Sustaining Crowdfunding, A French Manifest

Introduction

The text below is an approximate translation in English of the original French text.

In straight line with the publication of this Manifest, we’re organizing an event on the 26th of March 2012 in Paris to propose a series of amendments to French law in order to sustain the growth in crowdfunding in France. We’re also organizing a crowdfunding campaign to help us cover part of the logistics.

If you’re organising similar initiatives in your home country, or if you want to coordinate our efforts to act at the European level, please contact us through the comments below.


Sustaining Crowdfunding, A French Manifest

Object of this manifest

Actors involved in Crowdfunding wish to bring the attention of public representatives and of all the citizens to the opportunities offered by a more direct and local support in project developments. This new mode of financing complements the existing models by mobilizing small individual amounts, it benefits to the development of entrepreneurial projects which are social, at an early stage or in a development phase.

This manifest brings together entrepreneurs looking for financing, operators of web platforms, individual investors, business angels; and more generally citizens who wish to keep a better control on the use of their savings, who want to contribute to entrepreneurial projects they feel close to, and who want to follow their development and monitor their impact.

What unites us?

We wish that reliable modes of financing develop to complement existing channels.

We witness the growing desire of citizens to be involved more directly in small enterprises they feel close to, we see the success of Internet platforms, business angels’ networks or investment clubs, despite an unfavourable legal framework, these observations demonstrate the feasibility of this new mode of financing.

Today, thanks to the investment of a  wide audience in France (approximately 35,000 Internet users), Crowdfunding  platforms have gathered more than 6 million of euros in cumulated financings and allowed supporting close to 15,000 entrepreneurs in France and around the world.

We are convinced that the diversity in Crowdfunding models (donations, loans bearing an interest or not, investments in equity) and the variety of actors and projects are a positive condition for a creative and innovating entrepreneurial activity, which is vital for our economy.

Direct financing allows citizens to be actors in the projects they want to see developing and is providing the transparency to let them freely and easily make use of their savings.

Collective knowledge and mobilization of communities to finance projects directly is a favourable condition for the development of trust and is a guarantee for success, usefulness and positive impact for the project which have been financed.

What is our proposition?

We propose the definition of a legal and regulatory framework that clearly sustains the possibility of direct financing, which will pay attention to the particularities of this new mode of financing and which will acknowledge the fact that the Internet modifies and enlarges the fields of possibilities and the notion of community.

Concretely this means:

-          Easing the collection and pooling of small amounts in order to finance projects

-          Softening the rules concerning public offerings of financial securities to adapt them for small individual amounts, with the acknowledgement that a community can outgrow 100 individuals when each amount is sufficiently small

-          Softening the regulation concerning direct loans between private persons

-          Softening the legal requirements concerning the collection of funds

-          Adapting the level of information and transparency required from the issuers (or the neutral intermediaries that the Web platforms are) to incorporate the reality confronted by the financed projects, and the exact level of protection necessary for savers who want to have an active use of their funds

-          Allowing intermediaries, notably Internet platforms, to be neutral actors, facilitating the connection between projects and funders; without requiring from these operators inadequate amount of information that practically greatly reduce the development of projects.

All these modifications should be implemented in the context of transparent and easily accessible information provided to savers on the possibility of not recovering the totality of their funds in the case of loans (bearing interests or not) or for investments in equities, and information on the outcome of projects.

 

Is the AIFM Directive bad for entrepreneurs?

There has been a call lately to entrepreneurs by people like Fred Destin or Seedcamp to meet tomorow’s deadline and bring their support against the AIFM Directive. Many prestigious entrepreneurs have already signed the petition and my attention was called to all this by my good friend Louis van Proosdij, who is a co-founder of P2PVenture.org and founder and CEO of FairPlay Interactive.

At P2PVenture.org, we try to promote commons that are favoring the all ecosystem. Which means we try neither to be on entrepreneurs’ or investors’ side, but try to promote what we think we’ll be good for the all community.

