THE CROWD CAFE: Mapping the Crowdinvesting Ecosystem

Mapping the Crowdinvesting Ecosystem

Dec 16, 2013 12:00 pm | Jonathan Sandlund |View Original Post|

A colorful ecosystem is evolving around the investment crowdfunding industry. Companies are developing products and services to alleviate nearly every conceivable pain point of the system’s stakeholders, including businesses (supply), platforms (infrastructure) and investors (demand).

In some cases products are being designed from the bottom-up to solve new and unique challenges crowdinvesting markets present. Take Asurvest, for example: it’s structuring an insurance product to cover crowdfunded securities. Insurance products have long existed in other industries but Asurevest is the first, to my knowledge, to go after early-stage private securities. Another great example is CrowdCheck, a company building out a holistic portfolio of products & services laser-focused on preventing fraud in securities crowdfunding markets.

In other cases—as often happens in new industries—companies are re-segmenting their products/services to the crowdinvesting market. The degree to which ranges. From as light as a new landing page with dedicated copy—say an accounting firm that launches an account for your crowdfunding raise service—to as heavy as a carving out a dedicated division.

Mapping the Crowdinvesting Ecosystem

The ecosystem is big, and it’s changing daily. Additionally, for participants preparing for retail crowdfunding, it has an unfortunately large dependence on yet to be implemented regulations. That said, let’s map out of the baseline. Where it is today, and where it may go tomorrow. For brevity—well, at least I can say I tried ;-)—this list is U.S.-focused.

Here’s the personal framework I use. I segment companies into six categories.

1. Technology Infrastructure
2. Financial & Compliance Infrastructure
3. Due Diligence Products & Services
4. Campaign Products & Services
5. Data & Analytics
6. Media & Education

A few things to note before we dive in.

First, I’ve included both existing and prospective market participants. Existing participants are directly serving the investment crowdfunding market today; whereas prospective participants are not, but they have relevant products/products, and may choose to do so in the future. I’ve used judgement here—it’s speculative, to be sure—but I believe including them gives a fuller picture. I’ve tagged these prospective participants with “P”.

Secondly, these lists are not curated or rank ordered. It’s important to do individual due-diligence. Lastly, I sincerely apologize beforehand for any companies I miss. Please do leave a comment or shoot me a note at j@thecrowdcafe.com, and I’ll update in short order!

Technology Infrastructure

These companies “power” securities-based crowdfunding platforms. Also referred to as white-labeled solutions or Platforms-as-a-Service (PaaS). Some focus only on the technology and leave compliance to customers; others bake in fully compliant solutions. Furthermore, some integrate suggested business models through affiliate systems and other potential revenue streams.

1.       Apicista/CommunityLeader (US)

2.       Crowdclear (US)

3.       CrowdEngine (US)

4.       CrowdfundConnect (US)

5.       CrowdValley (US)

6.       Invested.In (US)

7.       Katipult (US)

8.       Launcht (US)

9.       Proseeder (US)

10.    RebuildingSociety (Debt-based/UK)

11.    SecondMarket > DIY 506(c) offering product (US)

12.    Sponsorcraft (Rewards/Equity/UK)

13.    Symbid (NL)

14.    Webclusive (Netherlands)

Who are their customers? Look for the following: (i) existing access to deal flow; and/or (ii) existing access to investors, and you’ll find them. They include existing broker-dealers, venture funds, angel groups, universities, accelerators, upstart crowdinvesting platforms of course, and local community organizations. While many are geographically concentrated today, I wouldn’t count out global ambitions. As supportive regulations lead in new geographies, vibrant crowdinvesting markets—and the demand for facilitating infrastructure—will follow.

We should also note that select platforms license their technology in addition to managing their own marketplace. It can be purely white-labeled, or “gray-labeled,” where the licensor’s branding remains. SeedInvest for example recently launched HALO, a private funding product for angel groups and incubators; it enables them to manage a private marketplace, with the option of syndicating deals across the broader SeedInvest network.

These participants are rapidly improving their respective solutions. The technology alone is becoming more commoditized by the day.

Financial & Compliance Infrastructure

These companies are dedicated to facilitating clean and compliant transactions at scale. They’re mostly B2B: they’re primary customer are platforms.

