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11/15/2013 McKinsey & Co - Why crowdfunding appeals to the Middle East
12/30/2013 KQED Radio - Richard Swart - A How-To Guide to Crowdfunding 12/20/2013 Gulf Times - Silatech Hosts Seminar...

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The Role of Transparency in Small Business

While the most basic definition of transparency is “see-through,” in today’s competitive, online marketplace, this term has become synonymous with a new trend in customer service -- being completely open, honest and upfront with consumers, especially on the internet.

What are some benefits to utilizing this translucent approach?shutterstock 184576229

In a Perfect World

There is no such thing as perfect, period, and today’s consumers are well aware of this fact. Rather than attempting to hide mistakes, bury problems and otherwise pretend that something negative never really happened, acknowledge the errors and move on. Everyone makes mistakes, and people will give their trust and identify better with those who accept their shortcomings and still persevere.

The Internet of Everything

Many have already heard this phrase, or its cousin, the internet of all things, because practically everything related to any type of information can already be found online. There aren’t really any trade secrets, little known industry facts, it’s all pretty much out there, and consumers will find out whether you choose to share the information with them or not. You might as well just put it out there yourself and your customers will recognize and respect these revelations.

Contact - 1 - 2 - 3

Many ecommerce sites attempt to conceal their identity, hide their contact information or stash their phone numbers out of sight to cut down on incoming inquiries that can often become frustrating. But keeping this information under wraps will lead to suspicion from consumers who will look elsewhere for a business with a more open image.

From the Inside Out

Practice transparency from inside your organization and this will promote trust and teamwork from within your business. Today’s web savvy consumers can often sense if things are running smoothly, people don’t “click” within an organization and this can be concerning to them.

Internet speeds move at a rate equivalent to the blink of an eye, and if customers don’t see what they want right out of the gate, they will simply move on to a more pleasant, transparent site.

How Trust Influences the Flow of Capital In Crowdfunding

How Trust Influences the Flow of Capital In Crowdfunding

With our role in starting this industry and our work in 34 countries over the last 4 years on all types of crowdfunding (debt, equity, rewards), we have deep understanding of the social and psychological dynamics of the process of raising capital online. One of these that is important to understand is the correlation between the speed of capital flows (efficiency), the amount of capital flows, and the trust individuals have with crowdfunding campaign sponsors.  Or:  how does the degree of connection to a potential investor change their willingness to invest? 

So we set out to talk to as many people who have backed campaigns as possible[1].  We asked them about the kinds of campaigns they backed, the degree of affiliation with the campaign sponsor, and the size of their investment.  The chart below graphs some of the directional findings (a full report will be published shortly).  For the image below we normalized the data so we could chart it.

Screenshot 2015-06-05 11.13.15

The short answer is, as one might expect, the greater the degree of affiliation between a campaign sponsor and his donor/investor the more likely that the donor/investor will part with more money and the campaign will have more individual donations/investments.  As this affiliation diminishes so does the amount of investments in both quantity of investors/contributors as well as the amount per investor.

An even more interesting findings from the data is that depending on the type of business (nonprofit, startup that is only proof of concept, startup that is at product stage, or an established business), the curves for each move differently.  For instance, companies that were already established and hence had customers (and most likely cash flow from sales), were able to raise the most money particularly from those closest to them.

This likely has a lot to do with the trust these individuals have in the business and the business owner’s ability to execute.  On the other hand, non-profits that had a lot of trust were also able to raise more money faster but usually at much smaller amounts.  Both the size of the donations and the quantity of them were smaller for nonprofits at the 1st degree connectivity than they were for the established business.  However the converse seems to be true at the opposite end of the scale where nonprofits were able to raise more money from people they weren’t closely affiliated to over established businesses because at this end unaffiliated individuals were probably backing the cause of the nonprofit which was harder it seems for unaffiliated people to do with established businesses.



[1] For a copy of our online survey send an email to This email address is being protected from spambots. You need JavaScript enabled to view it.

Crowdfunomics Selection Matrix (CSM) – Matching Your Product or Service to the Right Kind of Crowdfunding

Crowdfunomics Selection Matrix (CSM) – Matching Your Product or Service to the Right Kind of Crowdfunding

One of the biggest questions we hear from entrepreneurs using our Success with Crowdfunding program is “How do I know what type of crowdfunding is right for my kind of company?”  The importance of this question cannot be understated.  If you fail to select the right kind of crowdfunding model (eg: donation, rewards, debt or equity) for your campaign you might very well never hit your funding target.

