Thoughts on Crowd Funding Platforms as a Business

Have been exploring and evaluating this area from the pov of an investor in the platform. Here is a summary of what I learned and think about the segment. Feel free to comment. In summary, I think crowdfunding works and there will be companies that do well. But the market is not as big as say ecommerce and growth will take a while. To me, it is not immediately obvious that it will scale like groupon clones or social media or sharing economy firms. Anyway, there are 3 types of crowd funding. Some players do only 1, some do all 3.

1) rewards crowd funding

This segment makes good sense to me as a platform and for the businesses who crowdfund. The downside is that it encourages sleek marketing and over promising at the expense of proper prototyping and testing. Improperly executed crowd funding can end up in pr disaster for the company and platform and consumer end getting nothing. Eg 3d pirate still can't fulfill all its orders up to today if the papers are right.

Perhaps a good tweak would be to escrow all the monies and only give the money when the product is delivered as promised. The firm can then use the promised sales to raise interim capital at their own risk. If terms are breached, platform returns escrowed funds so consumers are protected. Too bad for the company in this case but at least only they suffer which is fair.

2) debt crowd funding

Will end up attracting mostly middle class and high income professionals who may not fully understand the risk they are taking. People with more wealth to buy bonds direct will not be attracted to the 10-20% yields as junk bonds of >100m cap listed companies are yielding 10-15%. The extra few percentage of yield is not worth the risk. Don't forget, the companies that raise crowdfunding probably are at 1m to 20m market cap at best with couple of million revenues at most.

So if I were the authorities I would be very cautious on debt crowd funding. If companies fail, it will hit the crowd creditors who may have the wrong impression that debt is safe. Debt to small unlisted firms is not safe. I don't think the crowd funding platforms will warn people to fully understand the risk they are taking.

3) equity crowd funding

This is the most complex and interesting one. Somewhat similar to debt issue in that rich investors would probably do better sticking to Angel, vc or pe funds esp for tech area. Will attract income professionals who always wanted to angel invest but had no deal flow / smaller capital so can't do the min 50k angel bite sizes. I hope the platforms don't target middle class as early stage private equity is not a suitable asset class for average joe. It is telling that mas only allows accredited investors to invest in equity crowdfunding in sg. It is the right move.

On the company side, my feel is that good tech companies probably can raise seed (500k -1m) to series A (3/5m ) from vc funds. Why would a strong tech company want to raise passive crowd money compared to a brand name, value add vc? So perhaps non tech firms who need to raise will find the platform useful. This area may work.

Another group that may find equity crowdfunding useful is deals that require syndication. Say a company has already found its lead and raised 600k. They want 400k more. Crowdfunding could be a good choice here. Crowd Investors will feel safer that there is a lead who negotiated price , terms etc.. and it is not the platform or worse the company who unilaterally decided. This point about lead investor also applies to debt funding. 

Beyond 5m for all types of companies, pe funds, later stage vc and ipo on main/secondary boards are better alternatives for their strategic value and liquidity (in ipo case).  

Another reason running around which crowdfunding players say is that having many shareholders add user base but it seems like a roundabout way to do it. Maybe for some consumer oriented startups.... But I am not convinced.. the max shareholder cap at 500 means too little advocates.

So my guess is equity crowdfunding will revolve around mainly non tech companies and maybe some consumer tech, raising anything from 50k-1.5m. Beyond that, there are cheaper and easier options for the company. Below that and it is not worth the platform time to do it. 

Same as debt funding, crowd investors need to understand this is an angel investment they are making with a 5-10% sales fee paid to the platform. Most angel investments at such early stage fail. I doubt the platforms will warn investors about this. Also the investment is illiquid. It cannot be sold or transfered easily. Most equity platforms plan to offer an exchange or work with one to allow some liquidity but all that are just plans at present.

