Crowdfunding goes pro

Banking Insight, June 2014. Original article.

Screen Shot 2014-05-23 at 12.58.12How crowfunding is becoming a viable fundraising tool for business 
Starting out as a way to throw some cash at struggling musicians, crowdfunding is quickly growing into a fully fledged financing alternative for businesses seeking equity. Traditional banks best take notes.

They say necessity is the mother of invention – this would certainly explain why a brand new way for companies to access capital has emerged from a recession. Crowdfunding is the model that sprung up to fill the void when banks were reluctant to provide development cash for small companies during the economic downturn. For UK businesses, there is now a £84 billion to £191 billion gap in funding over the next four years, according to a government review. But if banks do not want to step up, there are others who might.

Of course, business equity was not what crowdfunding originally set out to do. Born in the creative industries, the first crowdfunding platforms were Kickstarter and Indiegogo, where musicians and artists could reach out to fans for cash for their next projects. Sometimes contributors would be rewarded with a copy of the product, but often the reward was simply to know they had contributed to something they wanted to see exist in the world.

This was the inspiration for equity crowdfunding, or peer-to-peer lending, which is slowly becoming a genuine alternative for businesses to access funding. For investors, the structuring of crowdfunding platforms is also improving to the point where they can offer not just donations but also loans with interest, and get return on equity if and when the company in question performs well.

An increasingly global market
Crowdfunding campaigns across the globe raised nearly USD2.7 billion in 2012 through all crowdfunding business models and platform types, according to the World Bank. USD1.6 billion of this was in North America, financing over a million projects including start-ups, scientific research, community projects and games. USD945 million was raised in Europe, with the remaining USD110 million in the rest of the world. Across all regions, crowdfunding expanded at a 63% compound annual growth rate (CAGR) from 2009 through 2012.

“While the recent global recession has played a part, advancements in technology are also a significant driver of the recent growth of this type of model,” said Yannis Pierrakis, Head of Investments Research at the National Endowment for Science, Technology and the Arts (Nesta), the UK innovation foundation. “The proliferation of internet use and growth in social media has enabled those seeking finance to reach more people with greater ease and at far less cost. The ability to securely transfer money online allows those seeking to back a project or business to safely contribute funds. And the increase in the quality and volume of data available on individuals and businesses finances allow for the creation of accurate credit scores, which allow lenders to set suitable interest rates on the finance they offer.”

It is still early days for crowdfunding, and Nesta’s 2013 report, ‘Banking on each other’, concluded it remains to be seen whether this kind of business lending will be sustainable over time. Still, studies by peer-to-peer lender Funding Circle have suggested companies are increasingly open to considering crowdfunding as a funding option, as long as the platforms provide attractive facilities. While 60% of businesses who approached Funding Circle had tried banks first, 77% said they would go straight to the crowdfunder next time. Speedy processing, good interest rates, clarity of terms, and easy-to-use platform was cited among reasons for preferring Funding Circle over banks.

Crowdfunding goes pro
Last year, UK fund management veteran Nicola Horlick raised £150,000 for her new film finance company, Glentham Capital, in just 22 hours through equity crowdfunding site Seedrs. About 135 investors chipped in to meet the funding target, which represents 10% of the new company. All UK-residing adults are eligible to invest via Seedrs, provided they pass a quiz showing they understand the risks of early-stage investing. Contributions can start as low as £10. Seedrs carries out due diligence on all the companies on the platform, and takes 7.5% of the funds raised, as well as 7.5% of any profit made by an investor through an exit or dividend.

“Having been a fund manager for the past 30 years, I know what a great opportunity it can be to invest in a fund management company. In the old days, there was no way that I could have opened an opportunity like this to the crowds, but Seedrs provides me with the perfect opportunity to do so,” said Horlick, who is now planning her own crowdfunding platform: Money&Co. “Our platform will let people lend to businesses at a rate agreed by both parties. It is a smarter way for businesses to get the capital they need and for people to get a better return on their cash.” said Horlick. “At the moment, banks are not doing enough for credit-worthy businesses. Money&Co will bring together good businesses that need to borrow to expand, with people who want to save at a more attractive rate than the banks offer.”