To assist answering this complex question we created the Crowdfunding Selection MatrixTM. It is a 3 dimensional way of helping you determine what type of crowdfunding is right for you.  It is meant to be a guide more so than a definitive choice for you but it is based on the deep analysis our firm has done into where campaigns have been most successful based on the type of individuals backing the campaigns.

Screenshot 2015-06-05 15.04.58

 

Here’s how you use it.  Answer the following questions to the best of your abilities.  The answers do not necessarily have to be all or nothing.  They could be in-between (this is why the matrix is 3 dimensional).

  1. 1.What kind of business do you have? Is it a service or a product?
  2. 2.What stage of your business do you have?  Is it an idea or it is established with customers and sales?
  3. 3.What is the growth potential for your business? Are you a Main Street type of business that will have slow or moderate growth or are you a tech company that has great growth potential?
  4. 4.Are the people that are going to be backing you risk takers?  Or are they conservative?

Now on each axis plot the answers to your questions.  Then connect the dots.  The point of intersection should give you an idea of the type of campaign that is right for your type of business.  You can see that each cube is color coded and numbered for the type of crowdfunding model.

We looked at a lot of campaigns and have dropped some of our findings in there.  The colored circles with the small letters tell you which types of campaigns seem to work best for these kinds of businesses. 

Remember, this is a tool that is meant to guide you.  It doesn’t have to be this way. However the best way to confirm your findings on this matrix is to answer the questions, plot your findings, find your result and then ask someone whom you think would be a backer of your campaign if they agree?  If not, talk about where they would plot you on the axes and have a discussion. 

Venture Markets are Necessary for Continued Growth in SME

While Americans have made significant advancements with the passage of the JOBS Act, there are still more changes that can be made to our securities laws that will increase the robustness of our economy. shutterstock 71191306

One such area in which we have room for improvement is our lack of Venture Exchanges, public exchanges where smaller entrepreneurial firm (often called Small and medium-sized enterprises or SMEs) can have their shares bought, sold, and traded in a manner similar to firms that have undergone an Initial Public Offering (IPO) to a major exchange.


Why Are SME’s Important?
Small businesses are the core of the US Economy. 99.7% of US employer firms are small businesses1. The largest firms in this class employ up to 500 people and produce millions or billions of dollars in revenue. Small firms accounted for 64 percent of the net new jobs created between 1993 and 2011 (or 11.8 million of the 18.5 million net new jobs). Since the latest recession, from mid-2009 to 2011, small firms, led by the larger ones in the category (20-499 employees), accounted for 67 percent of the net new jobs2.


What is Wrong With the Status Quo?
Small Businesses are being starved of much needed capital by antiquated laws that unfairly favor large, well connected, publicly traded companies.

The attractiveness of an investment is heavily influenced by whether the investment can be easily sold at a reasonable price. Without liquid markets to provide an exit opportunity to investors, only those with the ability, capital, and wherewithal to invest for the long term can benefit from growth in these small private firms. Without the presence of the greater market these investments are artificially depressed in value compared to equally situated public companies. The result is fewer people are interested in investing in these Main Street companies when they know they can buy into a Wall Street offering today, and sell tomorrow or in three or six months depending on how the market is performing.  Without the ability to sell your shares and exit, Main Street’s businesses will always lack cash because their investors are missing exit opportunities, along with other market benefits.

What Other Market Benefits Could be Provided by Venture Exchanges?
The proposed venture exchanges will be able to provide greater transparency, research coverage, and market making when compared to the current way small business investment is conducted.

Having companies audited financials and investment offerings available to the world will provide a kind of day-light to what has always been the wild west of investing. Knowing that the numbers you are looking at are the same number that have been evaluated by neutral third parties like accounting firms or the SEC will provide greater transparency in transactions.This transparency will help place an objective market value on the company’s business.


How do you know you are making a good investment? Most methodologies of answering that question involve looking at similarly situated firms, analyst recommendations, in addition to the released company data. Currently, how and where one acquires this information for SME’s can make a large difference in how they evaluate an offering. With Venture Exchanges, you will have a greater field of analysts and investment media providing information on your target and similarly situated firms. This can greatly level the playing field for small investors, without huge teams of researchers, in determining the value of a potential investment.

 In addition to transparency and research coverage, Venture Exchanges will provide greater liquidity to investors. By either acting as a market maker themselves, or simply matching buyers and sellers, Venture Exchanges will provide the necessary low cost entries and exits into investments in SME’s that larger stock exchanges have provided to publicly traded companies.

