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Welcome to 'In business', part of the podcast called Peter Day's World of
Business
in this edition, more about a new way of raising money, by asking complete
strangers over the Internet
Peter Day explains
these are tough times
especially for people who want to start a new business, banks seem reluctant to
lend, customers want to keep money in their pockets
but bad times may be good times to start something new
listen to Eric Migicovsky
he invented a watch called the pebble, it displays smart phone messages as well as
the time, he raised money, quite a lot of it, on an American web site called Kick Starter
we expected to raise a US$100 000 on kickstarter in about a month
that was our goal
I think we hit 100 000 in the first two hours
we received
a million dollars in funding in the first twenty eight hours
and uh... after thirty days we had raised is 10.2 million dollars
Adrian Hon is another veteran of this new practice called "crowd funding"
he used it for his British computer games company
six to start
there are lots of different ways you can get funding these days, you could try and get
a loan from the bank, although that probably won't work for anyone, you can
try and get venture capital funding, like they do in Silicon Valley, you can try
and get grants ....you'd thought about these things and rejected them ... we
rejected them and we instead considered a new root which is called crowd funding
it's not just for high-tech businesses, this crowd funding
here's a man who wants to teach bicycle riders how to build their own bikes
my name's Andrew Denham
I'm the director of The Bicycle Academy, I wanted to build a frame for a bicycle
race that I organised
and I realised that most of the frame building courses are quite expensive
but also that you get to build one frame on the course but that's it, there's no way
of going back and continuing, and that's something that I really wanted to do, so I decided
to create something with a format that suited me, and it turns out that lots of
people thought the same way ... and you need some money to get set up?
I realised very early on that this wasn't going to be cheap
so I've decided that actually
the best way forward would be to look at crowd funding ... how much money?
originally GBP20 000 but then...that would buy rent of premises and things?
yes, essentially that and the equipment that we needed, I then
realised that to do it properly we needed to double that, so we need is raise GBP40 000
although that's not an enormous amount of money to start a business, it's a lot of
money to ask other people for
and it's more than you had
an awful lot more than I had, yes
Andrew Denham is based in the Somerset market town of Frome
which turns out to be a neat little nest of creative businesses
he says it's an exhilarating experience watching the money come in
we went live on 1 November 2011
we had six weeks within which we needed to raise the GBP40 000 and it's
important to say that had we not raised the full amount within the six weeks we
would have received none of the money, so it was an all or nothing situation
now you put it out
you've done some prep work, you've started talking about the as loudly as you
possibly can, so this is not
quite out of the blue, but to many Internet users it would be
what happens
we actually raised all of the money within six days
that must be an extraordinary feeling, this is entrepreneurship with a
wow factor attached to it
right at the very beginning, you've hardly pitched and people are
waving cheques in the air ... and what was wonderful is that of course everybody
involved could see what I could see, so they were all as excited
it gained a hell of a momentum because people were trying to encourage their friends
to back the project everybody was excited, it was wonderful
a keen sense of biking community
emerges from the money raising
what we've created is 183 evangelists of the bicycle
academy
every single one of them are part of it, they know that without their
involvement we wouldn't have done, they help promote us, they help support
us, and that's invaluable
I'm Chris, Chris Berman
now from
I live in Bristol at the moment ... and a cycling freak
i wouldn't say a freak, but yes I do enjoy my cycling, I have to say I was
one of the
eager beavers
checking out the website everyday, I was one of the early backers just because I
had the money there, and I thought that this would be a
very useful project to engage with at the earliest stage ... how much money?
I think it was GBP400 put in at the beginning yeah
and you were essentially buying yourself an early place on the course weren't you?
but also I really wanted to see it happen, so I was very keen to put my money in
and encourage others to do do, and spread the word myself ... what's it like?
