ELIAN D. ALVAREZ

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- ENTREPRENEURSHIP - LATAM - INNOVATION -
- INVESTMENTS - PRIVATE EQUITY - FINANCE -

European Startups Seeking Assistance of Family Office Investors

Apr
06

There have been a number of stories about the connection between family offices and startups. Family offices are basically private wealth management instruments that are formed by rich families. There are a lot of venture capital companies that established their worth through family offices, including Greylock Partners, Bessemer Venture Partners, Atomico, and Frog Capital.

There are so many well-off families that have built their empires via entrepreneurship or by making seed stage investment.

 

Rising Trend of Family Offices in Venture Capital

It has been estimated that family offices around the world have $4 trillion worth of capital available for investment purposes. Moreover, there has been a rising trend of family offices in the world of venture capital.

An increased appetite for venture capital has been found among these investors. Interviews with 300 family offices around the globe, revealed that 70% of them were either actively investing in the startups or assessing the investment exposure to technology VC. However, there is another group of investors who had mixed reviews. They were still in the process of either recovering from a sudden shock or were still unsure of how to go about investing in startups effectively.

 

Consequences for Europe’s Tech World

Venture capital firms in Europe have experienced a huge funding gap with the United States. There are more technology companies in Europe as compared to the United States with high production of developers, yet, startups in the European region only receive a small percentage of investment in relation to their United States counterparts. Unless there is an improvement in this section, Europe will always lag behind in the production of tech unicorns and famous brands like Google or Apple.

Apart from large companies, family offices that currently have $759 million in asset under management should also contribute in bridging this gap.

 

Higher Returns

If you look at it from a startup or venture capitalist’s perspective, the involvement of family offices is not a big deal. Having relatively relaxed procedures, family office investors have created a stronger network as compared to institutional investors with an ability to open more avenues effectively.

It is totally understandable if you look at it from another angle. For example, family offices always look for those investment opportunities that offer a higher return. They are moving toward riskier products that offer high yield, such as a venture capital opportunity to grab prospective profitable investments.

Moreover, there was a research where it was pointed out that those who are taking control of family offices have a natural inclination and a better understanding of small scale businesses in the technology industry with ground breaking and innovative business models.

 

Changing Perception

It is true that family offices alone cannot bridge the funding gap of Europe as it requires an alliance between city or national level governments, institutional investors, angel investors, and corporate sector alongside the richest families in the world. However, it is not easily possible as it calls for a shift in perception toward venture capital, especially in Europe because it is still far behind the United States in terms of progress.

On the opposite side of the Atlantic, there is a high inclination toward taking huge risks. It is beneficial in the long run, because venture capital generates value much higher than the basic investment. In America, everyone knows that talented entrepreneurs who couldn’t make it in the first attempt are actually winners in the making, who will definitely make it big next time. Unlike America where failure is considered a stepping stone, Europe takes it as a stigma, which eventually influences their decision of capital allocation.

With the rise of technology startups in Europe, risk attitude is gradually changing among private as well as institutional investors. It is highly likely that family offices will be investing in the next wave of European innovation and research and development. This leads to increase in the number of startups that will get to the point of escape velocity and will also thrive at growth stage and beyond.

 

If the tech momentum in the European market does not die down, family offices should make a heavy investment into venture capital or else it will be left behind from other regions as well, such as Asia.

Angel Investors & Friends and Family – The Key Source of Funding

Mar
30

Investing in startups is a challenging task. Some startups make big promises, but end up failing, while others turn out to be quite a success. For example, the early investors of Instagram got more than 300 times return on their initial investment within a period of two years. But these are one of the mega jackpots. On many occasions, investors suffered heavy losses as well. This is the reason why they are wary of investing in startups.

However, it has been observed that the key sources of funding for a startup are either angel investors or their family and friends.

 

Friends and Family as a Key Source of Funding

According to a survey, friends and family invest more than $60 billion every year. Moreover, around 38 percent of the startup owners gather funds from their kith and kin and the average investment value is around $23,000.

There is no better way to raise money than to seek the help of your own family members or friends. They can be an ideal option to give your business a head start. If you have reliable family members who are willing to invest, it can be a valuable resource and a long-term opportunity, especially because their main motivation will be to provide support and show loyalty toward the founder rather than expecting a high return on investment.