Money&Co will join Seedrs and Crowdcube in their mission to fund UK companies. SyndicateRooms and InvestingZone are among newer entrants to the market. Specialist platforms include MoolaHoop, focusing on women entrepreneurs, and Trillion Fund, targeting renewable energy projects. In the US, Crowdfunder, CircleUp and RocketHub have joined Kickstarter and Indiegogo in a market that now has over 300 platforms. These include Somolend which specialises in loans for small businesses, and Appbackr which focuses on fundraising for new apps. AngelList is among established names in Silicon Valley, connecting professional investors with startups.

Regulating a young industry
The US crowdfunding market got a boost last year when the Security and Exchange Commission (SEC) changed the rules to allow companies to sell stock via these platforms. Previously, shares could only be sold if they were registered, a process that can be costly for small companies. The SEC’s new rules, politically prompted as a means for job creation, have been well received in the industry as likely to encourage growth. “The way the world has worked in early stage investing has been fairly stable over the last 20 years. The argument is that it is hard to manage investors, time-consuming to communicate with them, and challenging to gather their votes,” said Sherwood Neiss, co-founder and Principal of Crowdfund Capital Advisors. “The data demonstrates, however, that while some investors may be saying negative things about crowdfunding, others are using this new tool for deal flow.” Data from Crowdfund Capital Advisors suggests 28% of companies had closed an angel investor or venture capital round within three months of crowdfunding, while an additional 43% were in discussions with institutional investors.

Having said that, this remains a crucial time for the crowdfunding industry to get its foundations right; the theoretical potential for scandal is there if practices are careless or investor education poor. Wrote Neiss in ‘VentureBeat’: “The [SEC] rules need to maintain the ability for investors to sue for fraud, while reducing lawsuits against companies that just fail. Even though the legislation mandates that investors complete an education series on crowdfunding, investors should also be required to sign a document acknowledging they could lose all their money, that they are responsible for reviewing the investment materials prior to investing.”

Also keen to see a solid foundation built for this budding industry, the UK’s Financial Conduct Authority (FCA) announced in March a new set of rules for crowdfunding. This included a requirement that non-professional investors do not invest more than 10% of their savings per year, a move criticised as excessively strict by the industry. The FCA, however, pointed to the “significant risk of failure” on part of the companies seeking funding as a motivator for protecting investors from getting in too deep. “We are trying to strike a balance between on one hand making sure consumers are properly informed and have real clarity about the investments they are getting into, but on the other hand, making sure this […] source of funding is open to businesses and individuals,” Chris Woolard, Director of Policy, Risk and Research at the FCA, told the BBC.

Enter Asia
While crowdfunding has yet to make the same waves in the Asian markets, this may only be a matter of time. Singapore, Korea, Brunei and Malaysia have started showing interest in rewards-based portals, as several platforms have launched in South Asia in the last couple of years. Pozible is an Australian platform that expanded into Singapore and Malaysia earlier this year. “We are working to build up our user base in Asia, and these efforts are already starting to show developments, with an increase in Asian projects and Asian web traffic,” Pozible Co-founder and Director Rick Chen told ‘TechCrunch’. Focusing on funding creative projects, the company wants to differentiate itself by becoming a specialist in the region.

Swedish site FundedByMe entered the Singapore market last year, offering the option for local businesses to raise money in exchange for equity. “We see Singapore as the gateway to Asia. We will be reaching a massive new market of potential crowd investors who are eager to help us build on the cross-border investment motion that has made FundedByMe a popular choice for European investors,” said Daniel Daboczy, CEO and co-founder of FundedByMe. “Early feedback tells us that Asian investors are keeping a keen eye on the European start-up scene, and vice versa.”

