, is because it’s open and connected. Why is knowledge sharing important to startup companies? Think of user data, understanding (technical) product developments, exchanging ideas amongst co-workers or partnerships with other startup companies. Startups need an environment where they can add to their knowledge, share and combine existing knowledge, test this knowledge and finally turn in into a tangible product or service. Innovation can only be sustained via knowledge creation, so when picking a place to settle your Corp.-to-be, take into consideration the knowledge sharing culture. Is your city full of universities and is the culture open, or is most revenue created via IP lawsuits?

The Best

Tel Aviv, London, Berlin, Paris.. I’m not going to tell you what city is best: it varies per company. The combination of requirements for your startup may differ form what the hyped lists and expensive reports show you. What is “hot” might be a “not” for your company. Think about your product, what industry you’ll be working in and where you have the best chances to decently develop your product. Quality innovative product development aimed at value creation for your customer should be your main focus as a startup, so ask yourself where you’re most likely to acquire the mile stones needed to achieve that goal before picking your startup hub.

This article was previously published on CrowdfundInsider

Figuring Out Crowdfunding: Should We Support Open or Closed Markets?

As the European Union continues to monitor crowdfunding developments, countries in Europe, like France and the U.K., are already developing legislation in an attempt to establish a cohesive government approach. These developments make an interesting case study that can help to decide whether or not to strictly guide and possibly slow down crowdfunding expansion, or to unleash a host of crowdfunding platforms that might leave investors disillusioned. France and the U.K. have taken two different approaches (almost opposites), which give us a great opportunity to study the pros and cons of open and closed markets.

UK: from unregulated to regulated

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The UK has had a relatively open marked compared to other European countries, allowing the crowdfunding industry to raise £ 76 million or well over USD 127 million, (equity) crowdfunding and peer-to-peer (P2P) lending combined. Now, the Financial Conduct Authority (FCA) has implemented rules that will regulate the crowdfunding industry to a great extent, evoking mixed reactions. On Startups.co.uk Barry James, founder of The Crowdfunding Centre, said that the FCA appears to be “inflexible, stubborn and unimaginative”. Others like Luke Lang, co-founder of Crowdcube, welcomed the regulations: “these changes will help build market confidence”.

What are the new regulations?

Luke Lang Co-Founder of Crowdcube

The most important changes in regulations are a limit on the amount inexperienced investors can invest: a maximum of 10% of their portfolio has been introduced. Second, equity platforms are limited in their advertising opportunities as they’re no longer allowed to address inexperienced investors. Lending platforms must have a minimum of 0.2% in financial resources for any £ 50,000 (USD 83,700) of outstanding loans, with a minimum of £ 20,000 (USD 33,500). Further, the FCA requires platforms to present information in a “fair, clear and not misleading” way, reports Out-Law.com.

The good

What do these regulations mean for UK crowdfunding development? Though the responses have been mixed, the general tone of the discussion seems to be positive: some form of supervision is welcomed, even the much discussed 10% rule. As crowdfunding is growing, more people will make bigger investments, increasing the potential losses these investors might experience. It’s an illusion there won’t be a big mistake that blows a hole in the trust people currently have in crowdfunding. Being presented as the holy grail in startup funding, it’s time to get down to earth and protect both investors and entrepreneurs for funding gone awry.

At Symbid, we’ve been long supporting initiatives like the US CAPS accreditation program and we want to be involved in the development of legislation so we’re involved in the European Advisory Board. These are activities any serious platform should aim to conduct.

Luke Lang recognises the importance of market confidence. I don’t think I need to explain why banks and related financial institutions are being monitored after the financial crises. Crowdfunding is far from a minefield, but managing expectations and portfolios of people who have the ability to spend their money in ways they had not before, requires decent information and safety.

The bad

 

Chris Woolard

The 10%  rule is too rigid as it declines the potential of non-accredited investors to one tenth of the entire potential market. Chris Woolard of the FCA onBBC News says that:

“What we are saying [with the 10% rule] is, if you have never had experience with this before, we want you to gain experience before you make a large investment.”

But investor experience is not directly related to the amount of money or income one has, making the 10% rule an awkward attempt to limit risk as an affluent person might loose more money or a larger percentage if he is not well educated.

France: from over-regulated to less regulated

France Liberte Egalite Fraternite

Though crowdfunding is the fasted growing market in France, the unlocking of this industry has been hold back by stringent rules, like the requirement € 5 million (USD 6.9 million) in financial resources for lenders, or the maximum amount of 149 investors per offer before the company needs to create a rigid prospectus in cooperation with a lawyer. In contrary to the U.K. market, the French market is very risk averse, says Joachim Dupont of crowdfunding platform Anaxago on The Local.