It is basically a close circle of those individuals who have a strong affinity with your brand or with you.

However, it is very important that these investments are officially set down in writing. All the documentation should be signed by the investors with their consent to the fact that there is a risk that they might not get their cash back.

 

What is the Risk Involved?

It is crucial to know that business should not be mixed with pleasure. Taking money from friends and family is a huge responsibility and risky at the same time. Make sure you share a strong bond with them so that your goals do not get affected when things go wrong. By accepting the funds provided by the family members or friends to start your business, you risk their money. Therefore, it is of vital importance that all parties come to a consensus before anything is initiated.

To manage and control the risk, every party should sign a promissory note that contains repayment terms. In case, your friends or family members want to partner with you, sign a partnership agreement and keep the official documents with you.

 

Angel Investors as a Key Source of Funding

According to a report, more than 268,000 angel investors are active in the United States. Every year, they make an investment of 20 billion dollars in around 60,000 businesses. The average investment amount is approximately $75,000. As per the Angel Resource Institute database, in 2012, the recorded number of angel groups in the U.S. was 385.

Angel investor is an affluent person who provides funds for startup companies, mostly in exchange for equity ownership or convertible debt instruments. A lot of these individuals are either business professionals, higher-ups in the corporate sector, or renowned entrepreneurs. Similarly, there are angel groups as well that consist of individual angels who come together for a common goal, i.e., to evaluate and fund the startup companies. These groups allow such investors to pool their money and make larger investments.

 

Benefits of Having Angel Investors as a Source of Funding the Business

They are usually the ideal source to fulfill funding requirements, because they are focused on the healthy growth of a startup company. Moreover, they also contribute as a coach or mentor based on their own experiences. For example, angel investors introduce startup founders to prospective investors and potential clients. They also identify the problems, advise solutions, and help these businesses to get recognition and credibility in the market. All in all, angels take a lot more risk as compared to other institutional investors. This is the reason why they are so dedicated and seriously concerned about the profits and losses of their portfolio companies.

 

 

To summarize, there has been a rising trend of getting funds from angel investors or family and friends, as they have not only been beneficial to fuel the startups, but have also contributed toward a better economy around the globe.

Israel Government and Venture Capital

Feb
05

The government of Israel has actively participated in the development of Israeli Venture Capital (VC) market through hybrid financing, i.e., a mix of private and public VC funds. This was done to gain the maximum advantage of private funds from foreign investors.

 

Formation of the YOZMA Group – Initiative of the Israeli Government

The government has continually faced the challenge in Israeli VC policies on how they can deal with a small size of their domestic market and limited availability of funds. In order to tackle this issue, the Israeli government created the YOZMA Group in the early 90s. This program followed the U.S. style VC operations. Although, it carried tax breaks and equity guarantees for foreign investors, yet, there were not enough incentives for local investors.

YOZMA group was formed in 1993 with the infusion of 100 million U.S. dollars that was supplied by the Israeli government. It is basically a VC fund that invests in high-tech startups. During the next three years after its formation, the group created a total of ten hybrid funds. The second fund was launched in 1995 with the backing of European, American and Israeli investors. Each of these funds was financed with approximately 20 million U.S dollars.

Alongside these initiatives, YOZMA was also involved in new startups, which gave rise to a professionally managed VC market in Israel. The group turned out to be a catalyst for development and growth of the VC sector in Israel. Companies at any stage of development could receive funds from the group, but its primary focus is to invest in early stage companies that target high potential companies in biotechnology and life science sectors.

 

YOZMA III CEO Club – Initiative of the YOZMA Group

The group also developed professional relations with a number of well-known academic institutions and IT incubators in the country. Some of the companies in the YOZMA portfolio directly arose from these institutions. With the aim to involve executives at a senior position and founders of successful firms in YOZMA’s activities, a group was formed called YOZMA III CEO Club. This group turned out to be a great success and was a valuable source of a number of investment opportunities available at a particular point in time to companies or investors.

 

Privatization of YOZMA and New Challenges Faced by the Government

The late 90s, the government took a decision to privatize the YOZMA group as it believed that the private sector was adequately strong and healthy. The Israeli government auctioned its direct co-investments in 14 organizations. It also sold away its interest in 9 YOZMA funds to its partners. Although, the state still holds a small interest in two YOZMA funds, yet, all the funds are privatized and the direct contribution of YOZMA related VC capital has largely declined.