1.       Amazon Payments (Payments)

2.       Balanced Payments (Payments)

3.       BancBox Crowd (Payments)

4.       Paypal (Payments)

5.       WePay (Payments)

6.       506accredited.com (Compliance)

7.       AccreditedInvestorSolutions (Compliance)

8.       CrowdBouncer (Compliance)

9.       CrowdCheck > For Platforms (Compliance)

10.    CrowdClear (Compliance)

11.    Crowdentials (Compliance)

12.    cTradeExchange (Compliance)

13.    Gravitasity (Compliance; Recently inactive, may be shut down?)

14.    Invigor Law > Investor Verification Service (Compliance)

15.    SecondMarket > Accreditation Verification Service (Compliance)

16.    VerInvest (Compliance)

17.    DocuSign (Digital Signature)

18.    EchoSign (Digital Signature)

19.    Right Signature (Digital Signature)

20.    Docracy (Legal Docs)

21.    VentureDocs (Legal Docs)

Compliance is a broad categorization. Crowdbouncer, for instance, provides many services under this umbrella while others are focused on one.

Let’s drill down on Accredited Investor Verification (“AIV”). It’s particularly important because it’s required of all investors who participate in 506(c) deals—the publicly advertised private offerings that make up the “accredited crowdfunding” market. This verification requirement has perhaps been the most vocalized criticism of choosing 506(c) versus 506(b), which requires only self-certification.  How is this point of friction being overcome? 

A  couple observations. First, check out InVigor Law. It’s a full-stack Seattle law firm that’s carving out a niche in securities crowdfunding. Interesting. Will we see AIV  become a staple service of boutique law firms? Or—a la SecondMarket’s AIV service—will we see a few large players become de-facto clearing houses? Or it may be blended, with “clearing houses” partnering with feet on the ground—accountants, lawyers, etc.—to aggregate completed verifications. If I’m a high net-worth individual, I may feel more comfortable verifying through my existing accountant, opposed to an unknown (and online) third-party.

My hope is we’ll something of an “Accreditation Passport” emerge that allows investors to verify once and then carry the designation over to all platforms. This isn’t necessarily optimal for (all) platforms—it cannibalizes a potential revenue stream and reduces switching costs—but it would dramatically lower the friction of entering and actively participating in accredited crowdfunding markets.

Due Diligence Products & Services

These companies offer products (technology-driven) and/or services (human-driven) aimed at optimizing due diligence processes. The types and structures vary significantly between equity and debt but they a share a common goal: helping investors evaluate opportunities more efficiently and effectively.

Due diligence is enormously laborious. It’s likely to be the single greatest cost-center of platforms that curate deal-flow. Scanning their team ranks, it’s not uncommon to find former investment banking (IB), or even private equity (PE), experience. It’s not cheap—1st year PE experience, with generous equity and/or participation, will run upwards of $100k, likely much more. Of course, technology also plays a role. Each platform is creating their own unique due diligence recipe—and these recipes will prove critical to achieving scale economically. How will platforms (i) surface “high-quality” investment opportunities, and (ii) guide mutually-fair valuations? The guidance of valuations isn’t talked about as much, but it’s equally important because most platforms will one day be defined by their returns—and returns are baselined by valuations.

Perhaps you’re wondering why I included Expert Networks. Where do they fit? There’s an enormous amount of distributed knowledge out there, just waiting to be creatively harnessed. Think of an amorphous “Shark Tank” structure, where one of the Sharks evaluating each deal has domain-expertise. Online, this is quite possible to do on an ad-hoc basis.

It’s not unlike what Angellist has done with Syndicates: they’re distributing the due diligence to the Lead investor, who often has domain-expertise. Lots of interesting implications of how distributed knowledge—either within or outside a platform’s network—can be harnessed to improve the efficacy and scalability of due diligence.

Campaign Products and Services

These companies are guiding and supporting issuers thorough their crowdfunding raises, many focused on specific pain points. My hope is that platforms curate a recommended list of providers—or integrate the services themselves. This will help with quality control. I’m unfortunately already seeing lots of shady stuff out there… we must not let the same shenanigans that have overrun the public markets pollute the private markets as well. I included one example below. They’re hard to miss.

Data & Analytics

These companies are bringing greater visibility to online private capital markets. Some are directly or pseudo-positioned as the “Bloomberg for private markets.”

