Paul Wallbank – Brilliant Communications

Tag: capital

  • Equity crowdfunding arrives late to the party

    Equity crowdfunding arrives late to the party

    Equity crowdsourcing comes late to the Silicon Valley party but could it help the capital starved small business sector?

    As of today, equity crowdfunding is now legal in the United States.

    The interesting thing is it appears Silicon Valley is shifting away from the VC model that this initiative was intended to promote among smaller investors.

    Whether equity crowdfunding can be applied to ventures outside the tech startup industry remains to be seen, it may be in a world where banks have stepped away from their traditional role of providing capital to business that this is the way for proprietors to raise essential funds.

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  • The benefits of an unsexy business

    The benefits of an unsexy business

    Being a startup in an unsexy industry can have its advantages believes one founder, particularly when your only competitors are sales and marketing focused corporates that struggle to innovate or execute on new ideas.

    “There are some advantages of being in a non-sexy industry,” says Ziv Kedem, co-founder and CEO of Israeli company Zerto, “It means there are not too many people doing it and not too many can convince VCs this is a multi billion dollar market.”

    Kedem was speaking to Decoding the New Economy during his recent visit to Sydney about Zerto, a disaster recovery software company – a distinctly unsexy business – which is his second startup following the sale of his first, Kashya, to storage giant EMC in 2006.

    The advantage with being non-sexy is often the only competitors are large corporations, a prospect that doesn’t phase Kedem. “If the competition is only coming from the large vendors then there won’t be any innovation there,” he smiles.

    Sales and marketing focus

    Kedem’s view is many large companies are focused on sales and marketing, which means they don’t have the skills or the motivation to execute business plans in new sectors.

    In many respects this echoes the experience of Seth Godin who expected Google becoming a competitor to his Knol business would be the fledgling company’s death knell. Instead Knol survived and Google’s notoriously poor attention settle upon another shiny, sexy industry to disrupt.

    The problem for those non-sexy industries is raising investor money as the presence of a Google, Microsoft or Amazon in the market tends to scare VCs, private equity firms or retail investors away.

    Crowdfunding downsides

    Unlike his compatriot, John Medved, Kedem doesn’t see crowdfunding as a way around an investment drought as smaller investors are attracted to the ‘sexier’ businesses as well and raising the substantial amounts necessary for enterprise ventures is difficult on those platforms.

    When a startup can find an investor, Kedem recommends not being shy about raising funds. “It’s rare to meet someone who raised too much,” he states.

    Kedem also recommends investing in the team and looking for skills that the company will need in the future, not just today. Talking, to everyone from investors to customers to peers, is also important and he believes this is why Silicon Valley and Israel are so successful as technology hubs.

    Believing in yourself

    The most important aspect for an entrepreneur is self belief says Kedem, particularly when raising funds. “You’re doing the investor a favour when you go to them,” he says.

    Ultimately that self belief is probably what everyone in business needs, particularly when facing a huge competitor.

    Regardless of how unsexy your business is, believing it addresses a problem that people will pay to solve, may well be its greatest asset.

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  • Crowdfunding future businesses

    Crowdfunding future businesses

    Three years after the Jobs Act was signed into law by President Obama, the US Securities and Investment commission has proposed the rules for crowdfunding business capital.

    Behind the Jobs Act was the idea that new ways of funding businesses are needed in an era when banks, thanks to the flawed Basel Accords, have stepped away from what could be argued is one of the key functions of a financial systems – funding the wheels of commerce.

    So the new regulations are needed and the idea that funding can be raised quickly from crowds of supporters is one that ties well with the current ideas of crowdfunding products.

    Crowdfunding a business, particularly where equity is involved, is a very different matter than asking supporters for a few hundred dollars to manufacture a smartwatch, produce a music album or write a book. Modern securities law is based upon three centuries of charlatans defrauding investors.

    The SEC’s caution is clear in the guidelines that restrict crowdfunding to a small group of businesses seeking funding through Federally approved services and drastically limit the amounts that can be raised.

    • A company can raise a total of $1 million through crowdfunding in a 12-month period
    • In any 12-month period, individual cannot stake more than $100,000.
    • Individuals earning less than $100,00o per year can invest either $2,000 or 5% of their annual income.
    • People with greater than $100,0000 can stake 10 percent of the lesser of their annual income or net worth

    For companies the eligibility for crowdfunding even tighter with the following prohibited;

    • non-U.S. companies
    • securities trading companies registered under the Exchange Act
    • certain investment companies
    • companies the SEC has disqualified
    • companies that have failed to comply submit annual reporting requirements
    • companies that have no specific business plan
    • Companies that have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

    That latter provision presents a problem for the tech startup based upon the current Silicon Valley ‘greater fool’ business plan however luckily for them, crowdfunding equity won’t be countered for companies worth under $25 million for other securities reporting requirements.

    What will be interesting is how savvy startup founders can use these rules – perhaps use this system to create a company structure and then use product specific crowdfunding projects to raise working capital.

    Just like project based crowdfunding, it’s likely these schemes will be used as a market test to measure community interest in a business. This may well also be a way to attract investors hungry for hot new startups to invest it.

    What is likely though is the current insider driven model of startup funding will remain. While there’ll be many worthy businesses seeking capital through crowdfunding, we can be sure the bulk of startup money will come through the insular world of VCs and tech investors.

    The main criticism though of these proposals are the low limits. This will make crowdfunding unworkable for all but the earliest and smallest of new ventures. The money will be handy for those who qualify, but more needs to be done to spark investment in the businesses of the future.