 

Other Initiatives by the Government to Improve VC Sector

The Israeli government also undertook a number of other initiatives, including the launch of tax incentive schemes for investors, fostering the international research and development, and development of other programs.

  • Tax Incentives for International Business Angels

According to a research paper by Günseli Baygan, a large number of Israeli VC funds are believed to be injected by business angels in Israel and other countries, specifically the U.S. The government offered tax incentives along with other programs to connect small enterprises and VC funds with international institutions and multinational companies.

Many of the VC funds started their offices in the U.S. and Europe to provide assistance to portfolio companies in finding investors and bringing awareness of technological and market developments in the international market. Given the small scale of the local market, it was a great move to flourish VC firms.

  • Fostering International Research and Development (R&D) Agreements

The government also fostered international R&D agreements, including the Israel-US Binational Industrial R&D (BIRD) foundation and the US-Israeli Science and Technology Commission. The BIRD was established in the 70s to fund R&D in startup companies. Moreover, it has also made a contribution by working alongside VC community, making its matchmaking services available for their portfolio companies in order to find out the business angels.

  • Other Programs

Apart from the above mentioned initiatives, different government bodies, including the Export Institute in Israel, MATIMOP – an Israeli Industry Center for R&D, and MESSER – Israeli Idea Promotion Center, made their contributions by offering assistance to small firms and entrepreneurs in assessing local and foreign markets for launching their services and products.

 

The VC industry in Israel grew from an investment of $440 million in 1997 to $1,759 billion in 2007, and almost all the investments in the country focus on high-tech companies, including bio-technology and ICT.

China Government and Venture Capital

Jan
12

In emerging nations, governments have greater influence over markets than ever due to regulations and political control. The ubiquity of a government can be seen in every economy through indirect or direct ownership of investment vehicles. China is no different.

The Chinese government started relaxing its grip on the economy during 70’s, which resulted in the escalation of investment and private entities. Since 1979, private and foreign investments have contributed a major role in making China one of the fastest growing economy in the world. Despite that, the country struggled to have standard financing mechanisms for businesses, including the availability of debt finance for smaller firms or presence of efficient equity markets. Although, it gave rise to a number of challenges, yet, it created opportunities for Venture Capital (VC) in China.

 

Rise of VC firms in China

The VC firms started making their way in the Chinese market during the early 80’s, and the impetus for this development was public policies, because the government still plays a dominant role in the country. The National Research Center of Science and Technology for Development suggested in 1984 that China should set up a VC system to encourage high technology market development. A number of local governments in the country supported and sponsored VC funds so that they could be invested in State Owned Enterprises (SOE) so as to level them up at a global standard in terms of quality and productivity. An example of such organization was China New Technology Venture Investment that was formed in 1985. Some of them were established for years, while others were formed only to make an investment in firms, especially the SOEs.

During 80’s, the primary focus of VC firms was to invest in property and infrastructure as there was an increasing popularity in hotel development and tourism sector. However, many of these investments couldn’t perform well and private equity investors lost interest in such investments. By the end of 1980s, interest in the Chinese market started brewing again. Due to steady economic growth and the government’s interest in such investments, VC was encouraged. But it wasn’t without a conflict as the government wanted to invest in high technology market and private investors wanted to keep their focus on low risk investments.

 

Evolution of VC in the Chinese Market

There was a lot of investment failure in the beginning as tourism and hotel development business couldn’t produce sufficient return. Moreover, a sudden proliferation of VC also turned out to be a failure, because the government officials and entrepreneurs didn’t have that experience.

As a result of such failures, a new body was formed in 2002, called the China Venture Capital Association, to improve the professionalism in this sector. Since then, the VC ecosystem has not only evolved but also shown tremendous growth.

 

Current Status of VC in China

While the investors in the developed nations are cutting their stakes in startups and golden age of unicorns is reaching the end, the venture capital fund backed by the Chinese government has brought together the biggest pool of startups in the world. It has reached 10 times the amount invested by VC in startups in 2015 ($32.2 billion).