From a portfolio allocation point of view, I encourage crowd investors to view this as highly speculative positions in their overall portfolio. This means for equity, view it as angel investment with high chance of getting nothing back. For debt, may end up having to be party to debt collection process. As mentioned before, private investment should be no more than 20% of total investible assets.  

Also be careful on how the deal is structured. Special purpose vehicles could be set up for such deals whether debt or equity and both can have detrimental terms. Eg. Can't sell or transfer equity as you wish. This is where a deal where there is already a professional lead will help a lot.

Summary

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Make no mistake, I think crowdfunding is a viable way to raise money and for some suitable people (probably Hnwi up to 5m net worth) it is a new way to invest and offers deal flow. Angelist and kickstarter are good examples with the former being relatively high quality and have attracted vc money too.

But as is the case with any new channels, the industry wiil over promise and some clearly unsuitable people will buy in. And over time it will seesaw until a balance and a place is found in the entire funding ecosystem for it. My guess is that it will take 5 years to determine what the stable market state is for our region. My bet is on it being much smaller than what people think unlike the ecommerce/ social/ sharing economy boom. The big danger for the industry is too many negative stories of joe average losing money on such platforms due to badly represented risk reward!

Analysis on techinasia fundraising (updated Nov 2017)

TIA has announced another round of 6.6M usd led by korean hanwah investments. I covered their last round led by Softbank back in 2015 when it was announced and it is below. Some observations:

1) Strategically, i got it wrong last time that Tia intends to move into deep analytics. Instead they moved in jobs for startup community. Makes sense and from what i can see in 2016, the 2 year effort into jobs space has yielded some revenue. Not fantastic but a few hundred thousand is credible for a 2 year effort. They did go overseas as expected which perhaps explains rather large losses.

Also, latest comment from press release seems to indicate that analytics and intelligence is still on the cards. Tellingly, events is still by far their biggest component.

2) Performance has been strong since i covered below. I was spot on in terms of revenue in 2015 at S$2-3M. It was actually 2.86M. But i expected them to run a lean outfit and almost break even as media play cannot operate like a Grab or Garena and use massive revenue growth in lieu of losses. That i got wrong, they expanded a lot post SB round and made a widening loss of 2.5M in 2015.

For 2016, revenue grew nicely by 42% to about 4.07M sgd. Losses grew slower to 2.9M.  A good sign but they actually went down to 1.1M in cash end 2016. Hence the need to raise capital this year.

3) Valuations. Latest round values TIA at 24.5M usd. This year probably will be 5-5.5M sgd revenues, so that values them at 6.5-7 times this year revenue. Quite fair number for current climate.

Last round done in 2015 was at 14.2M usd post money. So the current 17.75M usd premoney is actually not a big upround. And i feel it is reflecting the expanding losses and 1.1M cash position of end 2016.

4) Sole founder owns 16.4% of company which i guess is still slightly incentivised though if i have to be blunt, media play, i forsee mgmt will be demanding higher salaries from board as the payout from salaries is now significant compared to stake.  And we can see it from numbers. In 2016, TIA paid CEO/Director fees almost double what was paid in 2014.

Overall comments.

42% growth rate is good but not great. Growth rate will continue to slow down if events is still the biggest piece. Events is not super scalable and niche events even more so. I would pay great attention to cost moving forward. Reason is that while the VC money looks like it is here to stay, as mgmt, i have a duty to make sure my company survives even without much more funding esp since growth rates are slowing down to normal speeds. Of course the 6.6M usd will last quite a good 2-3 years even with slightly expanded costs. So there is much time.

Board will need to figure out how to incentivise mgmt properly as mgmt shareholding is somewhat low.  This is a very real issue i have experienced first hand. Can kill companies if not well managed. Unfortunately, no easy solution, its usually more pay and more stock options for mgmt.

Intelligence and analytics are nice buzzterms but hard to monetize and costly at first. I feel moving deeper into tech jobs and running even more events while watching costs can probably payoff bigger over the short/medium term.