1.       530Funds

2.       CBInsights

3.       CFEXS

4.       Crowdfunding4all

5.       Crowdlanding

6.       Crowdnetic

7.       Crowdsunite

8.       Crowdsurfer.co

9.       TechCrunch > Crunchbase

10.    Dashboard.io/Indicate.io

11.    Dealflow.com

12.    Dow Jones > VentureSource

13.    EarlyIQ

14.    MatterMark

15.    PitchBook.com

16.    VCExperts

17.    VentureDeal

I’m psyched about the data that will materialize as transactions move online. Questions that are incredibly difficult to accurately answer today—”What is average valuation of fast-casual restaurants with revenues between $500k-$1mm?”—will become common queries. This is a ways away of course, but it provides a glimpse into the possibilities.

I’m not a huge believer in bottom-up valuations for early-stage companies; simply too many exogenous factors at play. But I am super bullish on comparable transaction valuations. They’ll become all but automated—perhaps with premiums/discounts applied against unique attributes—as historical transactional data is captured and stored. What does this mean? It means the friction involved in setting accurate valuations, especially for non-tech companies, will be largely removed. The sooner we get here the better. It will do wonders for growth on the supply-side of the market.

It not unlike how Y-Combinator et al. have standardized their seed-stage term sheets, in effect taking big question marks off the table from the get-go.

Media

These companies, including myself :-), fall under the “Media” umbrella. We publish content on the industry in hopes of accelerating awareness and education. Some participants also host events and / or offer professional consulting services. Larger players haven’t aggressively entered the space yet—it’s still too small—but they will.

Our addressable audiences vary—from (i) issuers to (ii) investors to (iii) the industry. There’s often spillover. Crowdsourcing.org, for instance, as well as more or less myself, are mostly focused on the industry. Crowdfundinsider speaks to all three, in addition to covering rewards-based crowdfunding.

1.       Accreditedinvestormarkets (Media)

2.       Coastal Shows (Media / Events)

3.       Crowdability (Media)

4.       Crowdfund Capital Advisors (Media / Consulting)

5.       Crowdfund Productions (Events)

6.       Crowdfundbeat (Media / Events)

7.       Crowdfunding Campuses (Media / Events)

8.       CrowdfundingRoadmap > Crowdfunding Bootcamp (Events)

9.       Crowdfundinsider (Media)

10.    Crowdnetic > NowStreetJournal (Media / Events)

11.    Crowdsourcing.org (Media / Consulting / Events)

12.    Dealflow Media (Media / Events)

13.    Earlyinvesting.com (Media)

14.    TheCrowdCafe (Media)

In addition to independent participants, individual platforms are also building their own media presence. Think “Platform ABC University”, where accredited investors learn more about investing in ABC’s asset class. It’s likely to be a strong investor acquisition and retainment channel for many platforms; especially so in financial services, individuals are sticky when they find a trusted source of guidance and education. (Rarely do people leave their financial advisors.)

Concluding Thoughts

What the ecosystem looks like today is very different from what it will look like tomorrow. It’s rapidly evolving, and we’ll see many more entrants as it scales to support larger players coming downstream. We’re already seeing a bit of this today. The inclusion of the retail investor—individuals whom are not accredited—will also bring to bear significant change.

So where’s it going—where are the opportunities? Here are a few things that pique my interest.

1.       Standardization of Valuation (Pre-Funding) For non-tech businesses particularly—think single-location restaurants—valuation creates enormous friction in the fundraising process. Standardizing & automating this will drive huge efficiencies in the market: giving issuers instant baseline visibility into the implications of a fundraise;  and giving investors greater peace-of-mind in valuations. This is super important to portfolio management—manually running sanity checks on the valuations of hundreds of deals would create one heck of a headache!

2.       Optimization of the Cap Table (Pre-Funding) This assumes the luxury of choice. Some will have it. And I believe platforms/services will attempt to quantify the relevancy of individual investors to specific deals. “Investor Scoring.”  For instance, I’m a seed-stage startup selling software to Hospitals. Which investors have experience selling into enterprise, perhaps hospitals even? They should be surfaced. Likewise, they should see my deal. Investor scoring maximizes the relevancy for both issuers and investor. (Notably, a Kauffman Foundation study (PDF) shows that, in aggregate, angels who invest in their domains outperform those who do not.)In my mind, LinkedIn’s professional graph is the holy grail. Imagine querying a platform’s 100,000 active investors—hey, I’m looking ahead ;-)—for hyper-specific experience.“These 350 members have worked in Big Pharma. In these geographies. For this long. In this capacity. They’re sorted by investor activity.” Platforms that connect to LI accounts via OAuth/OpenID/etc. will have access to this data. When coupled with their own proprietary data… a gold mine, right.