 

Beijing Initiative

The country recently announced the formation of a $30 billion state-backed VC fund for encouraging the reform of SOEs and bolstering innovation. The fund is backed by the State Council and China Reform Holdings Corps, and it is established to find out the market-friendly ways to combine state assets and easily channel investments toward specific projects. It can turn out to be an effective move by the government in the long run despite the concerns regarding inefficient distribution and governance of assets. With the help of this initiative, if Beijing successfully upgrades its SOEs through effective investment in promoting high-tech companies, it can be helpful in rebalancing the economy of China by taking its reliance away from investments that focused on consumption based growth.

 

Other Investments Made by the Local Governments

China is struggling with economic difficulties as a result of ever increasing corporate debt, skyrocketing home price and reducing trend in exports. To combat such issues, local governments in China are also entering the VC sector, investing a total of ¥30 trillion. The purpose of this investment is to trigger the development of high-end manufacturing firms, internet and bio-technology so that it replaces the eroded economic growth of stumbling sectors.

Around 780 local government funds are competing to seed the upcoming multibillion dollar startups, including online emporium Alibaba Group Holding Ltd, Xiaomi, and SZ DJI Technologies Co. (Drone maker company), as China is striving to create at least one Silicon Valley in more than 20 provinces.

 

If China is able to achieve a desired outcome of such investments, it will not only enable the country to avoid the middle income trap, but also scale the entrepreneurship and innovation at a massive level.

Governments and Venture Capital

Dec
29

Several governments around the world have started equity co-investment programs to bridge the financial gap by injecting Venture Capital (VC) to businesses that do not have sufficient capital but they have high potential. These hybrid (public/private) programs still engage private sector VC firms as a channel through which public support and a large amount of capital is invested.

 

Hybrid Scheme in the United States

In the U.S., models of the Small Business Investment Companies (SBIC) program, such as, hybrid schemes have been launched. It involves a participation by the state as a public guarantor or a special liability partner (LP) for the large part of the total capital raised for investment. Subsequently, full operational autonomy is entrusted to the general partnership (GP) by the state once the investment eligibility guidelines are agreed upon. This is done to attract investment returns to the investors, i.e., the LPs.

These models have been widely adopted by a large number of governments since the collapse of dot.com bubble that violently shook VC funding raising. Moreover, developing countries have also started showing interest in such models to encourage innovation and new startups.

 

Hybrid Venture Capital Schemes – The U.K. and Australia

Other developed countries, including the U.K. and Australia, also followed the SBIC models and designed their own Hybrid Venture Capital Schemes (HVCFs). The Enterprise Capital Fund was formed in the U.K., whereas, the Innovation Investment Fund was formed in Australia.

The UK government devised the program to provide growing startups an equity financing of £2 million ceiling. Under the program, the early stage funds, invested in the growing small and medium enterprises (SMEs) and startups, consist of private investment by the private investors with uncapped profit share and loan or equity from the government with capped profit share. A common structure of investment is one where there is an equal distribution of profit between private and public LPs. However, to increase the expected profits of private LPs, HVCF adopts a number of mechanisms where changes are made to the profit distribution, down-side protection, timings of investments, and the payment of operating cost related to the funds.

Although, SBIC wasn’t a complete success, yet, the governments that are in favor of equity enhancement programs followed its design and changed it to match their own requirements and preferences.

 

Issues Faced by High-Technology Companies

High tech organizations face three major issues when they try to access venture capital. Firstly, they do not have enough information about venture capitalists in the market and there are limited financial channels for technology companies. Secondly, organizations that seek public venture capital causes low demand for other VCs, and thirdly, these organizations need to have creative and dedicated management teams or else they face issues in convincing VCs to provide funds, which further widens the financial gap.

 

Role of Governments in a Developing Country to Counter the Issues of High-Technology Companies

Governments of different countries have taken measures to address these issues. For example, there is a “triple-helix model” that expresses a relationship between: University – Government – Industry to promote innovation in a society.

Innovation can be brought in industry and university via direct or indirect VC investment, government stock, enactment of laws, formulation of policies, and through the promotion of high-tech SMEs. Government can play its role in different ways, i.e., by having a creative function, through venture investment regulations and tax policies that directly leave an impact on VC market, and by other measures that indirectly affect VC industry, such as regulations and laws that govern the labor market, patent, stock market, pension funds, etc.

For example, there is a city in China called Suzhou where 75 percent of the science parks are backed by municipal public VC. A special institute, which is responsible to the Local Science Committee of the central Chinese government, was developed to administer these parks. The employees of the institute are directly recruited and trained by the government. Therefore, as a developing country progresses in becoming a developed nation, a shift in the role of public VC arises from its direct participation in the market environment to provision of services.

