Jan 12, 2014

Angels Groups should manage equity crowdfunding.

As detail in a previous post, accredited investors should like crowdfunding, but there are still a lot of treats that could damper this new opportunity.

Here is a list of problems to solve:

-        As we can see in many web sites, scammers will try to make money with all vulnerabilities. This can be false start-ups, false attorneys or even fake crowdfunding sites.
-        Thrust is important in all investment. For large deal, there are many professionals with international recognition that can bond an investment: Business attorneys for security, accountants for due diligence, engineers for products and I.P…. At crowdfunding level, those professional may represent more fees that funding itself.
-        The number of investors may also induce administrative or legal problems that must be set at the beginning.

Angel groups may be more than a solution to crowdfunding; it can introduce synergy to the process.

Here is a proposal that is not necessarily the best possible solution, but it will show the multiple advantages to link crowdfunding and angels groups.

First; we need to crush entry fees, which does not mean that its need to be free. Angels groups will offer a service that address first its members, but also entrepreneurs, angels of others groups, and new small investors that will be qualify for crowdfunding investment. It is understanding that angel groups will be paid for this services. Those new revenues will strengthen angel groups with extra personal and higher cash flow.

Second; we need to set enough trust to make accredited investors willing to invest 5 to $15K without a too deep study of the offer. Investors could be comfortable with the fact that someone qualify and interested had done appropriate verifications, and invest its own money in the project.

Third; we need to produce evidence that money will be spend as presented, and that there is in place a reasonable control system.

Process starts with a pitch from an entrepreneur to at least 5 angels that are qualify to judge a start-up of this specific industry. Here the start-up will have to cover a first administrative fee of $250, for the basic expenses of the angel group. The entrepreneur will have first to pitch a employee of the group, to make sure angel are not moved for noting. The angels/judges will not be paid for this interview, but they will be in first position to mentor a start-up, which could be well rewarded.

To reach the second step of the process, a start-up must have at least one of the angel/judge that whish to mentor the start-up. Moreover, to be able to present on the crowdfunding platform, a start-up must have commitment of one or more angels (starting with one judge) to fund at least 10% of the minimum objective of the funding campaign.

The second step will be a series of verifications that will be proceeded by angel groups staff. This will not be a due diligent verification, but a simplify process where corporative registration, bank account, physical location, name and address of administrators, and a lot of other small things will be check. This step will also cost $250 to entrepreneurs, which will not necessarily cover the expenses of the angel group.

Third step is to set an in house private placement memorandum to make clear for every investors what they exactly get for their money, and what will be done with it. This PPM will be negotiate and close within entrepreneurs and mentors. The mentors, who already commit for at least 10% of the funding of the campaign, will countersign the PPM that will rule all other investments.

You will note here that the incentive for angels to be mentors of a start-up must be significative. They make the first analysis, they support the crowdfunding process, and they will represent the crowd of small investors on the board of the corporation. For all this, they should received twice the shares of other investors per dollar invested, even if they invest more than 10% of the require fund.

Fourth step will be to post the start-up in the crowdfunding platform. This will be the last upfront fee for the entrepreneur. Here again the $250 fee may not cover the expenses of the web platform. The success fee associate with the funding campaign should be 6% of total funding, 3% for the web platform (that should be own by few angels groups), and the other 3% to the local angels group that start the process, and bond some basic information’s.

Crowdfunding campaign should be set for 90 days. The first 10 days, the offer should be visible only to local angels. The next 20 days, the offer will be visible only for accredited investors of all angels groups that participate to the crowdfunding platform. The last 60 days, the campaign is open to everybody, including public that will be able to invest only one or two thousands dollars per person.

The campaign will have a minimum-funding objective. When the minimum objective is reach, the local angels group, that will receive and secure the funding, will transfer the appropriate fund to the start-up. This does not end the campaign, which will continue until maximum funding is reach. As entrepreneur will not wish to sell to many shares at the low price of the crowdfunding campaign, difference within minimum and maximum will sometime be small.

The campaign stop automatically when maximum is reach, this mean that goal may be reach at beginning by local investors, and no other one will see the offer. It may also be close few days after it is show to all angels, which will push angels to act promptly when they see something interesting.

Operating rules

The system must be versatile, and many options may be offer to investors. It is also important that the start-up do not fall under the law of public corporations due to a large amount of shareholders.

For this purpose, the corporation may offer regular “A” shares only to investors that fund $5K or more. For smaller investor, a “B” share may be set, with same participation to share valuation and dividends, but without voting right. Convertibles or fix revenues shares may also be proposed.