What are the new regulations?

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Fleur Pellerin, the French vice-minister of Economics, hit the French media headlines as she presented the new regulations applying to crowdfunding. France will be the first to develop a separate status for crowdfunding platforms across the country, CIP (conseiller en investissement participatif or “equity investment advisor”) and IFP (intermédiaire en financement participatif or “crowdfunding intermediary”) respectively.

In addition, the crowdfunding limit for equity has been expanded from € 100,000 (USD 138,000) to € 300.000 (USD 414,000) per year. Investors are allowed to fund up to € 1,000 (USD 1,400) per project in order to apply risk diversification. The obligatory prospectus has been reduced from an entire document to 4-5 page brochure, saving time and legal costs for entrepreneurs. In general, Pellerin suggested the government should develop a quality label for platforms and enforce information concerning the risk and related data about an investment.

The good

Back Camera

Of course, opening up the the markets and loosening the reins must be a breather for the French alternative capital market. But the most outstanding development for the crowdfunding industry is the separate status crowdfunding would get. Whereas most governments are not quite sure how to handle crowdfunding, the French government has clearly named and thus placed crowdfunding within the financial industry. Legislation and structure concerning crowdfunding in France a now much less fuzzy compared to the U.K. market.

Giving crowdfunding a well defined status allows it to be accountable when thing go awry compared to existing capital providers. At the same time it also adds weight to the potential of this type of funding. It shows that opening markets consists of more than simple deregulation and that some extent of supervision actually acknowledges and supports the sustainable growth of a new sector. It might even allow easier cooperation with “official” financial institutions like banks, as both operate within a clear area of jurisdiction.

The bad

The Crowd Woman Waving

The market in France has already been lagging in comparison to the other countries in Europe, such as Germany, the UK, Finland or the Netherlands. It’s an illusion that opening the markets will immediately decrease this lag. It might take years to reach the level some other countries have already acquired and it might even slow down European legislation on a larger scale. Though the current limits might be stretched further, even that will not have the impact an unlimited market might offer.

Conclusion

Regulation should aim to healthily let the industry grow, reducing both negative proliferation and the risk of choking prosperity. Investors and entrepreneurs should be both be well aware of the risks involved, and unlimited lending and investing has led us into trouble before. Regulation lets us manage expectations and cut out the bad weeds, creating an environment where quality funding and good investors relationships can thrive and create real, economic value.

This article was previously published on CrowdfundInsider, where it received much social media appreciation

Reasons Investors Don’t Support Your Crowdfunding Campaign

So you’ve recently started your crowdfunding campaign, congratulations! You’ve done your homework, all the business plan fields are filled in, and you’ve sent out your first mailing, but no ones investing. Why not? Here are some reasons investors don’t get on board.

You

Investors want to be sure they can trust you. Make sure you have a personal, well-developed profile that inspires trust and a personal connection. Don’t be afraid to mention you’re a “proud father of two sons,” but don’t forget to mention you’ve done some pretty hefty work as a marketing manager in the field you’re currently crowdfunding for. Starting off in a field you don’t have any experience in? Make sure to mention the team that does have the experience and how you’re going to lead them to success.

This didn’t work? Always make sure people can contact you directly via e-mail or phone. Answer questions immediately and work on the relationship you have with your funders. Both during and after the campaign, investors want to be involved. Ignore them, and they’ll ignore you.

Your pitch video

You video clearly explains the product and in addition, it has a great animation about the revenue model and scalability. In fact, the entire pitch video is animated so it looks playful and smooth. To bad, because animation isn’t what gets you funded, you are what gets you funded.

It’s perfectly fine to animate part of the video or the entire video if appropriate, but make sure you introduce yourself. Include not only the product or business plan, but also the incentive that investors can expect. Selling equity? Mention the expected value increase of the shares and possible dividends. Crowdfunding an actual product? Mention the extras they’ll get if they up their investment from $20 to $40. The video shouldn’t be about explaining your plan; it should be about involving them.

No clear vision on company development

It’s great that you’re developing the next big app, but an app doesn’t define company. A lack of vision concerning company development is alarming to investors because they’re usually in for the long haul. If they invest in your company by lending you money, buying equity or buying your product they’ll receive after three months, they will want to know you’re capable of keeping alive your company for an extended period of time. Make sure you’re capable of clearly communicating what kind of company you want to initiate, what you want to achieve and how you’re going to achieve it.

Lacking input from the entrepreneur’s side

If you want people to invest, you’ll have to make sure they believe in you and your plan. How are you going to show you plan is worth believing in if you didn’t invest yourself? Make clear what amount of money, time, and resources (working places, material, office supplies) you’ve made available for you company.  Did someone you know and not you make the investment? Show your investors that even when you don’t have the means to do it yourself, you have the skill to convince and arrange other people to do it for you.

