Note: This article was first written in 2012.
SeedUps.com CEO Michael Faulkner was an
admirer of the crowdfunding revolution since he first encountered
Kickstarter.com. The idea for crowdfunding appealed to him for its simplicity
and its originality. In the original crowdfunding concept, Artists of every
medium pitched their latest creativity online and people could fund the
projects if they liked what they saw. Faulkner thought: “what if we could do
that for startup businesses?” He didn’t waste time in answering the question. Less
than a year later, SeedUps.com was founded by Faulkner as a type of
Kickstarter.com for startup businesses. Despite a challenging economic climate,
in 2012 the business is thriving.
Now the company faces arguably its
biggest opportunity yet: The JOBS[i]
Act of 2012 in the United States means that SeedUps.com will be able to launch
on the American market in 2013, opening up a potentially huge market. One
Forbes article[ii] in 2012
stated that the crowdfunding startup market could be worth up to $500 billion.
But with the number of crowdfunding platforms growing by the day, CEO Michael
Faulkner will need to find a way to take advantage of this opportunity. Gaining
visibility and differentiating the SeedUps.com platform will be crucial to
gaining market share in the United States.
Michael Faulkner says, “This
is a great opportunity for innovative companies to get to market quickly and
start having a real impact on the American economy.[iii]
Previously, it was almost impossible for US startups to raise money from
anything but a small group of people, so this allows people to expand their
potential investment networks, and allows startups access to more funds. It
also allows people to become their own dragons: unlocking the potential of many
who want to make investments, but feel they lack the necessary finance and
expertise.[iv]”
 |
| SeedUps.com: As intelligent as it claims. |
2007 marked the beginning of the global
financial crisis. In the 2 years that followed, billions of dollars were wiped
from stock-markets, a global financial powerhouse went bankrupt and several
more were rescued by government bailouts. In what became known as the “credit
crunch,” liquidity almost dried up completely. Banks stopped lending to each
other, forcing bank-lending rates to the highest level in years. On November
22, 2008, the Economist front cover headline seemed to capture the mood with
“All you need is cash.”
Not
surprisingly, this environment had a severe knock-on impact on several sectors
of the economy. One such sector was venture capital. Venture capital (“VC”) is
financial capital invested in early-stage, often high-risk startup companies
(“startups”). The sector is a highly important source of funding for startups
as entrepreneurs have access not only to fresh capital but also to the
expertise of in-house investment experts that provide governance and
monitoring. The pay-offs to the economy at large for successful VC investments
are often huge. One study[v]
shows that in the period 1999-2009, 60% of all IPOs were VC-backed. Companies
such as Microsoft, Apple, Google and Cisco all received VC funds at early
stages in their development, underlining the importance of VC funding to the US
economy at least.
When the financial crisis took hold, VC
firms experienced a steep fall-off in investor participation. These investors
typically include pension and mutual funds, insurance companies and banks.
Under pressure from regulators to improve their balance sheets, these financial
institutions were already suffering from strains in their liquidity. They
couldn’t afford to invest in potentially high-risk, and highly illiquid startup
funds. And as with most businesses at that time, VC-backed firms had
difficulties in generating revenues which served to raise their already high
bankruptcy risks. Their financial backers began applying higher discount rates,
compounding an already difficult market for startups seeking funding.
The VC funding model pioneered in the
United States had been exported to Europe and was hit by the global financial
crisis there, too. A 2010 paper[vi]
by Joern Block, Phillipp Sandner and Geertjan De Vries of Erasmus University
Rotterdam said that the crisis was responsible for a 24.8% fall in first-found
funding by VC firms in the 12-month period after September 2008 relative to the
9-month period before. In the United States, the corresponding figure was
45.9%. In anyone’s language, it wasn’t a good time to be a startup.
Michael Faulkner was well aware of the
reality facing startups. Having worked for government-funded business
development agencies in Ireland and Northern Ireland, VC was familiar territory
for him. In five years, he was involved with over 100 startups, making him
acutely aware of the funding challenges that they encountered: “many innovative
ideas fail to get off the ground because of lack of funding at seed level, not
because they’re bad ideas. Initial funding for many projects is often the
hardest to find but is essential for development.”[vii]
Faulkner spoke to contacts of his in
the startup industry in Ireland and they told him what he was already
expecting: The prevailing economic climate dictated that not even government
agencies were capable of providing the funding that these new businesses required.
