Where can startups raise capital? Our guest blogger Guido Sandler takes a closer look at traditional forms of banking and VCs versus crowdfunding and its new kid on the block – Crowd Investing – a loan and equity-based platform opening up new doors for startups.
When looking at ﬁnancing opportunities for startups, the inherent business risk has to be considered. A startup in principal is a business proposition. There is no proof of concept yet. The hypotheses on which a new business is built has to be veriﬁed by the market. This stage in a company’s lifecycle is deﬁnitely one of the most risky ones.
In the days before crowdfunding was available, not long ago, an entrepreneur could go to business angels and VCs and pitch his idea backed by market research. The potential ﬁnancing partners could believe in the idea or not. There was not much one could do if ﬁnancing partners did not recognize the whole potential of the idea and in essence said “I do not believe in your proposal,” even if in general they put it more politely. At this stage a feeling of helplessness was the prevailing feeling startup entrepreneurs had. Many good business propositions vanished for good. Crowdfunding has changed this fundamentally.
Nowadays, startup entrepreneurs can present their ideas to the crowd and ask for funding and support. In return the crowd is offered the future product or service at a discount. If the crowd puts money into a product idea – this is the strongest indication possible that there is a relevant market out there.
Now entrepreneurs can enter discussions with ﬁnancing partners from a position of strength. The stronger the support of the crowd, the lower the risk of the startup. The good news is, this broadens ﬁnancing opportunities.
When it was only possible to talk to equity ﬁnancing partners in the past, it is now possible to acquire debt ﬁnancing products if the backing of the crowd is there: The crowd has not only given equity funding to the venture but also demonstrated the market potential. The most prominent example is Pebble with its e-paper watch. Via Kickstarter, $10 million was raised by 67,000 supporters. Should, in this case there be further cash requirements to ﬁnance the business, it could even be possible to raise debt.
Introducing Crowd Investing
The crowdfunding market has reached a volume where crowd-investing has become a feasible option for enterprises seeking ﬁnance. The term “crowd investing” is used when the crowd invests in – or funds companies with equity or debt. In this case the investors believe in the business proposition and expect to earn money through equity appreciation or interest paid. Risk is spread to a bigger group of investors with a smaller investment and risk share for each investor. Just as described in crowdfunding, the entrepreneurs do not longer depend on the decision of a few institutions but have the market judge the opportunity. Crowd investing will lead to more new businesses being ﬁnanced by tapping the private investor and broadening the funding available. The U.S government has just addressed this idea with the JOBS-Act. “JOBS” stands for Jumpstart our Business Startups. The legislation has been adopted to facilitate crowd investing for private individuals in the U.S.
In Germany the trend is picking up dramatically. So far, only non-licensed platforms are in the arena. Without a license form the Bundesanstalt für Finanzdienstleistungsaufsicht, the German equivalent to the SEC (Securities and Exchange Commission), platforms are limited to raising a maximum of €100,000 in debt per deal. In the fourth quarter of 2012, BERGFÜRST will resume business as the ﬁrst licensed platform offering € 3 to € 5 million of equity in the form of shares – with a trading platform to grant liquidity to the market. There is room for a disruptive ﬁnancing concept and the crowd is longing for attractive options.