Equity Pressure and Alternative Funding Solutions

Funding startups, projects is being fundamentally transformed with both technology and regulation: Currently what makes the most headlines is the typical startup funding, with angels and VCs making investments decisions on the potential for high multiply exits, the basis to create returns. That pressure for growth is making Equity a challenging source of funds.  See under at 1.01.50

New regulations, such as the JOBS act in the US, which makes to possibility for companies to raise funds with individuals more flexible.

see here for a detailed review of the Act // the application details will have a strong impact on its effectiveness.

This is basically geared toward an extension of equity driven funding.This is an interesting move and a valid idea that investment can be extended further for smaller businesses, especially in the light of the relative dysfunction of stock markets for long term shareholding.

Though because it is based on equity it is still suffering from the additional organisational cost of managing shareholders as well as the exit imperative, as the most plausible gain on investment.

Therefore it is interesting to see alternatives to this model being developped:

– Websites such as Kickstarter offer individuals and teams the opportunity to find funds for their projects, by proposing their future users and customers to pre-fund the projects, in most cases for an amount equivalent to the object or use of it. Its a great solution that has come to maturity with the relative lowering of the cost to receive and manage funds via intermediaries as well as the virality and critical mass of internet users. A mentioned by Kickstarter co-founder Perry Chen in an interview on GigaOm:

We’re going to keep funding creative projects in the way we currently do it. We’re not gearing up for the equity wave if it comes. The real disruption is doing it without equity. The real disruption is when you break down the funding of a project into all these little bits. We’re going to keep funding creative projects in the way we currently do it. We’re not gearing up for the equity wave if it comes. The real disruption is doing it without equity. The real disruption is when you break down the funding of a project into all these little bits.

The last piece is interesting, I think the current equity focus is creating a strong opportunity for other investment types to be further developed or invented.

Among the different ideas, Revenue Based Financing is a potential solution. See this very detailed post on AVC by Lighter Capital:

http://www.avc.com/a_vc/2011/10/revenue-based-financing.html

A revenue-based finance (RBF) investment provides capital to a business by “selling” an ongoing percentage of a company’s future revenues to the investor.  For simplicity, you can think of it as a revenue share type of arrangement. Investor gives capital to company in exchange for a small percentage of gross revenues. RBF lives as a hybrid of bank debt and venture capital. This kind of financing has been around for a while in non-tech industries such as mining, film production and drug development, but it’s recently been gaining traction in the world of growth finance and early-stage technology funding.

There maybe some potential on coupling these types of solution with the increased transparency and diffusion of data that web based technologies allow. Among other things, SaaS accounting systems could be leveraged to provide instant financial transparency on a company performance, at a much lower cost that current public company reporting.  

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