 

Governments usually provide support to the Venture Capital markets due to perceived market failure or financing gap faced by startups or early stage businesses, and also due to the positive impact it will have to bring innovation and create job opportunities for a prosperous economy.

Angels going back to heaven

Dec
22

The global market is at its all times high and businesses are getting investments in abundance.

Angel investments have also stepped up their game. In the past few years, a number of deals took place where the investments from angel investors flooded in, for example, Reid Hoffman, who made an investment in Facebook and Flickr, whereas, Chris Sacca invested in Instagram and Twitter. You would find so many names behind the companies who made it big in a short period of time, such as Friendster, Yelp, Twitter, etc.

 

Business Cycles leading the Angel Cycle

Most of the startups in the tech-industry have been backed by contributions made by angel investors, but the question is:

How long will it last?

This question has been brewing for quite some time, and there is a reason behind it.

If you take a look at past three decades, you will find out that angel cycle followed the same pattern as a business cycle. With the boom and bust experienced by the business cycle, angels took exits and departed to safe haven from time to time. There has been a total of five distinct cycles over a period of the last thirty-one years, depicting the rise and fall of silicon valley’s angel investors.

The sine curve that keeps track of fluctuations in the angel cycle typically follows the sine curve that keeps track of ups and down in a wider business cycle. It shows that as angel investing begins to rise up, the remaining startup investment market would be going through a radical shift.

 

Rise of Angels in Past 5 Years

For the past six years, the size of an average investment made by angels grew almost sixty percent, and pre-money valuation has shown a growth of around twenty percent.

Angels have invested heavily in the valley, wherein, different groups of angels have infused a lot of cash as the rounds got bigger and bigger each time. For example, two years ago in 2014, an investment of more than $24 billion was made by angel investors.

As they were risky investments, they hardly took into account more than 10 percent of an angel’s portfolio. Most of these investment decisions were discretionary; this is the reason why appetite of these investors and available funds got exhausted due to uncertain market conditions.

 

If the Cycle is about to Mature?

As predicted by Bill Gurley, a venture capitalist in the Silicon Valley, the cycle is about to reach its maturity growth is given more value as compared to making profits. Regardless of whether it is happening, when it eventually happens, angel investors will become more cautious, wherein, some of them would wait for the market to go back to where it was prior to the fall, while others would simply pack up and leave.

 

History Repeats Itself

If you look back in the past, angel investors flee from the recession that occurred in the beginning of 1980s, only to enter the market again with the introduction of PCs and record high job opportunities coupled with the surge in the real estate market in San Francisco. Another downfall of angel cycle was observed with the economic recession of the 90s, as they made an even dramatic comeback later on with the growth of the dot – com bubble. Right after the bubble was burst in 2000, not only did they leave the tables once again, the investments turned out to be a failure as well.

They made another comeback after that, but escaped to safe havens when the real recession hit the market in 2007. Since then, the industry has experienced bullish trends, but no one knows when it will come to an end. However, the only certainty on the basis of past events is that it will come to an end.

 

If Time for Startups is Now?

If you have a startup company or planning to raise capital for funding your idea, it is better to raise capital now. Try to attract as much funds today as you can, while the market is experiencing a boom, because when the business cycle takes a shift, angels will take a step back. In times of good market conditions, business cycles are considered perpetual. What businesses tend to forget is, it is a cycle that goes through a series of surges and plunges. The global economy is not immune to the unavoidable macro events, as their occurrence gradually causes the shift in business cycles.

How Smart Angels Invest? – A Guide to Creating Your Investment Strategy

Dec
15

Investing in a startup has become more of a trend recently as it promises to return more than what it’s originally worth if it becomes successful. Some of the startups that made it big include Uber, Facebook, and Twitter. If you believe that you have enough capital to invest in the startups, but don’t know how to begin and what strategic direction to choose, it is better to start by analyzing the strategies of smart and successful angels; the type of investments they have in their portfolio and the course of their invested money over a period of time.

It may take some time to master the skills of these angel investors, but don’t get disheartened by it because it will eventually be brought to fruition as you learn to take the right decision. Even the successful investors made plenty of mistakes before they reached this position. Following are some of the things some of the well-known angel investors believe in when they make seed-stage investments.