I must confess I’m like anyone else and tend to be very wary when I hear that the European Union’s technocrats will try to regulate something. But I’m also very deeply concerned, like everyone, by what went wrong with the financial system. I must also confess that reading the Directive, it seems very difficult to understand all the details (it took EVCA almost a year to produce several counter points). But I fail to understand why entrepreneurs are taking side with Venture Capital so rapidly.

So let me react to a couple of points to try seeing if things are so clear for entrepreneurs going against this Diretive.

Does the AIFM make sense?

I think there has been a quick parallel between what went wrong with Lehman Borthers and regulating funds. Lehman Brothers was a bank and was acting as a lender and borrower on many transactions. The fall of Lehman created the seed of what is called a systemic risk – a potential complete subside of the financial system through a domino effect.

Is the regulation of alternative investment funds addressing the same exact issue? I don’t think so, but let’s give credit to the EU that probably not everything is working as it should be in this part of the financial system and that anticipating problems could be a good change from what happened before.

Should Venture Capital be included in the AIFM?

When I first heard a couple of months ago that VC will be included in the regulation concerning hedge funds, I thought this did not make sense. Hege funds can be short (taking positions backed by a money they don’t have), VC funds are never short. Then, I rationalized that VC funds are such a tiny part of the financial system that including them or not would not make any difference for the purpose of the directive.

Is this bad for Venture funds?

I believe this is bad for Venture funds to be included in the Directive. But then, they also suffer from being part of Private Equity – which they are a small portion of. The most substantial part of Private Equity is made of  growth, distressed, mezzanine, secondaries,.. and there are issues there that, even though quite different from hedge funds for several aspects, is very similar concerning the use of leverage and the inherent risks that were poorly addressed prior to the crisis.

So Venture funds are caught in a regulation that is targeted at a much broader category, but for their own detriment, they are clearly currently assimilated to this category

Is this bad for entrepreneurs?

Here, I’m a bit puzzled why entrepreneurs accepted so readily the arguments of the EVCA.

  • Discriminatory disclosure requirements and administrative burden affecting startups backed by venture capital
    There is a clear bias against VC here in favor of familly offices and sovereign funds. Is this bad for the entrepreneurs? I’m not sure. Money could find alternative routes to come support young startups, but it is sure that VCs will be at a disadvantage
  • Cost of compliance estimated at €30,000 per year for your companies
    This cost was estimated by the EVCA. I don’t have the details of the computation, but I’d like to know what is the cost supported by companies for the reporting to venture funds, and I’m just wondering if there is no compensation in the reporting done that would lower this figure
  • Absurd capital requirements imposed on venture firms
    Here, I don’t really see this as a negative for entrepreneurs. The Directive says that funds below €100M will be exempt from the corresponding regulation and that fund management firms handling less than €500M will be exempt as well. EVCA would like to see the threshold raised to €1B for funds, but haven’t big funds – with the associated power -been a problem entrepreneurs have been complaining a lot. Funds entrepreneurs love – like Seedcamp – will not affected by the Directive. If we see more of these funds – as we do right now for other reasons (because big funds are fleeing Europe) – won’t the situation be better for entrepreneurs?
  • Requirement to use outside depositaries (i.e. custodians) and independent valuation agents, adding cost and complexity
    Having custodians and independent valuation agents will bring a cost, but is it as bad for entrepreneurs than for VCs. I’m not sure. Custodians will bring a much easier world for Limited Partners and bring transparency into the system (with some much needed industrialization of the VC backoffice). And independent valuation may bring quite a different setting: Is it really bad for entrepreneurs to have a third party valuating their company, when the EVCA argues that fund managers do that already very well. Anyone involved in a down round (subsequent round based on a lower valuation than the previous one) may have a different opinion on this.

So, all in all, the outcome of this Directive seems to me less clear for entrepreneurs than for the VC industry. We may even see some strong benefits because of the transparency it will bring to the financing of startups.

Are you giving equity to your VC to get their advice?

This post comes after a discussion through comments with Fred Destin on one of his recent posts. This is something I’ve been thinking for a long time, and I just thought it may be time for me to put this on paper: Nothing in the way term sheets are crafted creates an incentive for any of both parties to value advice from investors.

