Nothing will help or hurt your company as how well or poorly capitalized you are. Money will let you invest in those areas that require attention, it will help you grow, and growth is what we’re all here for. But, if you’re a first time entrepreneur you may not know how to raise money. This is why we’re here, a glance at three proven strategies that startups use to raise seed, angel, or venture capital.
This Saturday we would like to introduce you to CFI Partners, a crowd financing platform recently started by a couple of IMD MBA’s. What we find specifically interesting in CFI is their alternative approach to financing startups, it’s new, novel, and it’s taking a risk, it’s what we believe any startup should be, so without further ado, this week’s Startup Saturday: CFI Partners
How did you come up with the idea to crowdfinance?
Imagine the number of missed opportunities that are overlooked or can’t be addressed by the more traditional mechanisms of financing such as private equity and venture capital.
We ourselves saw several cases where entrepreneurs had a great idea but were unable to get past the initial seed funding, or where there idea had a potential for generating strong revenue, but not on the scale that would interest venture capital.
There are several reasons for this, the difficulty of evaluating each opportunity, the cost of the transaction, and the fact that risk capital is not as well developed in Continental Europe, let’s say in comparison to the US. These factors create a threshold where investment opportunities under <$2 Million are uneconomical for traditional venture financing. Furthermore, with more and more of the funding for venture capital and private equity coming from big funds, there is an increasing trend for larger investments.
With crowd financing we democratize the process and make it more efficient. The amount of money that can be raised can be quite significant. If you look at the Obama Presidential Campaign, he rose over $400 million from individual contributions of $200 or less. So substantial amounts of money can be raised. But another aspect that makes crowd financing attractive is the fact that by decreasing the amount that needs to be invested, you open up the process to a whole new market. As this market is more efficient, smaller investments remain attractive. Thus crowd financing allows us to address an interesting part of the innovation market, the area of 50,000 € to 2 Million €, which is underserved at the moment.
Another factor that attracted us to crowd financing, was the chance to develop a community where the considerable power of sharing information can be leveraged. Members of our community will help develop entrepreneurial ideas with their feedback. Basically we will act to bring together the information latent in members of our community, leading to more efficient and we hope more successful investments.
Interestingly, we set out initially to design a platform with the classical technology innovation entrepreneur in mind. However, we have seen a strong demand from film makers, bands, and designers who feel that crowdfinancing could be the best approach for them to raise funds.
Any milestones that you’d like to share?
We started out developing this idea in November 2009, and have been working on refining and developing the concept. Understanding the market and who are our customers. At the beginning of 2010, we refined the website of our company to explain more our ideas and elicit some feedback.
We have been also working on getting feedback from both entrepreneurs and investors. These inputs are going into the development of our web platform for crowd financing, which we are scheduling for launch in Spring/early Summer 2010.
Another important aspect, of course, is raising funding for our own platform. A process which we have just begun.
Can you tell us a bit about the team?
Hervé and I met as classmates in the executive MBA program of IMD. We have rather different backgrounds, but high levels of experience. Hervé has a strong background in marketing and finance, having worked both in large corporations such as GE, but also for smaller startups. He not only has experience working for start-ups, but also has worked with private equity. Thus he has a good experience with both sides of the equation.
Myself, I have over 16 years of driving innovation in Biotechnology. Initially, leading research at top Universities (I have a PhD in Molecular Pharmacology from Stanford) and more recently working in start-ups driving the R&D program and supporting product development. I have a strong insight of the needs that start-ups have when it comes to innovation support. Hence, my excitement in supporting our project.
Any difficulties you’ve experienced in the startup process of your company?
I think what has been the most surprising thing for us is the speed at which the interest and demand has developed around this idea and our platform. Hence, the biggest difficulty we’ve had has been the lack of resources. Hervé and I are bootstrapping the company, while keeping our full time jobs, and still making time for our families. Luckily for us, we seem not to need a lot of sleep! ☺
But seriously, the lack of the time and limited financial resources has meant that we have difficulty keeping up with the pace of the project.
To make sure we capture this opportunity is why we are pushing to launch this spring.
Any advice to pass on to budding entrepreneurs?
Engage with other entrepreneurs about your ideas, they can help you develop your ideas and evolve them. To many times entrepreneurs keep their ideas to themselves and lose the power of other peoples input to convert their ideas into successful ones.
And Tthe next time you are considering fundraising, consider the power of using crowdfinancing. You can a get more details at our website. www.cfi-partners.eu and consider using our platform this Spring for your fundraising needs!
Who pays the fees, should it be the startup? Most Investors will tell you yes. Or should it be the Investor, which most startups will simply expect. The story is however that is depends on a number of factors.
What are hose factors and how do you know who, when, how, why, what, where, and huh? Well that’s why we’re here to help navigate some of the murkier waters of your startupedness. With that, first thing’s first. You need a solicitor (attorney, lawyer), someone you can trust and who knows the corporate side of things, remember each country’s laws are different so if your an S.A. don’t get a lawyer do deals with Ltd.’s. In terms of getting one, network, network, and then network some more.
Now that you’ve got a solicitor, you can go and start talking about financing. If you were introduced to a BA by someone, chances are they’ll want a finders fee, this can range anywhere from 3% – 10% of deal size, and in some extreme examples has even hit 15%, mostly the % will be a +/- 1% of the market you’re in. Spain averages on the lower side of the spectrum, whereas the UK is on the higher side of it.
Aside from this you’ll have legal fees – issuance of new shares, dilution of your own, and even if you do have an MBA, all this will undoubtedly still be confusing at the onset, add to that a finders fee for a facilitation intermediary if there is one, hourly solicitor rates, administrative expenses, filing expenses, etc… etc… and with a seed investment of say €100.000, those bills can quickly add up to 10-20% of the total investment, and all of a sudden your 100k that was supposed to take your co. international looks like it just might flop on its bottom.
So who pays the fees? At the end of the whole fiasco it’s both of you. If the startup pays from invested capital, it’s really getting a fraction of that invested capital, and if an angel pays then that angel is throwing that money away ontop of the investment. Likewise, if the money comes out of company coffers it’s pretty silly as that cash is inherently dedicated towards operational expenses. In which case if you’re lucky enough to find yourself with a willing investor, we recommend the following.
When dealing with an angel be up front about the fees and additional costs, if you need 100k to get to operational business level 2, find out before hand what fees and additional costs will come into play.
Now, say you do need that investment of 100k into your company to bring it to the next level, fees will be 10% meaning a total 110k for the cash transaction. That 10k will go to lawyers, administrative expenses, what have you, and is a sunk cost, no ends or buts about it. But aside from the lawyers who can benefit from it? The truth is the investor more so than the startup. Why? Because many nations in the EU, (mind you not all, so be sure to look at your local laws) – offer a tax shield for business angels. Meaning, that if I as a business angel invest 100k into company X, I can write of 10-20-30% of that investment off of my taxes for the year of investment, additionally, if the company fails, I may be able to write off an additional say 20%, thus decreasing my risk and making my investment contribution a fraction of the actual sum.
In which case, if you can write off that 10% in year one per se, the investment on behalf of the angel would really be 99k instead of the equity for cash injection of 110k. That shield does not apply to the startup, and your law / admin fees will go on your books as just that, the are not depreciable, the are sunk costs that eat up your cash.
So the next time you find yourself at a round table with a few BA’s or are a BA yourself, just remember that there are numerous things you can do to lower your risk in any new venture. It’s not just about investing, it’s about doing it in an intelligent manner.