 

Investing in People

One of the most famous angel investors of today is Ron Conway, who has made an investment in a number of successful ideas in the past decade. According to him, the most crucial element to consider when you invest in a startup is its team. He said that the idea of an entrepreneur changes and evolve with the passage of time, therefore, it is important to invest in people.

He follows a common strategy called spray and pray by making a large number of small investments. Not every investment made by him guarantees a successful exit, but he certainly has a huge network with different types of investors who look forward to joining the league of these angels.

 

Capital Efficient Business Idea

Another successful angel investor, Reid Hoffman, who is also a founder of LinkedIn and has made an investment in Flickr, Facebook, etc., believes in innovative ideas that have a tendency to scale efficiently. Whenever he invests in a company, he looks for a product that is unique, has the potential to attract millions of users, and most of all, it can attract funding as a business grows.

 

Identify the Products that Appeal Consumers

Chris Sacca, an angel investor who has invested in Instagram and Twitter, looks for a product that will be in demand once it hits the market. An example can be his investment in Turntable.fm, in which he invested a lot of time, because he realized it in the beginning that users would become engaged in this investment.

 

Team Involved in Materializing the Idea

Another well-known name in the angel investors’ community is Chris Dixon, a co-founder of Hunch. He invested in Skype and Milo. Moreover, in 2010, he was ranked number 1 investor in Businessweek. Although, he is always on a hunt for high-tech startups, yet he believes in diversifying away from the risk, and so also invest in startups that do not fall in the category of high-tech. However, apart from the technology, he focuses on the team involved in bringing an idea to reality, and this, he believes, is a crucial part of his investment. He said that as environmental changes occur, the shortcomings in the original idea start popping up. A good entrepreneur would always adjust to the changing environment, which can only be seen through the passion of the team involved.

 

Reasonable Compensation

Everyone must’ve heard the word PayPal; its co-founder who also invested in Facebook, Yelp, LinkedIn, and Friendster, Peter Thiel, said that he keeps his focus on what a CEO is paid. If these people are being paid a lot of money in the company, the chances of an investment to run out quickly are very high, but if the CEO is paid less than average, it depicts the alignment of his interest with equity shareholders. Therefore, he sees how reasonable a compensation is in the company when he invests.

 

Provides Solution to the Problem

A famous celebrity, Ashton Kutcher, has only been on the field for four years, yet, he has made substantial investments in high profile companies, such as, Skype, Zaarly, Flipboard, AirBnB, etc.

According to him, what he looks for in a company is the tendency of its product to solve a problem, and the user it engages who demand that solution.

 

 

To summarize, whenever you plan to invest in a company, you can choose one or use a blend of these ideas in order to examine factors that may lead to finding a successful deal. All in all, what they focus on is the entrepreneur; the team he assembles, and the idea he represents that determines whether an investment would be profitable or not.

Venture Capital and Equity CrowdFunding Co-Existence

Nov
17

It’s been more than four years since the Jumpstart Our Business Startups (JOBS) Act has been enacted, and its democratization has already started with a few Regulation A+ CrowdFunding (CF) offerings officially recognized by the Security and Exchange Commission to raise funds.

Given the increasing interest in Equity CF and reward based CrowdFunding, venture capitalists would find it hard to seize startups seeking investment opportunities as they prefer to raise funds via crowdfunding. On one hand, it has ignited the fear in some VC firms as they believe it could disrupt their industry by creating a hindrance to attracting young companies, whereas, other venture capitalists are of the notion that startups looking for both seed and later stage funding can utilize CF and VC funds alongside each other.

This gives rise to an important question

Whether Equity Crowdfunding and Venture Capital Co-exist or Not?

The answer to that is yes.

Despite the apprehensions raised by VCs, both the sources have turned out to be successful for startup businesses, as they offer two unique routes to raise funds. Although Venture Capital makes up a large part of the financing, yet, crowdfunding can add an extra element to it and help companies by allowing them to raise money quickly and in a more cost effective way.

