In a country struggling with economic, political and social challenges, how does an equity crowdfunding platform become part of the solution in filling the funding gap where regulations stifle business starts and investments? This RABBIT Report details one of the early pioneers in Brazil.
Sector:Platforms & Secondary Markets
Location: Rio de Janeiro, Brazil
What problem is EqSeed solving?
EqSeed is a pioneer equity crowdfunding platform based in Brazil whose goal is to fill the very large funding gap that exists in Brazil for startups and SMEs.
Many quality companies in Brazil cannot access the capital they need to grow after they receive some initial funds from early stage accelerators and (limited) government programs. Accelerator investments are typically capped around BRL 150,000 (~US$44,000), which is generally enough for a company to develop an MVP but not enough to launch. After this there is early stage venture capital, however, they generally invest greater than BRL 2M (~US$586,000) and back companies with valuations of at least BRL 10M (~US$2.9M). Between these two points lies a critical gap in the capital access market. Without access to one or two rounds of post accelerator funding and a 12–24 month additional period of development, a large quantity of quality Brazilian startups cannot bridge the gap and do not survive or reach their full potential.
The angel investment market, which typically fills this gap very effectively in Europe and the US, is extremely shallow in Brazil with very few active startup investors in the sector. The angel investment market is also poorly organized and severely underdeveloped with inconsistent structures and valuations and even investment terms that are often detrimental to the growth of the investee companies.
2.Why is EqSeed necessary?
It is nearly impossible to access thousands of investors offline in Brazil. However, EqSeed gives Brazilian companies access to thousands of investors interested in investing in startups on their platform. EqSeed plays a very hands on role and provides its startups the tools and structure to publish regulatory approved investment offers online. “Using this platform, companies can transform their personal and professional social networks into investors and professional support to take their companies to the next level,” says co-founder Greg Kelly.
From an investor’s perspective, the platform makes investments in startups transparent, accessible and secure. Relevant information and disclosures about a deal are posted on the site, including the results of a legal due diligence process undertaken on the company. All investors receive the same investment terms and pricing, whether an experienced investor investing BRL 100,000 (~US($29K) per company or a first time investor, investing the platform minimum of BRL 1,000 (~US($292). EqSeed feels “this is incredibly important as it gives smaller investors access to deals and comfort in the fact that they are investing alongside more experienced professionals.” Kelly states, “The platform is attracting new investors, many of whom are ‘money-rich and time-poor.’ These investors have the interest and capacity to invest in startup companies and we give them the information and structure that they need to become active investors in the market in an efficient way.”
3.How does it work?
All the campaigns published on the EqSeed platform are public offers of securities, with each having passed through a pre-approval process with the local regulator, the Comissão de Valores Mobiliarios (CVM). All the offering materials are submitted to the CVM and once EqSeed receives permission to publish, the offer is released online.
All offers via EqSeed have a funding target, a defined percentage of the company being offered and a time limit. The campaigns work on an ‘all or nothing’ basis, meaning that the company has to reach the funding target to receive the investment. Kelly believes “this gives investors the final say over whether the company receives the funding sought and guarantees that the company will have the necessary funds to implement its business plan and adequately position itself to hit its sales projections.”
By taking place online, a company can engage a large population of potential investors. Campaigns are often the catalyst for investor events, webinars, individual meetings and calls, all with the aim of connecting the company to potential investors and giving them the opportunity to interact.
4. Who are the founders?
Greg Kelly is a British mathematician who formerly worked in capital markets for Lloyds Bank in London. Kelly began following the development of the equity crowdfunding market in the UK in 2010, and decided to move to Rio de Janeiro to launch the platform in 2014.
Brian Begnoche is an American economist and linguist with professional experience in marketing, sales and education. Begnoche has lived in Rio de Janeiro since 2008, during which time he has built a deep understanding of the country, its culture and nuances.
5. What about early traction/user experience?
The founders began working together in June 2014 and after 15 months of development launched EqSeed in September 2015. They closed the first deal on the platform in December 2015. This early success “increased the EqSeed’s profile and significantly accelerated the growth of the business,” says Kelly.
The equity crowdfunding market In Brazil is still very nascent and Kelly says, “we are only just at the beginning of our own story. Our focus is on the quality of the offers and companies on the platform as we look to establish ourselves as the go to market option for top quality companies with big plans for growth.”
2016 for EqSeed is about closing 2-3 further ‘proof of concept’ raises while continuing to refine their value proposition for both companies and investors. They also have their sights on completing a fund raise for EqSeed via the platform itself to allow them to expand their team and begin to scale the business.
6. What are the risks?
Investments in startups is risky and it is fundamental for EqSeed’s long-term growth that they only attract investors who understand this and are comfortable allocating a small part of their portfolio to high risk assets. To provide investor comfort around risks beyond business risk, EqSeed performs a legal due diligence on all companies before publishing their offers. Their success fee model incentivizes EqSeed to publish quality offerings at fair valuations. “Raising via equity crowdfunding is an incredibly public and transparent process,” Says Kelly. “With our platform due diligence processes we believe we are very effective in filtering out unscrupulous or poor quality companies.”
On the regulation side, EqSeed is currently allowed to operate under the general public offering regulation (CVM Instruction 400), which allows them to undertake capital raising for Micro and Small companies with annual revenues of up to BRL 3.6 million (~$US1M). In 2016, the CVM will launch a public consultation about specific regulation for the sector. The regulation itself is expected towards the end of 2016. While EqSeed is optimistic about the policy process they are realistic that overzealous regulation might inhibit the market.
7. Our Perspective on EqSeed:
While Brazil is the 9th largest economy globally and #1 regionally it lacks many social, cultural, technological and regulatory variables that are conducive to the advancement of startups and SMEs. Excessive and outdated regulation that promote complicated bureaucracy and unnecessary costs is shown to inhibit Brazilian business starts. Those entrepreneurs that decide to tackle these challenges face a funding void post accelerator larger than other South American economies.
With a market as big as Brazil and dominant in the region we would only hope that the government will promote policies to further support startups and SMEs. It is great to see 2 expats look beyond the regulatory hurdles and compliance issues to bring this alternative form for finance to Brazil. Much of the industry’s success will depend on the path the regulators take. While the US regulation looked to untangle a drastically complicated situation inherited from the Great Depression, Brazil faces no such restrictions and is free to follow the regulatory approach taken by the UK which has facilitated the growth of the most successful equity crowdfunding market in the world. The government could further foster this development with a data intensive approach to regulating the markets. EqSeed’s active engagement with the CVM will hopefully encourage this. The equity crowdfunding market can be hugely beneficial to the development of the companies that will create a new generation of the Brazilian economy, generating more competition and providing more and better products and services for citizens – something lacking in the Brazilian economy.