it's absolutely fantastic, the room is beautiful, it's not just a dingy workshop
there's artwork on the wall, it's a very light airy environment, I have a small burn on
my thumb already, so far all my expectations have been met
various kinds of Internet enabled funding are emerging
as Daniel Eisenberg explains
he's a serial entrepreneur
also an entrepeneur professor
at Babson College in Massachusetts
they're different types of crowd funding, there's donation crowd funding, there's
kind of like reward or product crowd funding ... where you put money up and
you get a sample of the production line if the thing rolls ... exactly
then there's equity crowd funding which is new, and that's selling shares in a crowd
funding way
but it seems that Britain is an early mover in selling shares on the internet
the crowd funding way
the USA has several well-known project funding websites but equity crowd
funding has only recently been legalised there
by the JOBS Act
it stands for
Jumpstart Our Business Start-ups
the American financial regulators
are still deciding how to implement it
so British fundraising businesses such as Crowd Cube based in Exeter
are gaining experience
that the Americans don't yet have
Crowd Cube's Chief Executive
is Darren Westlake ... I'm an entrepreneur, a frustrated entrepreneur, and I've started
in Exeter two businesses now
I saw this huge need for finance, and my own need was one of many
I really thought there must be another way that people could raise finance for
for businesses, the process is really quite simple, it's like any other
funding source
they provide us with a business plan and financial forecast and we'll go
through those and make sure that they are up to standard before we would let them
publish their business on the website
here we are with the website in front of us, so up comes the front
page, right what's it look like? ... So on the front page of the website we have a number of
different pictures, so some logos of the different businesses we
have, and a brief explanation about each of the businesses
what they do
how much money they're looking for, and the progress they've made so far in
raising their finance ... so this is all about the companies that are raising money at
the moment ... absolutely
yes, so there are a list of businesses that are looking to raise money
and then I click through it if I'm interested in a particular business, yes?
yes, click on businesses of interests, read up on it
understand the business
ask questions if you need to, and then when you feel comfortable, and if you wish
to, you can actually go through the process of investing ... right, ok so you
vet
or you see that the pictures are ok, I put it up on the site and then
pay some kind of fee, I am prepared to pay some kind of fee, what's the
arrangement? Yes we only charge if you're successful in raising money, and we charge
5% of of the money raised, if you don't raise money
we don't charge you anything
equity stakes in a start-up businesses this is a high-risk thing you're asking
people to do isn't it? It is a high risk thing, absolutely, these businesses uh... you
know, many of them will fail, and some of them will be successful
uh...it comes back to having that information in front of you
to try and make an informed decision as to which will be the star, and which
one may not be so successful ... because presumably the health warning
for the investor
is
you don't put too much money into a single
company ... absolutely yes, the average investment we've had through the site so far
it's been about GBP1600
what we're trying to do is enable people to
build a diversified portfolio of investments
and spread their risk, because if they are high-risk, the best way to deal with that is
to diversify and spread your risk
narrow to a brand new name from a new company born on a London kitchen table
that's financed its development using the crowd
what you see
on the front of this packet is immediately what to get you get
you get bursts of ginger, bursts of sesame
I can smell it before you even pour it out
you're going to put a little in there and then I dip lettuce in it do I?
I get a nice bit of lettuce and then
so this is our Asian inspired dressing
you get immediate bursts of sesame
and a subtle hint of ginger
it's a business funded using Crowd Cube, Righteous All-natural Salad Dressings
created by Gem Misa
born in the Philippines, now based in her flat in west London, she gained high
level international marketing experience, with the global consumer goods giant
Unilever
but she eventually wanted to do something for herself
Gem Misa spent a year testing recipes
and finding suppliers, and getting a few supermarket clients
but then she realised
she needed something else
when Righteous ended up on supermarket shelves, and we realised that
we needed to change our game plan, we
couldn't do slow organic growth
anymore, we needed to tell more people about the product, I realiSed that we needed
a big advertising campaign, and there was no way that I was going to be able to
fund that myself
other options we looked at were bank loans
now the problem with that was because the company was only two years old
it didn't have much credit history, the amount that we could actually borrow
wasn't enough for what we had planned
and also the interest rates weren't ideal
how much did you want? We were looking for GBP75 000 ... and you
were offering a stake in the company for that money?