Further funding

As the start-up already count angel investors, the next round of funding will generally be set inside the local angels group. It may also be practical to use the crowdfunding platform as a deal flow platform to complete the next funding round.

Please react.

If you are an accredited investor, and if you like this crowdfunding concept, please leave a support comment, and forward this presentation to your angel group and business contacts.


Jan 10, 2014

Why accredited investors should like crowdfunding.

When you talk to your banker to make an investment, before he give you any advises, he’s gone to ask you a lot of questions in order to evaluate your objectives, and you capacity to manage risk. Base on the answers, he will propose a portfolio with a percentage of: Fix revenues, low risk funds, higher speculative funds, and sometime direct investment is public corporations.

An accredited investor will generally self-manage his investment. Even if he is more open to risk, and have more experience to manage it, he’s still gone to wish to invest a part of his assets in safe options, another part in more active products, and a last portion in risky business with explosive potential.

Up to recently, acting as an angel investor was the risky business. Today, angel groups still give an exciting opportunity to accredited investors, but behaviour is different. As discuss in another post, angel group are not at seed level for start-ups, they are acting between seed and VCs, which is often call funding round 1.

Crowdfunding will act at seed level, and investors that wish to invest 10 or 20% of their asset in potentially explosive products will have to follow that new trend.

At seed level, a start-up will generally look for 25 to $200K investment. Consider this example; In order to give a good number of shares to investors; a start-up at seed level sells new shares at $0.25 each. Those shares may also be granted of some purchasing options for following funding round.

After few months, if the product delivers as expected, we are now at the next funding round for commercialisation. As all facilities of a new corporation must be set, require funding will be few hundreds to one or two millions dollars. Angel groups will be interested here, as the corporation already have presales of a tested product. In this case, shares should be sales between one to three dollars per unit.

As sales growth well, it will be time for a larger factory, or to begin international deployment. Investment require in round 2 is now 5 to $20M; its time for VCs to act. At this point, we have established profitability, detail market potentials and a good management team. In our example, shares should be sales between five to twenty dollars.

Next step is the exit for investors, it is time for strategic investors, or IPO.
In our example, as we have few years of profitable operation, shares may worth 25 to $100.

In short:

Seed investment is at time 0 and shares worth $0.25.
Round 1 is at time 6 to 18 months, share worth 1 to $3.
Round 2 is due after 1 to 3 years, share worth 5 to $20.
Round 3 is 3 to 8 years after beginning, share worth 25 to $100.

However the sale scenario, the ROI is always much higher for seed investment.

Future of seed investment is crowdfunding, where accredited investors can bet $5-20K on an idea, or a charismatic entrepreneur. The objective now is to build a structure that scammer will not destroy before it’s become mature. This is the subject of my next post.

Jan 4, 2014

Climates changes, some bad news of 2013.

We can be optimistic and believe that soon new tools will enable a stronger fight to climate changes. We also have to be realist and accept that some facts damper clean energy progression. Here is what we count as the three saddest news of 2013.

The USA is expected to be oil self-sufficient within few years.

As unconventional gas had drop down the price of this raw energy, unconventional oil production will increase offer while internal US demand is lightly decreasing. Add to this the new more open rules of Mexico for oil development, and the fact that Canadian had difficulty to hand out their excessive oil sand capacity, this ended with a strong pressure on price reduction for crude oil.

Some stand that crude oil barrel may drop as low as $92 in 2017, beside an average of $112 in 2012. This is good news for US economy, but very bad news for cleantech and climate changes.

Subsidies will not last forever.

Even if we can count on green energy cost to continue to decrease, the price of those options are still far above fossil energies one. If crude oil cost drop too much, it will delay, or simply close the door to many clean alternatives. We need to stop the green house gas concentration that continues to increase on earth.  This request to install 5 to 10 times more clean energy facilities than what we actually do every year. Subsidies cannot achieve that goal. Price gap must disappear, but with fossil energy costs that stay low, we are far of it.

Coal is expected to become the first raw energy source of the world.

It should be clear for everybody that coal is the #1 enemy of fight against climate changes. More than just a greenhouse gas producer, coal also makes huge pollution; we received regular news and pictures of it from China and India.

Emerging countries needs energy, it’s link with economical progress. The problem is when you’re not to rich; you go with the most simple, rapid and cheapest solution. For coal, this mean low efficiency / high pollution facilities. China and India had important coal reserve, and growth fast. The used of clean (or cleaner) energy options just begin to be consider in the decision process of those two countries, but it is not true for all emerging nations.

There is only one-way to stop the coal progression: Clean electricity (wind, sun, water…) at 2-3 cent per KWh, which is feasible, but not achieved yet.

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