3.       Optimization of Execution (Post-Funding) We’ve raised our round. Sweet! But not so fast on the champagne. Raising capital is not success—execution is. How can maximize our odds of execution? Well, we did just curate our cap table with targeted investors, stacking the deck. And—let’s assume favorable regulations—we also opened a tranche to retail investors.We now have 800 investors whom all have a vested interest in us. They’re insanely biased, as will be their friends, and maybe even their friend’s friends. How do we interact with our extended network? Reach out for support, for customers. We’re social creatures—if a friend asks me to download an app that he’s invested in, or check out a restaurant he backed, will I? Absolutely! A try at least. Lots of possibilities here for maximizing the value of a distributed investor network post-funding. (Nielsen ran a study that showed consumers are 4x more likely to buy if referred by a friend.)

I’d love to hear your views. What developments particularly excite you?

It’s been lots of fun witnessing this growing ecosystem. I’ve had the great pleasure of getting to know many of its participants, and I’m psyched for what’s next. Regulations have created painful and frustating uncertainty, but that hasn’t stopped the private sector. It marches on, its dynamism matched only by its resilience.

The post Mapping the Crowdinvesting Ecosystem appeared first on The Crowd Cafe.

The Many Use Cases of Rewards and Equity Crowdfunding

Nov 20, 2013 05:42 am | Paul Niederer |View Original Post|

Many a good innovation dies on the vine due to the lack of funds to make a prototype or take it to market.

Crowdfunding is bridging this gap.

The main idea with reward and equity crowdfunding is that the innovators and their helpers set up a fundraise as a new project on a crowdfunding platform. The innovators—now promotors—invite others to assist them with funding their goal within a specified timeframe. Most projects have a funding goal that if reached makes their project worthwhile. Depending on whether the crowdfunding is donation, reward or equity-based, backers receive a gift, product, a good feeling or shares.

In a recent Indiegogo presentation I attended it became obvious to attendees that reward crowdfunding is not just about the money. Innovation is at the core of virtually all raisings. The presentation highlighted five reasons innovators may use a rewards crowdfunding platform to raise capital.

• To validate the market. The innovator wanted to open a “Cat Cafe” in London, needed £108,000 to do it, but was unsure if there was enough interest. Thecampaign raised £109,510 in two months which validated the idea of opening a cat cafe where visitors will have the opportunity to kick back and relax with a cup of tea and spend time in the soothing company of our purring feline friends.
• To test a market. Canary pitched itself as the first smart home security device for everyone. Canary is a single device that contains an HD video camera and multiple sensors that track everything from motion, temperature and air quality to vibration, sound, and activity to help keep you, your family and your home safe. Unsure of the market the promoters pre-sold their units in a crowdfunding campaign with an initial sales goal of $100,000. The market responded with orders for over $1.9 million. Over 7,000 units were sold. A very successful market test.
• Get extra promotion. Sometimes your sales may be confined to the market as you know it and need a wider audience.  Take the Robot Dragonfly for example. The dragonfly was developed at the Georgia Institute of Technology, as a joint effort between 20+ researchers, PhDs, professors and students from multiple universities across the world. Through their crowdfunding project they raised over $1.1 million and gained 3,200 customers.
• To capture data. The Scanadu Scout is a personal scanner packed with sensors designed to read your vital signs and send them wirelessly to your smartphone in a few seconds, any time, anywhere. The device promotors used crowdfunding to target the consumer market but the backers they attracted, and the data generated by these backers, is certain to capture the attention and significant budgets of the medical industry around the world.
• Money and matching money. Sometimes it is about the money. This was the case when Tesla’s final laboratory came up for sale. A non-profit wanted to buy the property and turn it into a Nikola Tesla Museum. The property was listed at $1.6 million, and this non-profit would receive a matching grant from New York State of up to $850k if it raised the money.  33,253 contributed over $1.3 million and the building was saved.

Equity crowdfunding and innovations also go well together. On our platform hundreds of products and services have reached the world due to raises on ASSOB’s proven capital raising platform. For instance, below is a select sample of companies which, combined, have raised more than $16 million.