yes, so I was thinking it was more friends and family that were going to be
participating, but I was so amazed that people had heard about the brand
and wanted to be able to be part of it, so we able to get 85
fantastic investors
they believe in the ethos, the values behind the company
and they just wanted to see it succeed, and also, when people are watching the
business and they start seeing
that of the funds, 15%, 20% have been committed and there's a
certain panic that they want to be part of it, and we found
almost like a landslide of
investment coming at a very short time
Righteous Salad Dressings
salads just got sexy, naturally
much to my surprise, if you know what you're doing
it's now possible to finance the making of a TV commercial, and the showing
of it on digital TV channels, for quite a modest amount of money
GBP75 000 isn't much, when you think about it, but
it was enough for us to create an ad that made a statement about the company
showing the level of quality of products that we offer
and really making us, not really just a kitchen counter brand
in people's eyes, and I think that's a that's what we needed
that is something else extremely interesting about crowd funding, and that is
trust
85 people are putting an awful lot of trust
not just on a concept or a company
but on you personally, sole employee
yes yes uh... and I think there was a very big part of my pitch as well when I
presented this project on Crowd Cube
in terms of
investment they are just as much invested not in the idea, but in myself
I just made sure they knew that I did have a very solid background in marketing and
in terms of
being an entrepreneur I've had a successful salad
company in the Philippines, which in terms of experience sort of helped them feel
more secure about investing in me
Gem Misa got the money, she had the commercial made in the Philippines
and shown in Britain
so where has Righteous got to now
while
the ad was running, we also ran a supermarket promotion, which incentivised trial, but the combination
of the two ... increased our sales by 300%
the ad has just finished what we're hoping for now is that we get the
retention rate that we're hoping, fingers crossed
it happens
Gem Misa of Righteous Salad Dressings, and even at this embryo stage of crowd
funding
there are quite a lot of eye-catching success stories
but what about the would-be startups who fail to attract investors, I got a run
down on some of the figures from Darren Westlake
of the funding side
Crowd Cube
how much money have you raised so far
we've raised GBP3.8 million in the eighteen months we've
been going, that's for twenty-three different businesses so far
how many have failed to raise the money? About 10% are actually
successful in raising money through the site ... so there's quite a large sort of
wastage here, people failed to attract investors attention with the
proposition on the site .... absolutely, and we think that's the way it should be
we try to give investors
a good choice of businesses to invest in
and only the best ones will succeed, and that's the way that the crowd, and the wisdom
of the crowd should work ... are there particular things that seem to work?
people invest in things that they can understand, and that they know to some degree
so we've had a lot of success in consumer products that have been in supermarkets for instance
Gem from Righteous, she had her salad dressing
she had her product, and people can understand those, they're very simple
she'd have a uh... a big company background of course, so you can add that to
the cv and there was the product
which they could actually buy and test, because it was in
nationally distributed
supermarkets, so that ticked a lot of boxes for your kind of investor
that's right, I know we've had a few sort of scientifically more complicated type
businesses on the site
and people just don't understand them, and if people don't understand them,
they're not going to back them, because you can't feel confident in your investment ... what
about the other 90%, are they duff businesses, or do they need to
reshape and re-pitch?
because it must be a bruising experience when you put yourself up for recognition
and money and you don't get either
they probably need to have a look and try to understand why they weren't successful, was
it because
they didn't have the right kind of collateral, they have the decent business
plan
was it because they're just not a consumer kind of product, and therefore
crowds don't really understand it ... yet ... yet yes, or is it there's just
something fundamentally wrong with their business, and they're probably not going
to be a success ... individual failures but also the skeptics who think buying shares
via crowd funding
is not an investment strategy that can work
Professor Daniel Eisenberg of Babson College is one of them
equity based
crowd funding has no place in the overall portfolios, and the reason I'm
against it, is I think inherently it has to be unfair to the investor, the
investor
inherently, intrinsically, will have to lose money...why, why have to .... have to because
when it comes to equity markets, crowds are notoriously not smart, they're not
wise, people talk about the wisdom of crowds, and that's true when you want to
rate a restaurant, and you say you can go out and what are thousands of people
think about this restaurant or book, or movie, that makes a lot of sense
but the only way you can make money
buying equities, is by buying low and selling high
that means you have to see an asset, that the market thinks is not
valuable, and you have to buy that, thinking that it will become valuable
you have to go against the market
in order to make money, as an equity investor
the smart investors are going to be the ones staying out of equity crowd funding
so who's left
but crowd funding is still an intriguing idea, and very interesting
projects and business founded on projects, are coming out of it
the biggest money raiser on the American site Kick Starter was that Pebble Watch
devised by Eric Migicovsky
it's a watch that you can connect by blue tooth
and you can get messages, emails, calls, you can even change music tracks and
the biggest thing that we've brought to the table with this watch