Innovative startup ideas were being left idle as the financial crisis took hold
and traditional means of financing dried up. To an entrepreneur like Faulkner,
the adversity only meant opportunity. In 2009, he began mulling a concept that
had the potential to fill the funding void for startups brought on by the
financial crisis. Faulkner says, “We knew there was a gap in the funding cycle
for disruptive tech-based entrepreneurs and we also knew that angel investors
were struggling to find enough opportunities to fulfil their investment goals,
so SeedUps was born from that.”[viii]
The SeedUps.com
Concept
The concept first conceived by Michael
Faulker in 2009 evolved into SeedUps.com. The website was launched in February
2010 as an online platform which brought together startups and other
entrepreneurs with tech-saavy investors. SeedUps.com was the latest addition to
the so-called crowdfunding movement. The funding horizon for startups suddenly
looked much broader than it did before. Not only could they now bypass their
local bank, enterprise board or VC firm, they could also reach investors at the
other side of the globe. Likewise, it had the potential to be a boon for
investors who registered with the website; they had new access to hundreds of
entrepreneurs with startup ideas pitching for the investors’ funds.
Faulkner’s concept for SeedUps.com differentiated
itself from other crowdfunding platforms in that it aimed to be a platform for
serious investors. Before gaining visibility to the hundreds of startups that
are seeking financial capital, potential investors are required to prove their
wealth status. This provides the website with credibility that perhaps other
websites of the same nature don’t have. It has also served to create a hub of
accredited investors, who are more likely to divulge opinions with each other
than they might be with the general public. From the startups perspective, they
know that the people looking at their concepts have the means to fund them if
they’ve been impressed.
In 2012, SeedUps.com has offices in
Ireland, Northern Ireland and Silicon Valley. It has pooled funds of 900
investors of over €60 million and is marketing over 1,200 startup ventures.
How the
process works for Entrepreneurs
Startup firms and entrepreneurs looking
for seed capital can register on the SeedUps.com website by adding a basic bio
together with a photo. Once they’ve registered, they are required to fill in a
few fields, giving a brief snapshot of their business idea, along with the
funding that they’re requesting to make it happen. Startups in the USA, UK and
Ireland can raise any amount between $25,000 and $500,000. When these details
have been submitted, the team at SeedUps.com review the submission and give
some suggestions before the business goes visible to investors. There follows a
6 month period where investors can conduct their own due diligence, market
research and submit bids for equity. During this 6-month period, entrepreneurs
are encouraged to keep potential investors updated with webinars and other such
news updates relating to the business. If the startup has received offers by
the time the process closes, the SeedUps.com legal team organize the paper work
for the sale of equity.
How the
process works for Investors
As with entrepreneurs, investors begin
the online registration process by entering a photo and basic bio. They are
then contacted by SeedUps.com to confirm their high net worth individual
(“HNWI”) status. Of this, Faulkner says, “We see high net worth individuals are
providing the most appropriate liquidity pool.” Once this has been confirmed,
the profile can be seen by the investor community. In the tradition of social
networks, all the investors can interact socially, add others to their peer
group and invite users from linkedIn.com and other social networks. This social
element adds a dimension of collective due-diligence to the SeedUps.com
platform. Investors come from various backgrounds and by looking at startups
from different perspectives, they can delve deeper into the business models of
the startups on offer. During the listing period, investors can make blind bids
of between $1,000 and $25,000, based on how they value the equity of the
company being offered. By having to make a blind bid, an investor is forced to
make a genuine offer for fear of being outbid by other investors for the
equity. The more interest the startup attracts, the less equity will be given
away to investors. When the process finishes, the startup is made an offer for
its equity and the SeedUps.com legal team organize the relevant paperwork.
The JOBS
Act, 2012
The Jumpstart Our Business Startups Act
(“JOBS Act”), was signed into law by President Barack Obama on April 5, 2012.
The new law is an attempt by the US government to increase the ability of small
firms to raise capital. As a result of its passing, from January 2013 it will
be legal for startup entrepreneurs to use crowdfunding to raise early-stage
equity-based financing. And unlike many crowdfunding options, the JOBS Act
lowers the barriers to regular people becoming investors. Until now, only
accredited investors could purchase equity in firms.[1]
Among the implications of the Act for startup
businesses are as follows:
I. A company can now have 2,000
shareholders in total (including 500 unaccredited shareholders). Previously,
the maximum threshold was 500 accredited shareholders, at which point, the
company had to publicly list its shares.
