Archive for the 'funding' Category

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.

 

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…

BarCampBank London was great!

Last Saturday happened the first BarCampBank London. I shared earlier my excitement of participating to this first English BarCampBank and I must say that I’ve not been disapointed. BCBL was just great!

First we had an interesting mix of participants with

Second, the different workshops were really great and covered diverse subjects like biometrics in fi-services, innovation and regulation, near money, open banking,.. This all showed that the European ecosystem in financial services is currently full of vibrance.

I disclosed earlier the different projects I’m working on. At BCBL, I had the opportunity to expose in more details the piece about FundCamp FinTech. From the reactions to the discussion and because of the general atmosphere during this BarCampBank, I feel that we should definitely move forward. Anyone interested in this intiative, please do not hesitate to contact me.

Heading to San Francisco for first BarCampBank of the Year

I’m packing my things to be ready Wednesday morning when I fly to San Francisco. Next week-end there will be BarCampBank San Francisco, first BarCampBank of the year, and quite an unsual event because of the wealth of startups that will be represented there: Wesabe, Mint, Zoppa, Zecco, just to name a few who confirmed their presence here, and I hope a lot more will drop-in to join the mind-shaking debates we can anticipate.

I will use the opportunity to discuss with all the brilliant people there a couple of projects I’m currently working on:

1) creating a virtual incubator for FI-startups

In the spirit of P2PVenture, I think there is an opportunity to create a virtual space where entrepreneurs, professionals and investors can mingle and co-develop projects up to the point where some of the professionals can join the project and investors finance it

2) creating a FI angel investors network

One of the components of the previous space could be a virtual angel investors club dedicated to the FI-business. I’m thinking of maybe setting up such a club in a near future

3) organizing a FundCamp FinTech

While launching FundCamp is one of the main action of P2PVenture.org right now. I’m also thinking of organizing a FundCamp dedicated to FinTech. I also see this as an opportunity to boot-strap the 2 previous points.

4) setting up a FinTech venture fund

This is a rather longer term project. There are not so many venture funds dedicated to FinTech and I believe there could be an opportunity to offer real value along the money a dedicated FinTech venture fund would invest in FI-startups.

As you see, quite a lot of things to discuss and get feedback on. Hopefully, critical mass could be assembled on a couple of these subjects and we could see something taking off in a not too distant future.

FundCamp France 2008: the first FundCamp ever

 I have not been updated my blog for a long time and guess what, mainly because of my last post. In this post, I was annoucing that we launched FundCamp, an initiative to let people share processes and tools for organizing seed acceleration contests. Since then, I have been quite busy actually organizing FundCamp France 2008, the first FundCamp ever.

 FundCamp France 2008 will happen on the week of march 17, 2008. 20 projects will be preselected to spend an intense week of exchanges and coaching in Paris. At the end of the week, a dozen of French business angels will select 5 or more projects to which a funding of 25k € for 10% in equity will be offered. The business angels will then coach the winning projects for the next 6 months in order to reach a funding round by the end of year 2008.

 The annoucement is surely only a small step and we’ll still have a lot to do – and wish for – to make FundCamp France 2008 a success. But I think this is already a good sign that so many people got involved and took risks to launch this initiative and I’d like to take these few moments just to enjoy this sign that maybe things can change when enough people try to change them.

LendingClub secures $10M in Series A

LendingClub just announced that it secured a Series A round of $10M from Canaan Partners and Norwest Venture Partners. Seems like things are really accelerating and VCs are pouring more and more money in new financial startups.

 We spotted LendingClub at BarCampBank a while back and put them on our Bank & Finance Watch site. Seems like we are going to live a rapid increase in the number of startups we’ll follow on our site and witness more and more funding for a selection of these.

Should I give an arm and a leg to the VCs?

Bringing VCs on board can be an emotional (and sometimes traumatic) experience. It always seems that you’re giving a lot for what seems little in return: cash. Using simple maths may prove a powerful tool to set some context before taking the dreadful decision of accepting foreigners’ money. In this case, we can rely on the notion of discount rate to shed some light to the debate.

 Let’s first take the theoritical case of a startup doing a seed round of €500k on Year 1, a first round of €2M on Year 2, a second round of €6M on Year 3, a mezzanine round of €2M on Year 4 and a brilliant exit of €30M on Year 5. If VCs use a discount rate of 50% to define the shares they want with a target exit of €30M, they’ll dilute you from 100% ownership to 91.5% after seed-round, 71% after first round, 39% after second round (ouch!) and leaving you 35.1% ownership of the company after mezzanine round (where we keeped a 50% rate for the sake of simplicity). So you’ll end up with €10.5M in Year 5.

Not bad! But wouldn’t have you been better not taking VCs’ money and maybe take 10 years to exit with 100% of the final €30M? This is where using discount rate can bring some rationale to the decision. Let’s forget all the details of the different rounds that were there just to set the stage for: am I better owning 35% of the exit value in Year 5 or owning the entire exit value in Year 10? This is where it all depends on your own discount rate. If your own way to assume the discount you apply on years between 5 and 10 is below 23.3%, then you should go all on your own and shoot for the big prize; just be prepared for a long, long trip. If it is above 23.3%, then settle for the “quick” route and pocket the %35.1 percent faster (still 5 years).

 When we compare this 23.3% with the 50% of the VCs, it could seem obvious that the decision should be: pocket the money on Year 5 and then,..become a VC. In fact, the 50% holds only for specific projects: The successful ones. VCs invest in a portfolio of projects and as the old saying goes: Out of 10 invesment, 5 go down the drain, 2 become zombies (projects with no exits), 2 give back less than what was disbursed and only 1 is a superstar offering the famous 50% or above. All in all, a fund is very happy if it can provide an Internal Rate of Return (IRR) above 12%. So you could assume that you’re finally better off keeping your investment in your own startup and make it blossom at a rate superior to 23.3%. But remember that your investment is tied to one “single” project, and that the risk is exactly what is making the transition from a discount rate to an IRR.

In fact, from an option point of view, it is always very positive to get cash out sooner than latter. What the little example illustrated was just that faster exits are actually made possible by the cash that the VCs bring in: this provides the acceleration needed to reach more rapidly the way out.

So when taking the decision, remember the paradox: Giving an arm and a leg can help me run faster.