Let me just state first that I’m not saying that some VCs or BAs are not adding value to companies they’ve invested in. I know Fred and he’s definitely a nice fellow and very proactive investor, he’s for example participating in a lot of initiatives like Seedcamp. But, my point is that VCs or BAs are best viewed as pure financiers with the incentive structure put in place through current shareholder agreements: Their added value is in putting money in the projects that will be providing the best returns – with or without them on board.

Today, once the money has been committed, there is no incentive for the entrepreneurs to listen to investors’ advice – entrepreneurs are not paying for it. Furthermore, there is no incentive for investors to put extra skin in the game – if they do, other investors will benefit from these freebies on the same terms than they will.

OK, we regularly do see some investors providing extra help. But for me, their incentive belongs to either empathy or reputation management (providing value now to get a discount on future financing rounds with other startups). The carried interest, that is often cited, is not actually a hard incentive. Investors will receive it, whether or not they were really instrumental in the success of the company. Sure, investors have an incentive not to let the company fail, but the way to “fix” a company is certainly something that is not widely shared between entrepreneurs and investors, and I don’t think entrepreneurs see them as advice they have paid for when they issued equities.

So my whole point to entrepreneurs is that they should not expect particular help from VCs or BAs. Sure, they will get some “free” advice, but like everything that is free, you may like it or not, it may even have a lot of value for you, but you can not complain on the quality.

I’m actually thinking that we need alternate incentive structures so that entrepreneurs do pay for advice that have value for the project. There is a problem of assymetry in information products like advice, it is that you don’t know the value until you’ve consumed them, and when you’ve consumed them for free, you have litlle binding to pay their full value. My current thinking is that alternative currencies may be a good way to solve this problem: You can imagine that projects will be able to issue local currencies that will be backed someday by actual shares of the profit. But this is another story, a subject for another post…

Creating “Commons Domains”

I’ve lately been involved in a discussion thread on “why we need software patents or if we should kill them“. My position is clearly that patents are a value destruction for the entire community. But the problem is that they create a rent for certain actors and it makes it then difficult for political action to act for the common good when financial powers is concentrated in the hands of a few beneficiaries.

While thinking of a way we could come to the desired end without waiting for politicians to realize where the common good is, I’ve just had the idea of “Commons Domains”. A Commons Domain would actually be an ambitious extension of the notion of a patent pool. The idea would be to create an institution to administer a Commons Domain, a Domain where any signing company would consider that all their IP would belong to the pool of companies.

While at first this may appeal to companies with no IP, I think there may be a twist so that it becomes a winning machine over the IP oriented rent seekers. In fact, once a company has signed into a Commons Domain, and when it is facing with the prospect of patenting a new idea, it could:
1 – patent the idea and try to make money on the companies that did not sign in the Domain
2 – put the idea in the Public Domain for the good of the entire community
3 – propose the idea to the Domain’s institution who could choose to patent the idea or not

The interesting aspect is that there is an accelerating effect. Once you start having a few valuable patents within the Domain, the interest for other companies to adhere and bring potentially more IP within the Domain grows.

I would be interested by your reactions and why not, see how we could rapidly create the first Commons Domain.

Systems to organize what employees have to do, or want to do?

I blogged before on the difficulty Enterprise 2.0 faces for entering big organizations. It suddendly occured to me the other day that current IT systems (ERP, CRM,..) are mainly meant to track and organize what employees have to do. While Web 2.0 tools are doing wonders aggregating intentions and organizing actions of people according to what each one of them wants to do.

It is not new that Markets and Hierarchies represent two forms of coordination with their specificities. In this sense, Web 2.0 seems very suited for Markets, allowing people with diverse interests to loosely collaborate for a while, before moving to something else. With that in mind, it seems that Enterprise 2.0 is confronting a very tough challenge, it wants to re-use for Hierarchies the tools that seem to be almost meant for Markets.

But for people who have been in management positions, it is clear that the command and control model has its limits. That a good part of your job is actually to create meaning so that what people have to do, more or less align with what they like to do. It is even more so when you deal with knowledge workers, where there is a strong asymmetry of information, where they know what they have to do, and you as a manager painstakingly try to keep up with what they are explaining to you.