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  • The pros and cons of bootstrapping

    The pros and cons of bootstrapping

    There are plenty of ways of raising money for a business; venture capital, bank loans, private equity and – by the far the most common – bootstrapping, where a company finances it’s growth through its own cashflow.

    An article in Tech Crunch by Ashkan Karbasfrooshan looked at the reasons why bootstrapping doesn’t work, his views are understandable Ashkan given his own business has raised $1.5 million in venture capital (VC) funding over the past four years.

    Outside the Silicon Valley bubble, it’s worthwhile considering the real benefits and disadvantages to bootstrapping your business. As with any business tool there’s real pros and cons with all financing methods.

    Benefits

    There are a number of benefits with bootstrapping, in that it forces the business’ management to focus on the product and customers while giving founders full control of the business.

    Total control

    A bootstrapping business has total control over its destiny – the business owners answer to no VC, bank or outside imposed board of directors.

    Those outside investors may also have different business objectives to the founders. Often a venture capital or private equity investor has a three to five year time frame while a founder may be looking further.

    Also a mis-match between the founders’ and investors’ exit strategies will almost certainly be a problem should the opportunity to sell the business arise.

    One of the biggest risks for a smaller business is banks can call in loans or ask for additional security – something that crippled many smaller businesses during 2009.

    For those who’ve raised equity funding, founders can find their shareholdings diluted or even be fired from the business they created.

    Customer focus

    The business that is focused on funding itself pays close attention to the needs of its customers. The distraction of raising, and then managing, investors or lenders can distract from building the business.

    Validating the business model

    A successful business that has grown through funding itself is has, by definition, a valid and profitable business model. This is not necessarily true of VC or debt funded enterprises.

    Overcapitalisition

    In his Tech Crunch article,  Ashkan quotes Marc Andreessen and Jason Calacanis as saying “raise as much money as you can.”

    This may well be conventional wisdom in Silicon Valley though the reality is a business can have too much money, as we saw in the original dot com boom with businesses such as Boo.com lavishing money on founders and expensive frills.

    A business can be crippled by having too much investment money that distorts the founders’ objectives and allows the company to lose focus on helping customers and getting the product right.

    Generally with bootstrapping this isn’t a problem unless the founders have an insanely profitable business, which renders the need for outside investors largely irrelevant.

    Disadvantages

    For all of bootstrapping’s advantages there are real downsides as well including the risk of being undercapitalised and the difficulty in attracting diverse management.

    Undercapitalisation

    One of the main reasons for business failures is under capitalisation; simply not enough money to grow the enterprise or to put it on a sustainable footing. This is a constant risk for bootstrapped businesses.

    Inability to focus

    Many owners or managers of bootstrapped businessese focused on making sales so they can pay the rent and make payroll; this distracts management from executing the longer term aims of the business.

    Expertise

    In taking an equity partner – either in private equity, venture capital or angel investor – the founders get the benefit of the investors’ expertise.

    A good investor who has similar objectives to the founders can add real value and complement the original team’s strengths and weaknesses.

    No one size fits all businesses

    Overall there’s no black and white to bootstrapping versus borrowing money or finding an equity partner; all of them have their risks and benefits.

    As entrepreneur Steve Blank points out, there are six types of startup and only two of them; the scalable and buyable (born to flip) are suited to the Silicon Valley venture capital model.

    The real risk in business is assuming one way or another is the only way to fund an enterprise, for many it’s a combination of some or all of the methods to raise funds.

    It’s quite possible to see a business first bootstrap to get established, then get a bank loan to finance growth, followed by a VC or seed investment that finally sells out to a private equity fund.

    For many business owners though, funding the business out of cashflow is the most sustainable way to grow and profit. If you’re happy with what you’re doing, there’s no reason to be hassling for equity or begging at the bank.

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  • So you want a business grant?

    So you want a business grant?

    “Funding Available from $1000 to $500,000! Get an advantage over your competitors or give your business the Government Funding boost it needs to be more successful!” Is the promise of a website offering to find grants for your business.

    Free money from the government sounds good and, as we’ve seen in the various Quantative Erasings and bank bail outs around the world, it sometimes is free.

    Rarely though is cash really “free”, usually there’s strings attached and government money is no different.

    Why do governments give business grants?

    First we should understand why governments make grants, subsidies and loans available to businesses.

    Governments have various objectives with their programs; they could be to get unemployed workers back in the workforce, to improve skill levels or to encourage exports. Whatever the motives are, they have clear criteria for giving money away.

    One area they don’t give funds for is to “Get an advantage over your competitors” as that website. That’s clearly not the role for governments and they’d be rightly criticised for doing so.

    The paperwork storm

    Contrary to what some media outlets portray, most public servants take their responsibilities seriously and don’t give out taxpayers’ money unless the application clearly meets their programs’ objectives.

    Meeting the objectives is important, because the public servants – and their political masters – are held accountable so they will make sure the business receiving the grant or subsidy has actually done what they have promised to do.

    This is where things get tricky for business owners and managers who have received government money. Completing the paperwork to prove you’ve met the objectives will be time consuming.

    Drive a cab

    Often it would have been more cost effective to drive a cab rather than spend hours filling in government paperwork.

    There really is no such thing as free money, there’s always a cost. While sometimes there are good reasons for applying for a government program, free money should never be your objective.

    It’s also worth keeping in mind that services offering to find government money for you will usually take a cut of the grant as commission. Also, they won’t help you do the follow up paperwork, that’s your expensive problem.

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