Earlier in 2013, Singapore’s own Crowdonomic stepped up to provide a professional crowdfunding service for businesses. Leo Shimada, Founder and Managing Director of Crowdonomic, told ‘Fortune’ there are several reasons why the region has yet to fully embrace this funding model. The absence of a high-profile frontrunner like Kickstarter is one, as this means the concept is still alien to much of the general public. Local culture is another reason, said Shimada: “Wherever you are in the world, no one wants to be a loser, but especially [not] in a region like Asia, where there is this thing about saving face and a pronounced fear of failure.” This is different from Silicon Valley, which is unique in its acceptance of trying and failing as a natural part of building a business. As long as he or she works hard and is smart, an American entrepreneur can go to a crowdfunding site and still save face if the target is not reached.

Scholars have however deemed crowdfunding to be Shariah-compliant, suggesting it could become an interesting opportunity for Muslim countries to explore. The World Bank’s 2013 report, ‘Crowdfunding’s potential for the developing world’, pointed to the early success of Eureeca, which helps small companies in the Middle East raise equity, and Shekra, an Islamic finance-compliant site which combines an incubator model with crowdfunding for Egyptian companies. “There is a bias towards real estate and equity in compliant [established companies], you also have some commodity funds, and so on,” Rushdi Siddiqui, Co-Founder and Managing Director of Azka Capital and Shekra board member, told industry site ‘Crowdsourcing’. “But in the area of venture capital, which is what the essence of Islamic finance is supposed to be about – partnership and risk-sharing – there is very little [activity].”

Success factors
When it comes to determining how successful a crowdfunding project will be, the quality of the project is only one factor. Ethan Mollick, Assistant Professor at the Wharton School of the University of Pennsylvania, found that equally important is the size and quality of the founder’s network, and whether the project has a connection to the founder’s geographic area.

“For entrepreneurs who seek crowdfunding, there are some clear lessons. First, project quality is important, and entrepreneurs should look for ways to signal preparedness. Social network ties have also been found to be important in crowdfunding,” said Mollick in his 2012 research paper, ‘The dynamics of crowdfunding’. “Second, appropriate goals are those that allow a founder to deliver a product on time; achieving significantly more funding than requested is rare. Most importantly, careful planning is required both to set these goals and to prepare for a crowdfunding success, which will entail a need to rapidly execute a promised venture.”

While smaller companies looking for crowdfunding may find there is more competition now as the funding method has become more popular, others may find there is more money to go around. As platforms are being set up to handle larger investments, the bigger guns in traditional finance are increasingly showing interest; US peer-to-peer platform Lending Club spent around USD1.5 billion last year, and has among its directors former US Treasury secretary Lawrence Summers and ex-Morgan Stanley CEO John Mack. Last year US hedge fund Eaglewood Capital sold some of its Lending Club loans in a USD53 million securitisation deal, essentially giving institutional investors exposure to SME loans for the first time.

Of course, this is nothing in comparison to the funds handled by traditional financing outlets, but for an industry that is only a few years old, it is a flying start.

Generation Tech

Cover story for Square Mile Magazine, December 2013. Original article here (p75-79).

SMGeneration Tech:
Interview with James Gill, co-founder and CEO of GoSquared

Prufrock Coffee is buzzing even though the lunch rush has come and gone, as James Gill isn’t the only startup CEO who likes hauling up in the airy Clerkenwell cafe to talk shop. While we wait for our caffeine, new business ideas are being doodled on napkins all around us, and Gill declares proudly that GoSquared has just had its best month yet. In jeans and boating shoes, his graphic print t-shirt seem fitting for a 22-year-old CEO, but Gill has actually had plenty of time to get his bearings – GoSquared, the real-time web analytics company, was founded by Gill and two friends when they were just 15 years old.

“I have definitely had my 10,000 hours doing design,” says Gill, peering up on the wall to the sign that reads ‘10,000 hours’, a reference to the idea that mastery only comes after having spent that long practicing. “That’s what started us on the route to GoSquared. If you go back to the beginning I would spend ages drawing things, and that evolved into drawing interfaces and designing websites.” When he was 14, Gill inherited an old Mac from his father’s office, and started playing around with Photoshop. “I picked up this magazine which was a basic intro to Photoshop, Flash and all the tools you needed to build a website at the time. I would spend all my time outside of school learning how to design things. When I met Geoff [Wagstaff] and JT [James Taylor] they were much in the same way, but on the programming side.” As the trio started making websites they learned as they went along, first designing features and then working out how to get them to do what they wanted. “Before we started GoSquared we knew almost nothing, so it was all about spending hours and hours working things out. It’s definitely taken more than 10,000 hours.”

