Paul Wallbank – Brilliant Communications

Tag: equity

  • Scamming the Jobs Act

    Scamming the Jobs Act

    When the Obama administration approved the US JOBS Act in 2012 it was almost certain the crowdfunding aspects would attract charatans looking to separate gullible investors from their money.

    And so it has turned out, with the New York Times reporting how some crowdfunding sites are worried by the poor quality of startups touting for funds on some platforms.

    The Times piece follows the story of Ryan Feit, the founder of New York’s Seedinvest who tells how he has rejected substandard proposals only to have seen them embraced by other crowdfunding platforms with often terrible results for investors.

    One of the early companies he rejected was shut down by regulators — who labeled it a fraud — after it raised $5 million from investors. And Mr. Feit expects it won’t be the last.

    That fraudsters would be attracted to crowdfunding sites is unsurprising and with regulators still working out how to manage investor protection the field is still very much ‘buyer beware.’

    High valuations are also an investor warning sign.

    Mr. Feit has been particularly worried about companies that have assigned themselves sky-high valuations that will make it hard for investors to ever make their money back. In several cases, companies that he rejected because of their high valuations have shown up on other sites with the same valuations

    The unicorn mania of recent years is the cause of this focus on high valuations and is strange for investors as those richly priced stakes are not in their interests or those of employees taking equity in the business. If anything, a ridiculous market valuation should be the biggest warning of all to potential stakeholders.

    Ultimately though it may be that crowdfunding equity isn’t about taking a stake in a business but more showing one’s support for a venture suggests, Nick Tommarello, the co-founder of Wefunder.

    Mr. Tommarello also noted that many small-time investors so far were viewing their investments more as donations to businesses they like, rather than as investments that will make money.

    As JOBS Act equity crowdfunding campaigns are limited to a million dollars each, being the modern equivalent of the ‘friends, families and fools’ may be the future of these capital channels. Hopefully there won’t be too many fools.

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  • Testing the limits of Silicon Valley equity

    Testing the limits of Silicon Valley equity

    Ride sharing Lyft is beginning to show all the weaknesses in the current Silicon Valley startup equity model as the company sees ‘ratchet clauses’ invoked by investors seeking their returns dilute the stakeholdings of earlier supporters.

    One thing a lot of people will be the effects on early employees as the equity they took in lieu of a market wage is eroded by the increased stake of later venture capital investors.

    What we’re seeing with Lyft are the limits of the 5-4-1 model of the current tech boom where for every ten dollars invested; one dollar goes into product development, four into customer acquisition and five into marketing.

    The idea in the marketing is to attract more investors and ultimately to seduce a trade buyer or impress the stock market ahead of an Initial Public Offering.

    In Lyft’s case the company is spending $96 million a year on marketing, twice its income. The company has raised a total of $800 million since it was founded giving the company a valuation of $2.5 billion.

    As we’ve discussed before, these billion dollar valuations are as much a curse for a startup as a mark of success. Now the realities of a being unicorn are dawning on the employees who are often the oldest shareholders.

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  • Getting crowdfunding right

    Getting crowdfunding right

    Crowdfunding is not for every business or project, however the great story on the success of Flow Hives shows how it can be done right.

    Flow Hives, based on the North Coast of the Australian state of New South Wales, is a father and son business that has cracked the way for consumers to raise bees and get fresh honey from the hives without having to suit up.

    There’s a few notable points in Flow Hives’ story  that challenges a lot of the basic wisdom about starts ups and funding we’re hearing at the moment.

    Taking the long path

    Flow Hives’ founders,Stu and Cedar Anderson, spent ten years getting the basics right. That’s a long time to get a Minimum Viable Product to the market.

    On top of that, they were experienced bee keepers, not keen young outsiders looking to ‘disrupt’ what they saw as a staid industry.

    Carefully choosing support

    Like all good Australian businesses, the Andersons’ first stop was at the government where they found the support programs were too cumbersome and onerous. Another problem they’d have encountered with that path would have been the funds available are trivial compared to the time spent on compliance.

    They found a similar thing with the courting of investors being too much of a distraction and, rightly, saw that VC and seed money is actually quite expensive. This made crowdfunding a viable options.

    Selecting production methods

    While 3D printing worked for prototypes it didn’t scale for production runs. Knowing they’d need injection moulding for their plastic parts, the Andersons chose a local supplier rather than dealing with the lowest cost operator in China so they would have better control over their supply chain.

    Coupled with choosing a local supplier for their plastic components the Andersons’ also chose a US supplier for the wooden enclosures based upon the service they received.

    Going with trusted suppliers meant they were able to get a good product to market quickly. When a Chinese company attempted a cheap imitation it failed because of the shoddy quality.

    The Flow Hive story is a good reminder that the principles of the today’s tech startup culture are only applicable to small group of the businesses in specific sectors.

    In a diverse economy, there’s many different other business principles and models that might apply. Trying to shoehorn one type of business into a different model may well be a mistake.

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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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