Aside from these obvious positives, there are additional benefits to the listing company and its consumers. A company may experience increased value in the exposure and coverage they receive by being listed on a Venture Exchange. This could increase both the inherent and perceived value of the company to investors and customers. Another less obvious benefit would be that a company listed on an exchange would be better situated to make acquisitions bankrolled by their quoted shares.

Have These Types of Exchanges Worked Elsewhere?
While the US is a center for financial innovation, several other countries have already created similar venture exchanges with successful outcomes. In our neighbor to the north, Canada’s TSX Venture Exchange (Formerly the Canadian Venture Exchange until its acquisition in 2001) has provided a public venture capital market for emerging companies since 1999. Since then the firm has raised more than $80 billion in capital for these small issuers.

Across the pond, the London Stock Exchange, a historic institution founded in 1801, has lent its credibility and knowhow to their own version of the Venture Exchange. Billing itself as “the world’s most successful growth market,” London’s Alternative Investment Market (AIM) has employed its trading platform for over 3,100 companies since its inception in 1995, raising over £67 billion to fund their growth3. A wide range of businesses including early stage, venture capital backed as well as more established companies join AIM seeking access to growth capital.AIM offers smaller growing companies the benefits of a world-class public market within a regulatory environment designed specifically to meet their needs4.


What Do We Need in the US?
Maybe the concerned voices of the entrepreneurial community are right, and any venture exchange in the US would be better than no exchange, however, I believe that with the forces looking to maintain the status quo, we will only have one opportunity to get this right. We need to look at the strengths and weaknesses of the various international venture exchanges in formulating how ours will work. We do not want an overly burdensome regulatory regime which could snuff out the flame of innovation, nor do we want rules so lax they would let the whole exchange burn down. It is our opinion that the most reasonable way to move forward would be to have scaled and appropriate regulation based on the size of the offering. Less regulation for smaller offerings, more regulation for larger, and hopefully a few intermediate stages in between to allow right-sized regulations when they are appropriate.

What is the Current Proposal?

There is a  bill designed to amend the Securities and Exchange Act of 1934 to allow for the creation of Venture Exchanges to promote liquidity. The Main Street Growth Act, sponsored by Rep. Garrett, would add a new Exchange Act Section 6(m) to allow the trading of small company stocks on venture exchanges.  These small companies will include the SME definition of small companies from earlier, but also include any non-publicly traded firm with under $2,000,000,000 in assets.

This bill’s provisions include the following structure around these exchanges5:

  1. They will only be able to bring together buyers and sellers and perform a match making of them.
  2. For some securities, they may elect to hold mid-day auctions instead of continuous trading.
  3. They may not extend unlisted trading privileges to any venture security.

They will be exempt from requirements under several regulatory measures including6:

  1. Rule NMS, 242.600 through 242.612 of title 17 of the Code of Federal Regulations
  2. NMS basically required exchanges to coordinate in order to ensure price uniformity across multiple exchanges. This included a requirement to provide quotes in $0.01 increment, and provided rules for dissemination of information to ensure uniform and timely pricing7.
  3. Rule ATS, 242.300 through 242.303 of title 17 of the Code of Federal Regulations. Rule ATS requires each Alternative Trading System (ATS)  to report weekly volume information and number of securities transactions for each security to FINRA. It also require broker-dealers operating as ATS’s to each acquire and use a unique market participant identifier (MPID) when reporting information to FINRA. The rest of the rule applies to increased requirements for record keeping and record preservation standards8.
  4. Submit any data to a securities information processors
  5. Use Decimal pricing. ( the proposal specifies $0.05 cent ticks)  

 

What Do We Do About It?
We have a great opportunity here to make a significant positive impact on the US economy. This could mean more jobs for the people, more tax revenue for the government, and new products for consumers. The SEC’s new Regulation A+ final rule implementing Title IV of the JOBS Act has proven that the people can produce dramatic re-regulations in the public interest if they aren’t afraid to ask. Venture exchanges may be the next step. These new exchanges could trade the securities issued by smaller public companies, and those issued under the JOBS Act Regulation A+ and crowdfunding provisions. This could drive more investment into crowdfunding and small businesses in general, creating a tide of new opportunities and innovations.

The SEC, the House and the Senate have all been exploring the idea of introducing venture exchanges recently. The House and Senate have even held hearings on the matter to gather information. The Financial Services Committee in the US House of Representative has introduced the The Main Street Growth Act as a bill for consideration. When it comes time for the vote, we don’t want a congress of laymen voting on a bill they might not understand having only heard misinformation from critics. Call your Congressperson. Write an Oped article on the topic. inject truth into the debate.