GoSquared originally started out selling advertising squares (hence the name), with analytics being a sideline that quickly became the main offering. Unlike the main competitors, GoSquared delivers web analytics in real time, enabling companies to respond immediately to problems or opportunities. While CEO Gill’s job has long-since developed past the original remit, good design remains at the heart of the GoSquared philosophy: “Designing the product isn’t just about making it look pretty. It’s about which features really matter, getting rid of the things that don’t, and making sure we design something that not just looks great but also works great.”

Competing with the “hellishly complex” Google Analytics, and Adobe Omniture, Gill credits better design as a key reason GoSquared has been able to gain a foothold in the analytics space. Being young and nimble helps too: “By having a relatively tiny team who know what they want to do, we can be much more unified in everything we make. … Maybe a time will come when we have to expand, but right now we love it because we don’t need to have too much structure or too much process. People get to stay more autonomous.”

A lot has changed for Gill and GoSquared over the past two years, though. While they started the company while still in school, the trio was well on their way to university when Passion Capital co-founder Eileen Burbidge came after them with an offer of funding. Gill dropped out of university after five weeks to give the company a proper go.

“It was very much about the three of them as a co-founding team, says Burbidge when asked why she pursued GoSquared. “Given their age, and the fact that their business had already been trading for five years at that point, it was obvious they were ambitious, proactive and able to secure clients and generate revenue.” Their instinct for design and user experience was “extremely impressive”, says Burbidge, and integral to how they approach software development.

GoSquared has since raised more money from Passion Capital and Atlas Ventures, but Gill admits it’s been a challenge: “Everyone dreams of having their investment in the bank, but once you do, you have the pressure to grow much faster than you were previously. Not just with the users you sign up and the revenues you make, but also in terms of building the right team. We were really caught off guard as to how difficult it would be to build a team: to find the right people, to bring them up to speed, to get them working to your vision and to keep them happy and excited every day. We are still learning how to do that.” This CEO gig is, after all, Gill’s first job, unless you count some work experience at Oxfam: “Yes, I’ve never even had a boss!”

“It still amazes me that we have thousands of people using these tools we have been building. That is an amazing feeling.” Gill pauses. “I used to think, do I want to be an artist or do I want to be a designer? With art, people look at what you create and admire it, but with design they rely on it to get their jobs done. … I still love coming home and saying that we have created something.”

While analytics has traditionally been a somewhat dry topic for back-office staff, Gill believes this is the sort of information that will be driving businesses in the future. “We are approaching analytics from the point of view that everyone should have this data, and we want to deliver it in the easiest way possible to understand.” Eventually, this will mean providing not just raw data, but fully drawn conclusions for action: “This is a massive challenge and a heck of an opportunity for us. The analytics market is still in its infancy.”

A Londoner at heart, Gill is proud to be building GoSquared in the capital: “The London startup scene is getting more and more exciting, with so much having changed just over the past few years.” Born in Blackheath before his family moved to Kent, he now lives in the city with his girlfriend. While not blind to the allure of Silicon Valley, he has no plans of moving: “Maybe I’m naive, but I still like the idea of building a company in London that can compete with companies over there. We have so many talented people in our team and we have great investors, so I don’t see why we can’t keep growing as a company from London. And to show those Valley guys us Londoners can compete!” While Gill admits the London scene has its share of people who “spend all their time at startup events and don’t really do much else”, there’s also a lot of talent: “There’s a heck of a lot of smart engineers and developers on the scene. The main challenge is probably bringing them together and forming teams that can achieve something.”