 

CrowdFunding Provide Real-Time Feedback

Every VC investor seeks strong ideas that have a potential to provide high reward with minimal risk. With equity CrowdFunding, VCs have the advantage to get real time feedback as they observe the public response to see whether a product or service gain traction. According to an article by Deborah Gage on the Wall Street Journal, three out of every four startups (supported by VCs) fail. However, if it is supplemented by Equity CrowdFunding, the number can reduce to a minimum. As David Loucks, CEO of Healthios, rightly said that both the sources of investments complement each other. It can be seen as a sequence, wherein, CrowdFunding plays its part and then Venture Capital plays its role.

He further said that CrowdFunding doesn’t necessarily have to be restricted to the seed stage; in fact, startups can use it at a later stage to help strengthen their deal. He went on to say that instead of going to the capital markets, companies can turn to CrowdFunding in order to arrange funds around a specific initiative, as there is certainly going to be an investor in the market who would seek a partnership with a top buyer.

 

Challenges of VC and CrowdFunding Partnership

There is always a risk, to VC firms, of getting involved with scores of other equity investors. Loucks said that VCs have to be strict in ensuring the credibility of the sources of funds that a CrowdFunding platform represents.

Lynn said that there can be a situation where companies coming to the Venture Capital round, with thousands of shareholders if they find successful CrowdFunding offering, which complicates the capital structure, especially for Venture Capitalists who want to have a lion’s share in the business.

It also reflects a tough choice on the company’s part that seeks funds through CrowdFunding prior to attracting VC money.

 

Venture Capitalists Can Bring Their Own Skill Set

When it comes to CF, Venture Capitalists can go with the number of structures that allow them to co-invest in a company in tandem with new crowdfunding methods. For example, VCs might get access to preferred stock when CF investors may only get common stock. Moreover, VCs can also maintain control provisions, including anti-dilution measures so that rights attributed to them are not applicable to CF shares.

These arrangements can be quite fruitful for startups and investors alike, and in many cases, VCs can boost the overall value of an enterprise, while structuring arrangements in a way that meet their business needs. They can bring connections and market exposure to the table. As a result, new companies get to raise capital, Venture Capital firms get validation, and CF investors get the advantage of VC guidance and experience. Therefore, it can be fairly said that with the right strategy and partners, both the VCs and CF investors can co-exist.

Crowdfunding and Venture Capital

Nov
11

If startups manage to get funding from a venture capital firm (VC) or angel investors, they mark it as a successful milestone.

However, in the past few years, another investment vehicle has been introduced in the financial market to fund innovative ideas called CrowdFunding (CF). It has been changing the game ever since its inception and it is a new form of raising money to finance ideas. Unlike other forms of investments, such as, seed funding, angel investing, VCs or bank loans, CrowdFunding actually enables startups and entrepreneurs to invest in their business with a large amount of capital supply. Before going into detail, let’s look at what crowdfunding actually is.

 

What is CrowdFunding?

In simple words, CrowdFunding is a mean of raising money through a large amount of individuals, who are requested to fund an idea on a CrowdFunding website with a small amount of money. This phenomenon depicts the wisdom of the crowd, wherein, a business gets an opportunity to satisfy the market demand that was previously not exploited. Having this system in place results in creator getting funds to excel in his creativity and crowd getting a new product, which makes it a win-win situation.

 

CrowdFunding or Venture Capital – A Better Choice?

This can be a topic of solid debate if discussed in detail, because both sources have their upside and downside. In order to get a clear idea of which one of the two is a better choice, some of the key points have been discussed below.

 

  • Ease of Access

There is no doubt that it is easier to access funds via CrowdFunding than it is to raise capital via Venture Capital. You can meet your capital requirement with CF without having to build any connections, and instead, leave the decision to a large group of individuals. Sometimes, VC is hard to access. Despite having actual customers and real revenues, companies are considered small by the venture capitalists.

With CrowdFunding platform, it becomes easier to access a wide array of accredited individuals to fulfill initial capital requirements. On the other hand, regardless of how streamlined the venture capital processes are, there will always be more friction in terms of VC making inquiries and spending more time.

  • Stability

Stability is a key to a successful business, but it isn’t achieved easily. Most of the startups do not show an incredible growth curve in the beginning. It takes time to find the product/market fit and to find out a scalable way to sell a product. It means startups would need extra time for which, there will be extra financing requirements. In case of CrowdFunding, there is no apparent deal with responsibility and resources to fill this gap. This is where venture capital partners can assist a business to maintain their focus on execution by providing enough cash.

However, it should be done based on TRUST where both the founders of a startup and venture capitalists feel that the investment was done fairly.