There are plenty of established interests that won’t benefit from a stronger small business market. Lots of firms are happy to keep small investors out of these lucrative deals. Some bureaucrats fear that by opening venture exchanges, they will lose the power to make your investment decisions for you. It is the job of those whom will benefit, ordinary citizens, to take hold of the debate and demand Venture Exchanges as part of a strategy to improve the economy for everyone.

 ----------

  1. https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf
  2. https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf
  3.  http://www.londonstockexchange.com/companies-and-advisors/aim/publications/documents/a-guide-to-aim.pdf
  4. ttp://www.londonstockexchange.com/companies-and-advisors/aim/for-companies/joining/aim.htm
  5. http://business.cch.com/srd/MainStreetGrowthAct.pdf
  6. http://business.cch.com/srd/MainStreetGrowthAct.pdf
  7. http://www.sec.gov/divisions/marketreg/rule611faq.pdf
  8. https://www.law.cornell.edu/cfr/text/17/part-242

How Governments, Multilaterals, and Development Organizations Focused on Building Entrepreneurial Capacity can Leverage Online Co-investment Vehicles to Maximize their Efforts

In our World Bank report on the potential for equity and debt crowdfinance in developing economies, CCA created new models for governments, multilaterals, and development organizations to use in reaching their goals of entrepreneurial and SME development.  These organizations are focused on building entrepreneurial capacity and many times, the topic that is most difficult to deal with is access to finance, because it is often simply not available from traditional means, or organizations suffer from “the last mile problem” of being able to efficiently know which entrepreneurs are the “best” entrepreneurs to fund. Screenshot 2015-06-01 12.15.03

Now with online vehicles to raise capital (including P2P debt and equity crowdfinance) investors, multilaterals, governments and development agencies can leverage crowd-diligence to support decision making and increase the volume of grants/co-investments to targeted SMEs/entrepreneurs. A crowdfunding co-investment vehicle is a matching fund program that essentially states, “If an entrepreneur can raise x% of the funding target from the crowd, the institution will co-invest the remainder from the funds (up to their funding target)”

In order to enact this type of program, governments, multilaterals, and development organizations should partner with local enablers that are focused on building entrepreneurial capacity like incubators, accelerators and co-working spaces and offer the funding in conjunction with a crowdfunding campaign on a verified debt or equity crowdfunding platform.  Such a program allows the crowd to validate which ideas and which entrepreneurs they believe are worthy of funding. They vote on this with their own money. Data indicates that entrepreneurs/SMEs need to generate 25-30% of their funding need from people they are closely connected to (e.g. first and second degree LinkedIn connections) before loosely affiliated and/or unaffiliated individuals will invest. This “social proof” that is generated via crowdfunding, allows governments, multilaterals, and development organizations to narrow the focus of their diligence efforts on only those businesses and those entrepreneurs that have the support and validation of their own crowd.  To further the opportunity, companies that get the backing of the crowd and receive the backing of the government/NGO could syndicate the deal out to private institutions/investors focused on building entrepreneurial capacity as well via parallel investment vehicles or other pooled vehicles.

In CCA’s first World Bank report we write: “Countries with limited experience with technology and high-growth-potential start-ups can increase investor confidence by marrying the launch of [crowdfunding] to accelerators or incubators, such as Climate Innovation Centers – that is, to companies that have been vetted, trained, and screened. Syndication of the deal by a lead investor who is well known and trusted in the country will help attract additional capital. Co-investment strategies by governments or development organizations to partially or fully match crowdfunding targets of companies will help to build confidence for both professional and individual investors.”

We then provide the following case study:

“THE UNITED KINGDOM’S CFI CO-INVESTMENT SCHEME. In December 2012,  the U.K. government and Funding Circle announced that £20 million (about US $32 million) would be lent by the U.K. government to individual businesses via the Funding Circle in a co-lending facility. The government would contribute the last 20 percent of every loan that reached 80 percent of its goal from the crowd. By funding the last 20 percent of loans, the government was able to pursue its goals to put capital into the hands of businesses while not adversely affecting the loan bidding process on the Funding Circle platform. In September 2013,21 as the U.K. government announced a £900 million (about US$1,455 million) decline in business lending during June-July 2013, Funding Circle was able to report £14 million (about US$23 million) in successfully funded loans for the same period, an increase of 20 percent over the previous month and 250 percent over the previous year.”

If you wish to learn how you can structure such a co-investment vehicle that is stand alone, in conjunction with the crowd, and/or syndicated with enabling organizations or private investors feel free to contact us.