II. “Funding portals” which have registered
with the SEC, such as SeedUps.com will now, subject to several conditions, be
able to operate as a go-between for investors and startup companies.
III.
Significantly ease disclosure
requirements on firms that wish to go public.
IV.
Allow crowdfunding companies to
advertise to investors and entrepreneurs.
The JOBS Act will come into action in
early 2013 and will likely prove a boon to crowdfunding companies like
SeedUps.com. In the United States alone, 565,000 startups are launched every
month at an average initial financing cost of $78,406[ix].
The amount of funding provided by Angels and VC firms as a proportion of this
total is less than 2%. The JOBS Act has the potential to turn the market on its
head. Duncan Niederauer, the head of NYSE Euronext, believes that, properly
done, it “will become the future of how most small businesses are going to be
financed”[x].
Michael Faulkner says, “This
is a great opportunity for innovative companies to get to market quickly and
start having a real impact on the American economy.[xi]”
“Previously, it was almost impossible for US startups to raise money from
anything but a small group of people, so this allows people to expand their
potential investment networks, and allows startups access to more funds. It
also allows people to become their own Dragons: unlocking the potential of many
who want to make investments, but feel they lack the necessary finance and
expertise.[xii]” But
for the Act to have any impact with SeedsUps.com, it will be important to fully
understand the dynamics of the crowdfunding market at present.
An Overview
of the Crowdfunding Market
A report by crowdsourcing.org in May
2012 provides the most comprehensive overview of the crowdfunding market to
date. This section will borrow content from that report unless stated
otherwise.
At the time of the report, there were
452 active crowdfunding platforms (“CFPs”) worldwide. This was expected to grow
to over 530 platforms by December 2012. These platforms cover equity-based
(such as SeedUps.com) and lending-based platforms as well as donation-based and
reward-based platforms. Equity-based and lending-based platforms typically
raise more money per campaign than donation-based and reward-based platforms,
which tend to rely more on family and friends’ financial backing. In 2011, the
total amount raised through crowd-funding was an estimated $1.5 billion spread over
1 million campaigns.
Competitors
There are already several CFPs in the
United States. Some of these have attracted investor funding for startups but
await the implementation of the JOBS Act before beginning business. Others have
already begun funding startups through accredited investors. This group of
firms are likely to form the majority of SeedUps.com’s competition in the US in
the coming years. A sample of the firms is listed below to provide an
indication of the level of competition that SeedUps.com will face when the JOBS
Act is implemented in 2013:
CFP Name
|
Notes
|
|
Crowdfunder.com
|
>$17 million;
|
> 2,000 startups listed.
|
IPOvillage.com
|
$1 million in investment from 500
investors. First IPO will go live in 2013.
|
IPO Underwriting for individuals.
|
GrowVC.com
|
$25 million raised in 2011.
|
Claims to have 10% monthly growth.
4,500 startups listed.
|
Wefunder.com
|
10,017 investors; $28.6m startup
funds.
|
|
Circleup.com
|
>100 investors; 2 companies so far
have each raised over $1 million.
|
Crowdfunding consumer goods. This CFP
has signed a partnership agreement with General Mills.
|
EquityNet.com
|
$104.8 million in funds raised by
entrepreneurs.
|
Platform includes a patented due
diligence tool for investors.
|
Source: Various Company Websites
Growth of CFPs
The quantity of CFPs has been estimated
to increase by 60% in 2012, bringing the total number to 536 worldwide (See Exhibit 1). The figure is up from 54%
growth in 2011 and 47% growth in 2010. In 2012, the total funding provided by
CFPs is expected to grow to $2.8 billion worldwide, a 91% increase on the 2011
figure of $1.47 billion (see Exhibit 2).
The future growth potential of crowdfunding is a cause for much speculation,
but much will depend on the success rates of these first investments.
Capital Raised for Equity-based Projects, 2011
Equity-based crowdfunding currently
attracts most investment in the $50,001 – $100,000 (see Exhibit 3). These figures
should be taken in the context of pre-JOBS Act Legislation. That is, at the
moment, all crowdfunding for equity is made by accredited investors. Connor
Doherty of SeedUps.com notes: “We’ve found that the average investment is
€5,000 (approximately $7,500). The typical amount of equity offered is between
20% and 27%.”[3] As accredited investors are joined by individual investors,
funding patterns are likely to change considerably.
