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.

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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

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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.

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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

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

3 Ways to Reduce Crowdfunding Campaign Duration

Aren’t crowdfunding campaigns used to spark enthusiasm, create more customers, get in touch with the media, and bring in some money? Then why would you want to reduce the time your campaign takes?

Let me name a couple; you have to run a company, the campaign requires energy and you need the money before a certain deadline before your network is exhausted. Before I continue to list more reasons that inspire a “crowdfunding crisis,” let me assure you that preparing and running a campaign are fantastic things to do for a maximum of approximately four weeks.

Here’s how to stay on top of your campaign’s duration:

  • Prepare your network
  • Create a single launch date
  • Strategically use your bigger investors

 

Prepare your network

An often-recurring mistake in crowdfunding campaigns is to first go online or “live,” and activate your networks later on. The campaign doesn’t start until you do, and you should start preparing your campaign before it’s live.

You’ll need to gather, develop, and process required information; like a business plan, financial information, and a pitch video. This takes somewhere between 1-4 weeks, if you’re a motivated entrepreneur; and I’m assuming you are. In the meanwhile, don’t be shy and tell the people around you! You’d be telling them about your marathon training before you actually ran it, and there are very few who won’t respond positively.

Why tell them before your pitch is live? Because by the time you’re ready to go online they’ll be informed, even if it’s just a little bit. You need the “incubation” time per network. Your friends need to be able to update each other about it (“Did you hear, John is planning a crowdfunding campaign!”), your sports buddies need to be able to encourage you (“We can’t wait to contribute”), et cetera. The more you tell them about your campaign, the more it creates an expecting and enthusiastic atmosphere surrounding you pitch. By the time you go live they might already be asking you about investment opportunities.

Create a single launch date

You have several enthusiastic groups of people willing to invest. How to get them to invest as soon as possible? Create a kick off date. Communicate to your network that “event X” will take place, or that you’ve set a deadline that must be reached. Make sure you network knows the date and time, and why they should invest then and there. Make sure they also know who is going to invest too, so they won’t hesitate due to cold feet.

It’s very important to make sure you have a certain percentage of funding committed before you start. 10-15% is usually a good start, that’ll convince your network to jump in. Yes, even your best friends might have second thoughts when they see nobody’s investing. This is not a problem; just make sure they see people are investing.

A good reason to finish the campaign as soon as possible and therefore to invest as soon as possible is so you’ll be able to make the headlines or break a new record. Another option is to create a noteworthy event for you network. Invite a part of your network, officially start the campaign with a short pitch to your network (which will also let you practice your pitching skills for a later stage,) and send them home with a thrilled feeling and a great story to tell.

Last but not least, follow up. Immediately. They promised to invest on Saturday evening and didn’t do so? Call them on Sunday. Make sure they understand everything (your plan, their return, and the platform on which your pitch is hosted) and ask if they have any other considerations. Focus is critical in order to create momentum, and without it, your campaign won’t take off.

Strategically use your bigger investors

You might already have some bigger investors of whom you’ll know that they’ll invest. Make sure they break up their investments in smaller bits, especially after the 30% funding. After the phase of 30% funding, your network is usually depleted and it’ll be harder to hold on to the momentum generated in the first phase of the campaign.

That’s where your larger investors come in. By strategically planning their investment(s), you’ll be able to continuously showcase progress. You want to prevent your campaign from stopping so any luxury you have in terms of money to come; use it wisely.

In short

Plan, communicate, and energize you network and your campaign. Success doesn’t require luck; success requires organization and persistence.

This article was previously published on CitizenTekk

Premier Mark Rutte start crowdfundingcampagne voor investeringsplatform Symbid

Goed nieuws voor crowdfundingplatform Symbid, waar ik werk als campagnemanager. Afgelopen zaterdag werd het European Centre for Entrepreneurship (Rotterdam), waar Symbid is gevestigd, geopend door premier Mark Rutte. Tegelijkertijd startte hij ook de crowdfundingcampagne voor aandelen-crowdfunder Symbid.

Premier Rutte zei bij het luiden van de gong waarmee de handel werd afgetrapt, initiatieven als Symbid te ondersteunen:

“Ik juich het van harte toe dat bedrijven voor hun financiering ook geld ophalen bij particulieren als versterking van het eigen vermogen. Het leidt tot grote betrokkenheid van kleine investeerders.”

Investeringsplatform Symbid financiert zichzelf

Waarom start je als crowdfundingplatform een campagne voor jezelf? In ons geval is het al langere tijd mogelijk om als investeerder Symbid-aandelen te kopen, maar dan wel alleen via de Amerikaanse beurs waar we sinds december 2014 genoteerd staan aan de OTCQB in New York (tickersymbool SBID).

Fantastisch spannende ontwikkelingen natuurlijk voor zo’n relatief klein bedrijf met zulke grote ambities. Vanuit onze vrienden, familie, kennissen, klanten, zakelijke partners en oud-ondernemers is er dan ook erg positief gereageerd en hebben we ontzettend vaak de vraag gekregen of zij niet ook konden investeren. Via de OTC notering is het echter alleen mogelijk om te investeren vanaf EUR 25.000; vaak een te hoog bedrag voor onze omgeving.

Daarom zijn we afgelopen zaterdag gestart met een crowdfundingcampagne waardoor iedereen kan investeren in Symbid Crowdfunding B.V. Het op te halen bedrag is EUR 200.000, waarvan op zaterdag zo’n EUR 130.000 werd opgehaald! Inmiddels staat de teller op 75% financiering.

Hoe bevalt dat nou, zo’n campagne?

Als campagnemanager bij Symbid zorg ik er met mijn collega’s normaal gesproken voor dat andermans campagnes worden gefinancierd. Het is natuurlijk ontzettend leuk om nu eens “voor jezelf” aan de slag te gaan en alle stappen te doorlopen die ondernemers doorlopen.

Het is heel goed om te merken dat eigenlijk alle informatie die je ondernemers meegeeft klopt. Van planning tot en met de pitch video en van het benaderen van het eigen netwerk tot en met het uploaden van heldere informatie. Zeker het idee dat je je pitch ontzettend goed moet voorbereiden (informatie en alle investeerders op voorhand klaarzetten) voordat je je campagne start is heel erg waar gebleken. Door een goede coördinatie van het Symbid-team en alle netwerken van de teamleden, plus het tijdig informeren van deze netwerken, schoot de teller “ineens” naar 65%.

Leermomentje? De hoeveelheid vragen die er komen van zowel het eigen netwerk als onbekende investeerders. Vragen over de website, betaalmethoden, juridische structuur, duur van de campagne, kosten, te verwachten dividend, inspraak en zeggenschap: alles komt voorbij. Tip voor degenen die zelf gaan crowdfunden: verzamel de eerste tien vragen die je ontvangt en formuleer hierop standaard antwoorden. Hiermee gaat het beantwoorden van deze vragen sneller en kun je investeerders beter te woord staan.

Meer weten?

Lees het volledige persbericht op Emerce, of bekijk de campagne op Symbid.com

Equity Crowdfunding: Is It Hype- Worthy?

Crowdfunding is hot, kick-starting not only our companies but entire economies. It is the go-to miracle measure to create ambassadors, marketing, money and products out of nowhere.

These expectations came into existence after major crowdfunding successes, like that of Pebble Watch. There are different types of crowdfunding however, and each type of crowdfunding benefits a specific type of company or a specific need within that company. Let’s look at the differences to get a grip on how crowdfunding can help your start-up!

Continue reading my article on CitizenTEKK