These are just a few of the thousands of examples world-wide where innovation and crowdfunding go hand in hand.

And … this is just the beginning.

Afterword from Jonathan
I’m sincerely grateful to Paul for contributing this article. It originally appeared on his blog, which I recommend all to follow. In the examples he gave, do you see the pattern?  Well that’s just it, isn’t it…. From encryption software to mining tenements, there isn’t one. Like project creators on IndieGoGo, the use cases of equity crowdfunding span every hue. High tech, non-tech; exponential growth, steady growth; billion dollar potential, million dollar potential; decisions are made through lenses of every color, not just one. And herein lies the beauty.

The post The Many Use Cases of Rewards and Equity Crowdfunding appeared first on The Crowd Cafe.

The Investment Crowdfunding Landscape in France

Oct 08, 2013 11:00 am | Jean-Baptiste Vayleux |View Original Post|

Introductory note from Jonathan: Jean-Baptiste Vayleux is the co-founder of Lymo, the first European Real Estate Crowdfunding Platform (www.lymo.fr). Lymo enables investors to invest in real estate residential niche projects that target a 10% annual return. Launched in Feb 2013, Lymo has raised €500k+ so far  on 3 projects. If you’re interested in real estate crowdfunding, you can reach Jean-Baptiste at jean-baptiste.vayleux@lymo.fr. 

Why France?

Reward-based Crowdfunding is booming in France, and security-based crowdfunding is following in its footsteps. I suspect this doesn’t come as a surprise; what is more interesting, however, is to understand how a country famous for strikes and extended holidays can be a fertile soil for such an innovation as crowdfunding.

1.       France is a place for companies and startups in general It’s hardly known but France is full of global competitive companies. France tops European countries in the Fortune 500 global ranking, by number of companies,  with 32 companies—the same as Germany, but with 25% less population (1). France is a fertile soil for startups as well: Paris is the 11th most promising startup ecosystem in the World, only second to London in Europe, according to research published by the Startup Genome Report last month (2).

2.       France has among the highest household saving rates in the world Frenchmen are not big spenders. We tend to save money a lot. Comparative studies show they save more than 3 times more money than US Citizens (3). The more money they save, the more they are willing to invest in crowdfunded companies.

3.       Government support & new Regulation The French government desperately needs to stimulate the economy and create jobs. Crowdfunding provides a mechanism to do so, and the government isn’t sitting by idly. With the help of Fleur Pellerin, a young minister with a strong business background, new legislation is being championed that will bring structure and support to security crowdfunding markets in France. (4)

Market Landscape: Investment Crowdfunding in France

Seemingly, a new platform emerges with every passing week. While not all will make it, it fuels competition and innovation. I’ve listed a few of the leading platforms below. Wiseed.fr has pioneered the market in France with great success.

Leading security crowdfunding platforms in France (2013)

The Advantages of Niche

It’s hard to say how new entrants will fare in such a crowded market. Differentiation will be critical. As it’s said: “Differentiate or die”. In this respect,  I’m particularly optimistic about niche crowdfunding—and it’s why I chose to start Lymo, a niche real estate crowdfunding platform.

Real Estate has a few advantages over technology startups.  While not as “sexy” persay, it’s an asset class everyone is familiar with, and has receives broad interest from investors. At Lymo, we figured,  “Why not create a real estate crowdfunding platform?”

Six months later our startup lymo.fr has raised €500,000+ from more than 140 investors. It’s only a start, but a good one.  Unlike traditional crowdfunding platforms, we are also producers of the products offered on the platform  (in our case real estate developers). Consequently, we generate our primary revenue through the production of goods (i.e. housing units) rather than the distribution of them (i.e. fees on amounts raised).

Might this be an alternative model for new platforms?

Sources

1.       World’s largest corporations by geography (Forbes)

2.       World’s 20 Hottest Startup Scenes (Entrepreneur Magazine)

3.       Household savings rate data in France

4.       More on proposed Crowdfunding regulations in France (in French)

The post The Investment Crowdfunding Landscape in France appeared first on The Crowd Cafe.

Crowdfunding the Franchise Funding Gap

Sep 11, 2013 02:18 pm | Mark Mohler |View Original Post|

The post Crowdfunding the Franchise Funding Gap appeared first on The Crowd Cafe.