Beyond Crowdfunding: Venture Capital
The growth of crowdfunding will mean
very little without secondary markets in which to sell on equity. At the
moment, without a recognized secondary market, shareholders will be limited to
selling shares on to VC firms and angel investors. Thus, the figures for this
market should be relevant to investors (see Exhibit 4) who invest using CFPs. As previously noted, the
financial crisis caused a steep fall-off in VC funds with a drop of over $8.5
billion between 2008 and 2009. The market is currently large enough to fund
secondary investments in crowdfunded startups, but as the crowdfuding industry
grows, the VC market will also need to grow in order to provide an exit for
investors.
SeedUps.com
Strategy
The JOBS Act is implanted in the first
half of 2013, several new CFPs will enter the market. These new platforms have
already signed-up investors interested in gaining equity in future startups and
will form a competitive environment in which SeedUps.com needs to find a space.
Gaining market share will involve appealing to a broader-market of first-time
investors, while simultaneously maintaining the company’s existing base of
accredited investors.
The future strategy is broadly outlined below:
·
Michael Faulkner and his team (see Exhibit 5) see the firm as being complimentary to angel investors and
venture capitalists. Unlike several other CFPs, SeedUps.com view their role as
more of an early stage concept and thus can help startups that are raising
smaller amounts of capital get to the next stage.
·
Unlike other CFPs, SeedUps.com seeks to
limit the number of investors in each venture. This is because VC firms prefer
to deal with smaller numbers of shareholders and allows startups in SeedUps.com
to move more freely to the next stage of funding.
·
SeedUps.com also differentiates itself in that it
has a matching engine that will allow investors to value startups as they make
investments (a bidding process based on the wisdom of crowds).
·
The sales and marketing drive thus far
has been limited to trade shows. The firm has attended the SXSW trade event for
startups since 2010.
·
SeedUps.com earns 5% from successfully funded
startups, and takes a 5% of any future earnings from selling on shares.
·
Surveys are being added to the site to
garner feedback from users and see where changes can be made to improve the
SeedUps.com system.
·
In 2013, management intend to grow the company,
hiring dedicated sales, marketing and technical development teams to expand in
the US and into other EU territories with the SeedUps.com platform.
·
Currently, SeedUps.com allows its users to conduct
due diligence among themselves, but as the firm expands, it expects to add its
our own compliance team.
Despite having this agreed-upon
strategy in place, there are certain areas in which Michael Faulkner and his
team will need to pay particular attention to. These are outlined below:
·
With no due diligence system currently
in place, does SeedUps.com leave itself open to fraudulent practises? It’s
possible that a large number of individual investors will insist on due
diligence before investing in SeedUps.com startups.
·
Crowdfunding is a new phenomenon which attracts
some scepticism among the investor community. One bad investment might be all
it takes to scare away future investors. Managing this PR will be a crucial
factor in the success of SeedUps.com.
·
Some of SeedUps.com’s competitors have
already gained the support of either acclaimed VC investors or industry giants
(in the case of CircleUp.com and General Mills). Would it be advantageous for
SeedUps.com to attract its own marquee investor?
·
SeedUps.com earns 5% from successfully funded
startups, and takes a 5% of any future earnings from selling on shares. With
some crowdfunding firms charging as little as 2%, should SeedUps.com look to
charge lower fees before gaining critical mass in the United States? Is this a
decision which will affect which CFP investors choose?
Conclusions
The JOBS Act of 2012 will present
opportunities for crowd-funding firms like SeedUps.com to gain access to a
potentially huge startup market in the United States. However, the figures
outlined in this document show that the environment for CFPs is quickly
becoming more competitive. To ensure that SeedUps.com gains market share in the
crucial American market, Michael Faulkner and his team must consider the best
approach to gaining market share. Given how competitive the market place for
CFPs is becoming, choosing an appropriate strategy could be the difference
between SeedUps.com becoming a market leader or merely a small player on a much
larger playing field.
|
Exhibit 1 Growth of CFPs, 2007 – 2012*
|
Source: crowdfunding.org, *2012
year-end estimate of 536 CFPs worldwide.
|
Exhibit 2 Worldwide funding volume through
CFPs, 2007 – 2012
|
Source: crowdfunding.org
|
Exhibit 3 Funds paid out by Equity-based CFP,
2011
|
Source: crowdfunding.org
|
Exhibit 4 US Venture Capital Market, 2006 - 2010
|
Source: Dow Jones VentureOne
|
Exhibit 5 SeedUps.com Team and Advisory Panel.