 

Venture Capitalists working with CrowdFunding platforms

Ron Miller, a CEO of StartEngine (CrowdFunding platform), venture capitalists are compelled to use CF, because it asks founders for revealing the strength of their teams and values in the marketplace. He further said that it shows that strong teams and concepts are likely to get exposure in the market, which will draw attention of the VCs and other investors to further invest in their ideas.

For Example, Oculus Rift, a virtual reality system. They raise $2.4 million through CrowdFunding, which gave them the opportunity to rise another round led by Andreeseen Horowitz (VC firm) to raise $75 million.

 

Both sources of funds have their pros and cons. However, some VCs are now turning to crowdfunding websites to get access to new deals. Having strict timelines, they use CrowdFunding to identify if the idea is worth investing time in.

Corporate Venture Capital vs. R&D

Nov
04

According to a venture capital database (CB Insights), the venture capital market invested $74.2 billion across North America in 2015. The Corporate Venture Capital (CVC) groups participated in 17 percent of the deals in that region, making up 24 percent of the total venture investment distributed to startups that have been fueled by VCs.

This definitely reflected a reasonable improvement in CVC activities as their participation was limited to 12 percent in 2011. Significant growth has been observed in this investor type as an alternative source of funding for new businesses, but only a few know what corporate venture capital is.

 

Corporate Venture Capital (CVC)

CVC is defined as an equity investment by an established company in a startup business. It can be put together as an independent part of a company or an appointed investment team that is off their company’s statement of financial position. The main goal of CVC is to invest in companies showing high growth prospects. Some of the marquee brands having venture presence in the technology and healthcare industry, include Dell Ventures, Google Ventures, Cisco Ventures, Intel Capital and Johnson & Johnson Innovation.

Corporate venture capital has been one of the most critical contributors in the venture capital ecosystem that has matured over time.

 

Research and Development (R&D) and Corporate Venture Capital

R&D and CVC are two prominent sources of creating new potential.

CVC can be used as a substitute for internal research and development in creating such opportunities or capabilities. In different theories proposed by Dushnitsky and Lenox (2005), Cassiman and Veugelers (2002), and Gompers and Lerner (2001), there was unanimity on the idea that R&D backs the increasing use of CVC, in contrast with CVC to be used as a substitute for internal R&D. However, not much consideration has been given to how different industries might affect the relationship between these two sources.

 

Preferred Use of Investment

With the rapid changes in the global market, companies have drawn their focus on research and development investment to strive for achieving short term targets, as VCs are considered too quick to get caught up in the latest thing. But it doesn’t have to be this way. A number of opportunities with the great potential to boost innovation already exist, except corporations are not able to make use of it. One of these means is to use corporate venture funds.

 

Corporate R&D – Slow and Expensive Investment

Research and development investment is mostly focused on perfecting technologies that are already used by the public. The United States has spent billions on gigantic science projects for years, but the commercial returns were not as expected. Cutting back on R&D is not the right choice either, as Kodak ended up filing for bankruptcy when they cut their research funding and focused on film, and Nokia is now being purchased by Microsoft as they tried to keep their focus on low-end phones.

 

Corporate Venture Capital – Quick and Cheap Investment

CVC, on the other hand, is better at identifying new regions and is quite flexible and cheap as compared to R&D. During the last 20 years, a number of CVC initiatives gave a boost to pharmaceutical companies that were struggling to catch up with new advancements in bioscience.

The large companies in a corporate sector stay cautious of CVC, as they have seen them distributed ineffectively. For a corporate venture to be a successful mode of investment, its goals should be in line with corporate objectives and the approval of funds should be done smoothly with the same compensation levels as offered by independent venture groups. If a company fails to provide a fair incentive, it is likely to face a consistent flow of desertion. Rewards should always be given if people solve a problem or launch a new product in the market, but they do not necessarily have to involve cash. Recognition can also be a significant reward for such efforts.

Traditional R&D are not good at pointing out threats from the competitors. Instead, it keeps its focus on a specific number of projects that results in ignoring innovative advances that happen outside the company. Whereas, CVC quickly responds to change and potential threats, which allows decision makers to withdraw from any investment that doesn’t seem to be generating revenue in the future. It is highly likely that a creation of the CVC fund would prove to be a breakthrough idea that changes everything.