With over 30,000 websites now using GoSquared analytics, is Gill scared of failing? He hesitates, but only for a second: “I don’t really think about it. For me there isn’t really an option but to make this work. I’ve sunk seven years of my life into this!“ To be fair, the worst case scenario for GoSquared at this point is probably a buyout, offers for which are frequent, confirms Gill: “But we really don’t want to get bought out!”

While Gill is doing “everything I physically can” to push GoSquared, there’s time for other things too, just about. For most things there’s an app: “I have my Nike+ running app. The YPlan app is great, they’re a London startup that help you find events.” He pulls out his iPhone and shows it to me, along with another couple of apps whose design he admires. Gill is a regular at the rugby to support the Harlequins, and frequently goes back to Kent to see his “amazingly supportive” parents. Before I’ve even asked he tells me about his girlfriend Emma, who has just started working for another London startup. He loves the London food scene, especially places like ‘Dirty Burger’ where they do just the one burger but what a burger it is – a well-designed concept.

But as most people who truly love their job, Gill never really stops working: “I don’t really have that switch between work and home. On the average day I get up, have a shower, get the Tube and then I spend some time alone in a coffee shop before I go into the office. I’m often there until 8pm, but even after that there’s always someone to reply to, something to sort out for tomorrow. There’s always so much going around in your head.” He seems happy though, excited to be in the hotseat, even though as he says, the startup life swings wildly between highs and lows. Is he saving the sports cars and parachute jumps for his mid-life crisis? “Mid-life? Do I have to wait that long?” Gill laughs. “Maybe someday. But for now I get plenty of adrenaline just going to the office.”

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Roundabout Royalty

Jude Ower, Playmob
Gaming, business and charity comes together at Playmob, the company founded by CEO Jude Ower in 2007. The company, whose technology enables charity elements to be added to existing gaming features, lets charities get a cut from in-game purchases. The games developers benefit too, as the charity link makes players spend more. Working closely with product director Caroline Howes, Ower comes from a background in consultancy and marketing. Now based in Fitzrovia, Playmob has raised more than $1 million to date, from the likes of Nesta, Midven, individual angels and startup accelerator Springboard.

Joshua March, Conversocial
Conversocial helps businesses keep track of customer services issues raised on social media, so they can respond right away to snarky Facebook posts and bitchy Tweets. By efficiently keeping up with the social web in real time, companies can provide great service and better manage their reputations. CEO Joshua March co-founded Conversocial alongside COO Dan Lester in 2009. A year earlier the duo had founded app-development agency iPlatform, which was acquired by Betapond in 2012. Shoreditch-based Conversocial has raised $7 million in funding, and last year opened a New York office.

Julia Fowler, Editd
Frustrated with the lack of provable information to predict trends in the world of fashion, designer Julia Fowler came up with the idea for Editd. The company mines and examines data to help the fashion industry measure trends and the market. Co-founder and CEO Geoff Watts brought the data processing expertise to Editd, and now aims to make the company the definite real-time resource for the industry. Established in 2009, Editd has the support of startup incubator Seedcamp, and later raised $1.6 million in a funding round led by Index Ventures.

Damian Kimmelman, DueDil
DueDil is making waves with its database of information on private companies in the UK and across Europe, letting subscribers access 20 years of financial and corporate information on private companies. CEO Damian Kimmelman founded the company in 2010, having previously founded two companies: a London-based digital agency in 2007, and a Chinese peer-to-peer online gaming platform in 2005. DueDil wants its services to lower the barrier to entry for entrepreneurs and developers, enabling them to integrate data directly into their applications as well as building new services.

Hannah Wong, Foodity
Foodity turns recipes into shopping lists, transferring ingredients for new dishes to online supermarket shopping baskets. Working with major brands and retailers to streamline cooking and shopping, Foodity also makes suggestions to users based on what’s most popular, affordable or best quality. Having raised £450,000 to date, the Waterloo-based company is currently in the process of raising an expected £2.5 million in new funds. Operations lead Hannah Wong is the impetus behind the company, having co-founded Foodity in 2009 in the hope of helping people make better eating decisions. She previously set up meal-planning website ‘The Resourceful Cook’.