Asking for too much money

As a good entrepreneur you’re well aware you’ll make mistakes and they’ll cost you money. So just to be sure, you’re trying to gather $100K instead of $50K? Think again. Asking for too much money only shows that you don’t have a clear plan outlined on which you can base you expenses. So asking for too much money, only signals you don’t know what you’re doing.

Is it wrong to ask for more? No, but be reasonable. An increase of you capital goal to 100% in case you make a mistake is not a good sign; try to keep the extra capital around 10%. There is no exact percentage that all investors agree upon, and while some say 10% is too little, others claim it is too much. The point is you show investors you’ve thought about additional costs, and you have a tight grip on your wallet and a clear view on what you plan is going to cost them.

Want investors? Be in control!

Show that you have a grip on your company’s development and make it plausible that you can give your investor a decent return on their investment, in whatever form. Be concrete and enthusiastic, and assume you’ll make mistakes. Acknowledge and chart the risks and show your investors how you’re going to deal with those risks. The focus of your story should be on the relationship you and your investors are building.

This article has previously been published on CitizenTEKK

European Crowdfunding Legislation: What’s Taking So Long?

While the U.S. are making major efforts to implement the JOBS Act, the European Union seems to be only capable of analyzing the developments, as J.D. Alois’ article “EC Releases Communication on Long Term Financing Including Crowdfunding” shows.

The most important conclusion was that the European Union should monitor, rather than develop and implement legislation. This apparently passive attitude can be seen as a sign of a broken and incoherent view on crowdfunding, but the opposite is true. There are several reasons why developing European legislation requires monitoring as a first, valuable step.

Implementing legislation can actually break up crowdfunding growth

Map of Europe

Europe is a diversified continent in terms of legislation. Some countries, such as Belgium and the Netherlands, work with a Twin-Peaks model meaning one party supervises the stability of the financial system (DNB) and the other party (AFM) supervises financial behavior (saving, investing, insuring, lending, etc.).

In some countries however, each financial product belongs to a sector (pensions, accountants, etc.) that has its own regulator. In such countries it is often hard to decide where crowdfunding belongs. Should lending via the crowd be regulated differently from equity-crowdfunding, for example, or is all crowdfunding equal?

As result, it is difficult for the European Union to develop and implement one set of rules that affects all European countries and systems. The risk exists that if Europe would force its countries to implement crowdfunding rules on a micro-scale, crowdfunding growth would actually be damaged, or worse, fully destroyed.

European Union Flag

The reason for this scattered legal landscape is of course that all the separate countries already came into existence before the current European Union did. Though legislation could break crowdfunding development in the European Union, European directives are preparing to set standards that all the members will have to meet while at the same time, leaving them free to implement legislation to their own understanding.

Local legislation in place poses a problem however..

Implementing European legislation at a local scale sounds like a great solution. However, in most cases legislation is already in place in order to regulate financial markets and products. Adjusting these in order to suffice European crowdfunding standards might create a stir across a country’s entire financial system.

It would not just be a case of setting up crowdfunding regulations: it would mean that countries might have to restructure their entire financial system. Countries are not willing to do that as long as crowdfunding does not yet contribute as much to the economy as most industries do, because the investment might possibly not pay off or be wrong due to unforeseen developments.

Differing legal entities across Europe

Different countries work with different legal entities for their companies. As a campaign manager at Symbid I know we often get requests from entrepreneurs across borders, who we can’t help if they do not establish a Dutch Limited Liability company first. A very strange fact if you consider the entrepreneur might only be some 60 miles away.

Crowd in Airport

In many cases, crowdfunding platforms can only service companies from their own country. Why? If the platform would want to extend the structure across Europe, they would face an increased risk of fraud. Even if they would be able to counter act this possible threat with a solid due diligence process, like some platforms already have in place, they would be liable for European legislation, while the entire legal structure was based on their homeland’s legislation in the first place. European legislation in this case might either have some holes as there is no regulation available for the structure, or might work against the platform. That is not a risk a crowdfunding platform wants to take for its investors or its entrepreneurs.

European Union Growth

Next step to actually developing legislation

The overall goal of course is to have European legislation work for all 28 countries, which is a challenging task to complete. A first step is indeed to monitor the crowdfunding developments across Europe in different countries. It will soon become clearer what structures work and which do not work. Rather than risking a downfall of the entire would-be pan-European crowdfunding legislative system, the European Union is avoiding the “all eggs in one basket”- strategy; something every good investor understands!

This article was earlier published on CrowdfundInsider.com