if that you can actually install applications, we had originally gone out and try to
raise about US$1.5 million from venture capitalists and
angel investors
the process of
failing to raise
money from venture capitalists and angels took about a month
you can imagine how long it would have taken to succeed
we expected to raise a US$ 100 000 on Kick Start in about a month
that was our goal
I think we hit US$100 000 in the first two hours
we received
a million dollars in funding in the first twenty eight hours
and after thirty days we had raised US$10.2 million
for any start up really
the ultimate goal is to make something that people want, if you don't make
something the people want, then
you won't raise money, you won't make any sales
what we've shown uh, it was our goal to make something that people want, I
think we've uh... we've started to show that, that's what we're doing, using Kick Starter
the "pebble" was using the business model of raising money to get things done
from payment in advance for goods to be received later, and I have to report the
delivery of the watch to backers has now slipped
it would be available as originally pound in September (now January 2013)
Eric Migicovsky is another of those skeptical about selling stakes in a
startup company
using
equity crowd funding
with equity based crowd funding, you're kind of just
getting back into the same investor groove where
instead of impressing customers, and building something for customers, you're
trying to impress investors, which are sometimes customers, but most the time
just people that are interested in return on investment, instead of return on
products, so
if you ever run into investors, who are going to be customers as well, why not
just make them customers to start ... Eric Migicovsky of Pebble
another of the new British, take a stake in the company crowd funding websites, is
Sedrs spelt with an 'S', it's co-founder is the American Jeff Lynn, now
based in London
one of the things that we feel very strongly, is that
the traditional type of company, the so-called Kick Starter model, is fantastic
in two sets of circumstances
if it is a creative project, that has very little prospect of profitability
then donating to it without any real return
is absolutely fine
and likewise, if you are getting a tangible reward, a watch as it was one
of the big ones on Kick Starter
that works too
but what you don't want, what a person providing funding doesn't want to do, is
be a person who kick started Mark Zuckerberg, they don't want to given Mark
US$500, and say good luck with this Facebook thing, and then find Mark a
billionaire and got nothing to show out of it ... well, they might have got
a bit of kudos, or something like that
or to get Facebook up and running
just because they like the idea of the project
don't discolour it too much, because you missed out on a fortune
I don't 100% agree, I think that if you look at Kick Started
and Indigo and the other businesses, they started almost
entirely based on creative and artistic projects, entrepreneurs have come to them
because until now equity based crowd funding hasn't been available, we think that
as we and other models out there, provide the opportunity for investors to
get upside proliferate, what we'll see is that people who allocate capital will not want to
give it away
to a business that has the prospect of serious profit, when they can
participate in the up side
what about that idea that equity crowd funding can't really deliver
investment profits
because investors need to beat the crowd to win, not be part of it
Jeff Lynn, disagrees ... I don't think you're trying to beat the market here, I think that
they're trying to build
a portfolio of investments
what we've seen from the data
this is from angel investing, at a slightly later stage, but what we've seen from the data
is that in Britain, average internal rate of return, IRR, on our own angel investments
has historically been 22%
that includes all the duds
we're not just talking about the ones that were a success
absolutely, about 80% of those returns came from 9% of the
businesses
and so for the most part, what we're encouraging investors to do
is to try to build a portfolio
not to beat any market
but to gain the returns there are available in this asset class, the other key
point, the difference between this and the public equity market in particular
is that you don't have high frequency or any frequency trading, these are long-term
investments, I agree that the crowds do tend to jump in, actually that doesn't happen
here, this is a one-time decision based on a one-time valuation
and I think that the crowds will do an excellent job of making that kind of decision
but there's another factor at play, maybe the secret source in startup investing
at the moment
the British government is currently giving great big tax allowances for
investing in small firms, Darren Westlake of the funding internet site Crowd Cube
explains ... there's huge tax breaks, there's always been uh... Enterprising Investment Scheme
which has been a
30% tax rebate, then they have the seed investment scheme, which is
a 50% tax rebate
and the government also have a
one-off offer, if you like this year, for people who have invested in other investments and
withdraw those investors to invest in the SEAS they end up getting a
78% tax break ... and the SEAS
it's an investment operation for people investing in
in businesses and looking to raise up GBP150 000
so, that means in total this year you can get a sort of a rebate on your investment, you
de-risk your investment by what %? By 78%
the old investors we see coming through our site, the one thing
that they're really demanding above and beyond a great business, is for those
businesses to have these tax breaks, and I think of the 23 businesses
that we funded, I think perhaps only two of them haven't had EIS or SEIS
in place, because that's what investors look for ... what worries me a about that is that it
distorts the market
this is a tax thing, not an investment thing
I think it's designed to open people's eyes to the opportunity to investing in small
companies which
the man on the street may not have normally thought about