As usual, all this is just my own analysis and thinking. Overall, i think TIA has done a good job expanding in a niche space. Only thing that concerns me from company POV is the cost control and ability to seek good high margin revenues.



Below is the original article written back in 2015 June
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Tia has announced a usd 4.6m round from investors lead by SoftBank on a premoney valuation of usd 9.56m. That's about 13m sgd premoney. Post money will be about 19.2m sgd. this is based on acra data submitted by company 22nd June 2015.

I first encountered Willis back in 2011 ish. Company was still called Penn Olsen. He was asking JobsCentral to sponsor something for their first event. I remember he was a driven , gusty founder. Somewhat green in his expectation of why clients would sponsor but clearly hungry. We did not sponsor as no clear value to us but he left with me a reader of the then blog. 

Over the years, I have seen Tia grow well and become far more professional and under jungle I attended one of their events. They are a great example of a niche media play with online and events revenue streams. In 2013 they did almost sgd1m in revenue, doubling from 2012. Losses were 180k. If we extrapolate that to 2015 and considering their many more events and execution, I would venture a guesstimate of 2-3m probably closer to 3m in 2015. So that mean a deal valuation of 4+ times sales. A fair deal definitely not overpriced. Of course if revenue in 2015 is lower, then the multiple will be higher but a range of 4-6 is probably correct.

To note: they raised $1.3m in 2014 and issued 14009 shares for it valuing the company at s$8+m. So it is a up round and existing vc like fenox continue to participate which is always good. 

Two things stand out to me. Why raise so much for a media company? 6m sgd is quite a fair bit of money. My guess at sgd 3m revenues they are near breakeven or slightly profitable already. So it must be to scale up core/geographically and execute the techlist side of the business which is a saas and analytics platform. 

Second thing that stands out, Willis is a single founder and used to pay himself just 30k in directors fees. He now owns 22.5% of the company post money. If this is true, he has been more than fair to shareholders and dedicated to building the business.

From a fellow entrepreneur perspective, I hope he has/will negotiate a much better package for himself and team in the years ahead as I believe a company which is profitable should be fully loaded with market rate costs and still be profitable. That is a sustainable business esp since the firm is now more owned by investors than management team.

Would be interesting in the years ahead to see how Tia executes esp on the saas/analytics side. It is actually quite hard to transit from a media company to saas (JC and cb are doing it still...) but that is another long topic. Feel free to comment or correct my data. 

How do VC actually work in terms of revenues?

UFor a vc, funding a company is just the first step. It is like hiring a potentially great employee or finding a good business partner. All potential no real revenue. Even subsequent rounds raised at higher valuations are just unrealized gains which can evaporate esp at early rounds. Eg. Vc invest in company at 2m post money. Company raises 1 year later at 8m. Vc will change the net asset value of the company on their books by 4x. But later if firm fails and is written off, all the unrealized gain disappears.

So what is real revenue worth celebrating from a VC point of view? Finding more investors or lp. Each 1m in investments is worth 20-30k in annual mgmt fees for 5-7 years. That's real revenue and the hard vc work happens at pre-start of fund. Then vc work even harder, "hire employees" and then after 3rd year onwards of fund life hope to start exiting companies in trade sale or ipo. This is real cause for celebration as it is the carry revenues that count the most to the partner. Roughly for every 1m in excess of lp capital, vc partners in aggregate earn 200000. 

So a 50m fund in ASEAN, say 2 major partners will earn :

1) 1m per year revenue from Mgmt fee for 7 years. Usually not much profit here after all costs like legal, transport, salaries, compliance, marketing etc

2) 12-15% of the 20% carry at end of fund. So if fund in the end exits 150m. The classic 3x, the 20% carry is 20m. Their 15% is worth 15m. So each take home 7.5m before any tax (10% if concession or 17% normal corp) if equal carry.

Reward is sort of like running a startup for 7-10 years and exiting for 20m. But the risk is lower since there are 20 bets made rather than just 1 concentrated bet.

VC friends, pls feel free to chime in!