What should you consider when raising funding for your next big idea? And how do new funding innovations measure up against more traditional options?
By Rob Orchard
Just a few short years ago, part of pitching a prospectus to investors meant dressing smartly, meeting with solemn financiers in austere offices and arguing your case face to face, as you pored over P+L sheets and sales projections. But the playing field has changed. With the advent of investors working through non-traditional loan- and equity-based crowdfunding sites, you now can connect from the comfort of your couch. The evolution of crowdfunding platforms has enabled anonymous investors from around the world to make investment decisions worth millions of dollars each day based simply on whether an idea is good and a prospectus promising.
These new platforms are the latest innovations in the world of funding and are causing major disruption within the investing industry. They join a long list of more traditional investment-raising options, including angel groups, incubators, accelerators, venture capitalists, ultra- and high-net worth individuals, and deal platforms inside banks. “It can be bewildering, particularly at the early stages of working out what type of funding will work for you,” says YPO member Anne Glover, Chief Executive and Co-Founder of Amadeus Capital Partners Ltd. in London, England, UK. Glover launched her firm in 1997 with two partners after they identified the opportunity for an early stage technology fund. Amadeus works in partnership with entrepreneurs to help develop their businesses. It’s a more traditional approach than that taken by the new crowdfunding options, but Glover is not averse to innovation in the sector. “I always applaud more capital coming in at early stages and any new mechanisms that fund startups,” she says.
Legislation spurs online funding
In the United States, such online funding mechanisms were set in motion in 2013 by the Jumpstart Our Business Startups (JOBS) Act. “Before the new legislation it was basically illegal to raise money online,” says YPO member Joanna Schwartz, Founder of CRE Direct, an advisory firm that helps commercial real estate firms embrace new technology and capital-raising methods such as crowdfunding to grow their businesses. “Although the new regulations aren’t perfect, they loosen things up so you can now advertise your capital raises online in a way that complies with all of the rules and gives you broader access to investors of different types.”
The growth of the new market from the kickoff of the JOBS legislation is astonishing. “In 2014, the numbers that were published just for online capital raising in real estate were USD150 million,” Schwartz says. “The numbers for 2015 haven’t been confirmed, but the estimate is USD1.26 billion. The market is expected to grow exponentially over the next five to 10 years, so it could end up taking a huge percentage of the overall capital that’s raised in the real estate industry in the United States.”
That’s not to say that all investing is going online, but people are starting to adopt a technology-first approach. “Twenty years ago, if you wanted to buy a stock, you never went to E-Trade first — and now millions of people do that every day,” she says. “Technology has changed how we behave and interact with every other industry, and now that’s happening with capital raising and investing.”
However, this “democratization of funding” doesn’t come without its risks. “I worry about the rigor of due diligence,” Glover says. “It’s hard to do due diligence on a company in the very early stages. It can take months, if not years, to get to know a management team, and I don’t know whether the crowdfunding platforms have that opportunity.” What this means for those looking to raise money through crowdfunding is that it’s vital to take your time choosing from the myriad of platforms to ensure you select one that will reassure serious investors. “You need to do your research,” Schwartz says. “The platforms vary across every single metric that you could think of — in terms of due diligence, in terms of vetting, in terms of deal structure, as well as how they raise the money, how they’re complying and what regulations they’re using to raise money.”
The funding fundamentals
Troy Bowker, YPO member and Founder and Executive Chairman of the private equity group Caniwi Capital in New Zealand, has a clear recommendation for those seeking to raise money for a project. “The first thing you should do is look at bank funding,” he says. “Bank funding is incredibly cheap: It’s only when you can’t get it that you should look at other forms of funding. And outside of the banks, YPOers should ask their peers for advice on the specifics of other funding options on offer because every market is different.”
Whatever funding path you choose, Bowker believes certain things always should be brought to the table. For starters, put your own money on the line, as well as that of your potential investors. “I’m skeptical of people who want to raise capital unless they’ve got a lot of skin in the game,” he says. “I mean almost every cent they’ve got. I’m a pretty hard taskmaster when it comes to that. I’ve seen so many people go to the markets with dumb ideas expecting investors to put in all the equity. You have to be a Warren Buffet to get away with that.” But it’s not just personal financial involvement that is required. “You’ve got to have integrity. You’ve got to have a track record. You’ve got to be able to demonstrate that the money you’re raising is going to go to be invested to grow the business, and you’ve got to be able to demonstrate that to a high degree,” Bowker says.
Glover, too, is clear that all pitches need certain key fundamentals in place, regardless of the funding mechanism chosen. “It’s about the quality of your team, the size of your market, the competitive differentiation of the proposition and the speed with which customers will adopt whatever your innovative idea is,” she says. “If you are going after a very big idea which needs a lot of capital, then equity crowdfunding is probably not a great place to start because you end up with a complex share register and then a big cleanup exercise later on. Don’t underestimate the complexity of looking after a lot of shareholders. But if you need a relatively small amount of capital to get to a profit-making business, then loan-based crowdfunding can be a fast and non-intrusive option.”
Schwartz predicts that over the next few years, the most successful of the new crowdfunding innovations will be co-opted by more traditional financial organizations.
On the real estate side, for example, funding platforms are already getting more sophisticated and gaining more institutional backing, she says. “Now the big institutions are saying, ‘OK, this exists. How do we use it? How do we professionalize it and scale it?’ There are definitely holdouts who still think it’s not happening. But we all know it is.”
The funding revolution, it seems, is here to stay. Now all you need is that world-beating business idea …
This article first published in the November 2016 issue of YPO’s “Ignite” magazine.
Rob Orchard is the co-founder and editorial director of the Slow Journalism Company and the publisher of “Delayed Gratification” magazine, which revisits the events of the preceding quarter after the dust has settled and makes a virtue of being “Last to Breaking News.” The publication is an antidote to PR-driven stories, knee-jerk reactions and churnalism. Previously, Orchard launched and ran magazines for Virgin Atlantic and created the Middle East’s biggest travel magazine.