(source: seedups.com)
|
Michael
Faulkner is founder
and CEO of SeedUps.com. Michael is also the founder and CEO of Euroxchanger
Currency Services, a foreign exchange company since 2004. Previously, he worked
for five years in Economic Development with regional enterprise boards in
Ireland and Northern Ireland. In these roles, he assisted over 100 businesses
through the startup process. Michael holds an MBA from the University of
Liverpool, a BA Hons Economics Degree and a Diploma in Marketing (CIM Dip).
Gavin
Gallagher is the CTO
(Chief Technology Officer) of Seedups.com and is responsible for technology and
software development. In past roles, he worked as in application development at
microchip manufacturer Intel, and CTO at Euroxchanger Currency Services, where
he worked with Michael Faulkner. Gavin received a Masters in Electronics and
Software Engineering (MEng) from Queens University Belfast and won the Invista
prize for his final year project.
Connor
Doherty is
SeedUps.com´s Online Community Manager. Previously, he worked as a manager in
Sodexho and the Belfast branch of Euroxchanger Currency Services. He holds a
Masters in Marketing (MA) from John Moore’s University in Liverpool and a joint
BA Hons in England and Modern History from Queens University Belfast. In
addition, he holds a Certificate in American Business Practise (CAB), which he
achieved from Greensboro College, North Carolina.
Advisory Panel
Pa
Nolan is a
Non-Executive Director and on Seedup´s European Advisory Panel. He has worked
in the financial services industry for almost 30 years. He has been a director
of financial services firm FEXCO since 1984. FEXCO specializes in stockbroking,
foreign exchange and payment transactions.
Martin
Varsavksy is a
member of SeedUps.com´s European Advisory Panel. He has founded 7 companies in
the last 20 years, including Jazztel, Spain’s second largest publicly traded
telecoms operator. He is also CEO of Fon, the largest WiFi network in the
world. He is on the Board of Trustees of the William Jefferson Clinton
Foundation as well as being a board member of Instituto de Empresa, a prominent
Spanish business school, where he has taught entrepreneurship for nearly ten
years. He holds a BA from New York University and an MA in International
Affairs and Business Administration from Columbia University.
Marcy
Simon is a
member of SeedUps.com´s US Advisory Panel. She is also a managing director and
strategic advisor at Burson Marsteller. She has also worked in the public
sector with the William Jefferson Clinton
Foundation, the Clinton Global Initiative and the Bill and Melinda Gates
Foundation.
Mark
White is a
member of SeedUps.com´s US Advisory Panel. He is a founding partner of White
Summers Caffee and James, LLP. He has respresented companies in over 500
financings and over 200 acquisitions. He represents and advises companies on a
wide variety of transactional matters, including business and legal issues as
they pertain to complex strategic and venture financings, acquisitions, and
licensing and distribution arrangements.
[ii] “Why Crowdfunding will explode
in 2013,” Forbes, 15/10/2012. Available online at: http://www.forbes.com/sites/devinthorpe/2012/10/15/get-ready-here-it-comes-crowdfunding-will-explode-in-2013/
[iii] SeedUps.com
blog interview, September 2012.
[iv] Michael
Faulkner, in an interview with Silicon Republic. Available online at: http://www.siliconrepublic.com/start-ups/item/25170-the-crowfunding-revolution/
[v] Kaplan, S. N.,
& Lerner, J. (2010). “It ain't broke: The past, present, and future of
venture capital.” Journal of Applied Corporate Finance, 22(2), 36-47.
[vi] Block, J., De
Vries, G., & Sandner, P. (2010). “Venture capital and the financial crisis:
an empirical study across industries and countries.” HANDBOOK OF VENTURE
CAPITAL, Oxford University Press, Forthcoming.
[vii] Faulkner, M.,
in interview with O2, May 2011. Available online at: http://webkit.o2online.ie/ideasroom/?p=4483
[ix]
“The JOBS
Act: What Startups and Small Businesses Need to Know,” Forbes, 21/09/2012.
Available online at: http://www.forbes.com/sites/work-in-progress/2012/09/21/the-jobs-act-what-startups-and-small-businesses-need-to-know-infographic/
[xi] SeedUps.com
blog interview, September 2012.
[xii] Michael Faulkner,
in an interview with Silicon Republic. Available online at: http://www.siliconrepublic.com/start-ups/item/25170-the-crowfunding-revolution/
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