This is why, even though I believe it will be difficult and require a lot of cultural changes, I still think that big organizations can benefit from the new Web 2.0 tools. At the heart of the change will probably be a modification on the way we conceive firms. But, when some corporations let employee use part of their work time as they wish, there is still hope that big organizations can transform themselves to adopt more decentralized working models.

Trying to make value out of what your employees want to do, instead of what top management thinks they have to do is obviously a big shift. But who said the latter should be the ultimate way to run hierarchies. If there is indeed value in the former, evolution will naturally produce new types of organizations thriving on those principles. If you’re still running on the old model, you’ll just have he choice between mutating or sinking into oblivion.

Why do I need to know what payment systems my vendor accepts?

The answer seems obvious. Because I need to be a member of one of the payment systems my vendor accepts in order to complete a transaction. But it then occured to me that it does not necessarily have to be so. Wouldn’t it be simpler if I could use whatever payment system I want to release a certain amount of cash and if the vendor can have some guarantee of being the owner of the money before releasing the good to me? The answer is of course yes!

In fact, to get back to the former answer, it is not necessary that one organization like Visa, PayPal or a coalition of them controls the entire chain for making the whole thing possible. It’s only because this entire chain of processing takes today very long – like days or even weeks – to complete that my vendors asks me to use the payments systems they accept. They need to be sure of receiving the money, some day, to agree handing the good over to me now.

So, if we had an open and real-time settlement system, we could perfectly imagine that we would no longer have to care what is the ultimate system that vendors would be using.

To give a brief explanation of what a settlement system is, I’ll just say that this is a way to make valid the change of ownership of a certain financial property, in this case cash, from one party to another. A real-time system would be a system that would process the entire chain in a couple of seconds. And an open one would be a system which would let any cash sending system and cash receiving systems interoperate.

So, if my vendors could know in real-time that the money I’ve just parted with is now in his full posession, they would be perfectly happy completing the transaction. Which means I could send the money from my mobile phone – or any other online device – using whatever payment system I would like and I would feel comfortable using. My vendor could also use the payment system most convenient for him. As long we are both happy and trust our payment providers, we would no longer have to determine if both of us are members of the same systems.

Now, do you think it all sounds science-fiction because we can not create such an open and real-time settlement system or because current payment service providers have too antiquated backbones to dream processing such a transaction in real-time and have no incentive to move to an open system? If this is the latter, this suggest the word “Disruption” to me.

Refounding Finance

After the shock that the crisis created and the quick – but not cheap – measures that were passed, it seems that the debate is currently moving on the terms of a longer term solution (see posts in Javelin Strategy or The Bankwatch for example). And there, things do not look good either.

It is obvious that free market created a lot of wealth (that has not been equally distributed), but was unable to stabilize the deep imbalances it generated. Furthermore, it’s now obvious that the wrong mix of regulation and laissez-faire created serious flaws in the incentive mechanisms. Regulation prevented competition to come and erase unfair rents that some actors were extracting. Laissez-faire meant than no-one had the authority to correct these undeserved appropriation.

But going back blindly to regulation is certainly the wrong answer. It is interesting to see that people who considered Alan Greenspan as a genious, treat him now as the villain who made all this possible. The truth is simpler: Alan Greenspan is certainly a very smart man, but there’s no single human being on this planet who can master a complex evolving system like the financial system. So regulation is not the answer in itself.

I think we should think of the problem in deeper and wider terms. It’s a real refoundation of significant part of our financial system that we must address. And to do this, I don’t believe that tinkering the current system through new regulations will do. We must get back to the roots of this industry which aims at providing a service to people looking for an opportunity to save and to people looking for means to get access to current resources.

We will be discussing this subject – and many others – in London on Feb 14, 2009 at BarCampBankLondon2 and in San-Francisco on Apr 25, 2009 at BarCampBank SF2. Anyone interested in putting back innovation as a solution and not a problem to the current financial woes should certainly consider joining us.



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