I have another slightly skeptical feeling about all this
which I put to Jeff Lynn of Sedrs
basic objection to GBP10 minimum is that your
poor tiny companies are loading themselves with hideously complicated
shareholder register from day one, simply too complex to administrate ... one of the
key parts of our model is that we hold the shares as nominee for the
underlying investors so that means that from a company's perspective
they only face us as legal shareholder ... hang on a minute, if the business really takes
off, I want my 1% or 0.1% or whatever it is, stake, for me
don't I
you can sell it off at a premature stage on my
behalf willy nilly ... we can't, we do not make buy / sell decisions, that's the one
thing we won't do... I suppose the question anybody would ask about a
start-up like you
as well as the start-ups that are on the site is
why are they going this way to get finance, initial suspicion about the a new thing
I think there are two keys points, one is
that first GBP50-75 00 000 of capital
unless you come from a rich family
or you've worked in the city for 15 years and have saved up bonuses
that capital isn't available in too many places, I mean people talk about the
banks not lending, the banks never lead to businesses at that stage
and angels and venture capitalist don't invest there either, the other point that
I would say is what many of these businesses see, is that the prospect of
having say two or three hundred people, having the voted with their wallets that
they think this is a good business
have a vested interest in the business' success, and will be out there
promoting it
providing support, connections, advice, is a big advantage rather than having one
old angel
who maybe sold a pub chain 15 years ago, and that's how he got his money
here you get the big base of supporters to help you ... that puts the spotlight on
something which is an extremely interesting component of
the way angels tell their side of the story, and that is their involvement
with companies, the mentoring side of things, very experienced businesspeople
and these start-ups can do with that, doesn't happen in your sort of thing
oh but it does, and it happens even better
because first of all, you're not just getting the advice, and mentorship, and the
support
from one or two angels who happen to give you capital
you're getting it from two or three hundred
and there are already satisfied customers of crowd funding
one of them is Adrian Hon of the computer games company Six to Start
the amount that we needed was
you know, it wasn't a massive amount, and there are lots of ways you can get
funding these days, you could try and get a loan from the bank, although that probably won't
work for anyone, you can
try and get venture capital funding, as they do in Silicon Valley, you can
try and get grants, and they all have that advantages and disadvantages
what a lot of people don't realise, is that they actually take quite a lot of
time, and of course there's a cost, you're obviously giving up equity for
the money that you get ... so you'd thought about these things and rejected
we we rejected them and we instead considered a new route, for the
first couple of days it was people who we knew mostly, and then I think on the
third day it went viral as they say, it sort of started spreading over twitter
the weblogs and so on
and we got
US$20 000 in a single day, and
from that point on, press started getting interested, and so we had newspapers
and so on calling us up, and of course this is twofold exciting isn't
it, it's you getting the money to do this
but you
getting signals from the outside world that what you're working on is interesting
and probably has a potential customer base
it's it's a kind of double whammy ... exactly that, that is probably just as
important, if not more important than the actual money you get, that it's a proof
the product you're making actually has an audience and has a
market
supporters can also bring insights to the nitty-gritty of developing the game
the commentator Naomi Alderman helped Adrian Hon create the story for the game
called Zombies Run, it's where joggers use their mobile phones to enable them to
be chased
by computerised zombies ... you also can't underestimate the effect of having
3500 advocates for your product out there, and they're helping us make the
product, so
for example, when I was writing, I needed the help of someone who had a
military background answer some questions, we have many people amongst our backers who
had a military background, who had emailed us saying, if you need any help, contact me
some of the zombies helped you no doubt as well
a lot of my best friends are zombies
and at Frome in the Bicycle Academy, Andrew Denham is excited to be up and
running
after selling academy bike frame building courses to the internet crowd
we've pre-sold 75 course places
and we have a few hundred people on the waiting list, so it looks as though this
is a goer, does it?
Yeah I think so ... and you actually couldn't have done it without crowd funding
no absolutely, i think it would have been very very difficult to do it without crowd funding
I know of people in London who tried to go the conventional route, and have failed, the
banks have turned them down, it's very difficult at the moment to raise finance and by opening that
up to the people who'd be partaking in the course is we've been able to do it
a final cautionary question
to Jeff Lynn of Sedrs in London
there's a big crossed fingers about this, issue stepping into quite a big unknown
what you're doing isn't it? Absolutely, we are,
we think we have invented a new form of finance, and there is a absolutely a
great deal of unknown
that's involved with that, but so are all exciting innovations
there's no time like a crisis to launch a disruptive idea
and crowd funding is only one of the ways that outsiders are trying to rethink
the financing of small businesses
there will be flops a plenty of course, but maybe we'll also see some striking and
sustainable successes
among the businesses
that cannot resist, the roar of the crowd
Peter Day
the producer of the program was Mike Wendling
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