Crowd funding is all the fashion these days. But it takes a lot of marketing skills and some IT know-how to get this going. For those of you who already have all the parts of the puzzle, but not the platform, here is the alternative.
Let’s deal with this in a simple way, the way recipes are described in cook books.
What you need:
- A network of startup businesses or expanding businesses (more than 100 businesses will get you started)
- An friendly investment fund or a network of business angels / entrepreneurial investors (more than 5 will get you started)
- A bank that does small business loans, could be useful as a backup.
- A corporate lawyer – who is not afraid of doing standard contracts for a friendly price
- A notary without any hefty fees
- And a bidX Portal on bidx.net (can be delivered in a couple of days) – This is the only thing you have to buy.
- And you need the “cook”, the coordinator who pulls everything above together.
With 1,2 and 7 you have the basis, the rest is up to the cook’s skills.
- Identify 5 businesses which are good examples of the businesses that you’d intend to present to your future investors.
- Meet with investors, explain the types of businesses that you are seeking finance for. Then ask them what they would seriously consider investing in. Take a note of their preferences, like: industry, business size, stage, amount of investment, equity or loans? Make sure to check whether they are really interested and not just being polite to you. Also ask whether they would be open to advising a business that they invest in for approx. 4 hours per month, or if they would make introductions.
Ask them if they would be willing to pay USD 500 a year to become a member. If they are lukewarm, then stop with them, and go look for other investors.
- Meet with entrepreneurs, meet with 10 or so, and ask them things like: are you seeking finance for your business? How much, is it more than 50% of their annual turnover? Are they open to giving a 30% share in their business to an investor? Are they Ok with an investor advising them in their business? If their answers are positive then you have the right batch of entrepreneurs to work with. If they are not open to giving a share of their company to an investor then you may as well stop.
- Meet with a Corporate Lawyer. That is someone who knows how to put together a shareholders agreement* in less than 3 hours. He should have standard templates. Ask the lawyer if he would be interested in putting together about 10 of these contracts together per year. And if you are the one bringing the investor(s) and the entrepreneur, whether he can host a meeting for them to finalize the shareholder agreement*.
The lawyer is responsible for the Legal Process.
Also does he work with a Notary that can formalize the documents and arrange the transfer of funds. Ask the lawyer what the costs would roughly be per investment-agreement. Including the Notary it should be under USD 2000.
* Other forms of finance will be described below.
- Set up an entrepreneurship web-portal. You can have one set up for you at www.bidx.net for an annual subscription of USD 6500.
Have a look at some of the currently active portals www.bidx.net/active-portals. You can customize the portal to reflect the branding of your organisation, in your language.
- Get your entrepreneurs to submit their business proposals on your portal. You can engage them by inviting them per email, phone, facebook or other social media. Make sure you include the URL domain of your portal.
- Investment proposals can be worked on in the entrepreneur’s own time. Their documents are protected so that others can’t access them. You can invite mentors to register and provide advice to the entrepreneurs so that they can improve their proposals.
- Investment grade proposals, in the portal are those proposals which have a high completion score and have received a high rating by you as the coordinator.
- Invite your investors by sending them an email with the best proposals you have. You can either ask them to register on the portal to view the business proposals. Or you can send them the documents individually.
- Identify the interested investors by calling, meeting or emailing them.
- Arrange a pitch session for the entrepreneurs and the most interested investors. Invite the best 2 or 3 entrepreneurs to do a 3 minute pitch for the 5 or so investors that have shown interest. If there are 1 or 2 businesses that are serious candidates for investment, at this session you explain the next steps. These are the following:
- Due diligence (DD). You can either charge the investors and the entrepreneur approx $500 each to do the DD, or you do the DD yourself, at your own cost. You sign a non-disclosure agreement with the entrepreneur so that the entrepreneur can share their documents with you.
You need to check the authenticity, correctness and risks of their sales turnover, contracts, licenses, patents, bookkeeping, ownership, articles of associations, assets and liabilities. Make sure to speak to some of the staff about how things are going at the business. You can find due diligence checklists here .
Make a short DD report for the investors, indicating the items that are correct, authentic and considered to be a risk in the business. Give the entrepreneur a chance to read and if need be correct the report.
- Valuation of the business is a complex matter. With startups the valuation is simply a question of negotiation. With operational businesses the valuation is often based on discounted cash flow (DCF) models. Here are three other ways of calculation the value of the business. See the “Valuation Model Excel” by John Huston. Or use the calculator of EquityNet. Or get tailor made advice from Equidam. Add the estimated valuation of the company to the DD report, and explain the rationale behind the valuation.
- Termsheet Once you have completed a DD report and have an estimated valuation. You can complete theTermsheet. This is a summary of the investment proposal: the investment amount, the percentage shares and other conditions.
- Send the termsheet and DD report to the interested investors. And contact them within the next few days to check their interest or suggestions for changes to the Termsheet. Negotiate between the entreprenur and investors until an agreement is reached.
- Get the entrepreneur to pay for the legal process. This could be approx. USD 2000. These funds you transfer to the Lawyer and his Notary.
- Prepare the shareholder agreement and the revised articles of association with the corporate lawyer, based on the termsheet. Plan a meeting with the investors and entrepreneur for the signing. And send them the Shareholder agreement and Articles of Association so that they can comment. Once all parties agree, you are ready for finance and signing.
- Investors pay-in their capital to an escrow account held by the Notary.
- Signing. The investors and entrepreneur meet at the office of the Notary to sign all the documents. After signing the Notary transfers the paid-in capital to the Entrepreneur.
- Fee. The Entrepreneur then pays you (the Coordinator) a fee for arranging the deal. This fee can be between 3% to 5% of the paid in capital.
- Shareholder decisions & meetings. This is now the business of the entrepreneur and the investors.
- Monitor your results. Every six months contact the entrepreneurs and keep track of their progress and get their feedback on the investment process. The entrepreneur can update the status of their sales, operational costs and number of employees in the Entrepreneurship Portal.
ALTERNATIVE FORMS OF FINANCE
- Bank loan, backed by an investor deposit. If the investor wants to have someone else deal with the financing of the business. An approach is to make an agreement with a bank. The investor deposits the the financing amount in a time deposit with the bank. The investor will earn interest on this time deposit. The Bank then lends 70% – 80% of the deposit to the business, keeping the deposit as security against the loan. The loan arrangement with the business works like a normal business loan.
- Royalty Finance. If the entrepreneur prefers not to take on equity finance; And the business is young and growing. Then Royalty Finance is a good option. Royalty finance is basically commission paid to the lender over the total sales revenues of the business. If the sales are low the business pays a low royalty (interest). If the sales are high and growing the royalty will be higher, this will then incentivise the entrepreneur to pay off the loan.
With this set up the business pays less when it is still young, and more when it has the sales and is able to make larger payments.
The entrepreneur and investor sit together and agree on the projected sales for the coming years. They then agree to a royalty % that the business will pay the investor over its annual sales. If all the royalties to paid each year are added up, it would probably be a bit more than the interest that the business would pay over a normal bank loan for the same principle and period. They also agree to fixed monitoring fee to be paid by the business at regular intervals, like every month. This fee is not meant to earn interest, it is for the investor to know that the business is still alive and on top of things.
If the loan is paid off earlier than expected, then the business pays a penalty, because the loan was much cheaper than the bank rate in the first half of the loan period.
The royalty is based on projected sales, because this forces the entrepreneur not to inflate their sales figures. However, the agreement can contain an extra clause stating that, if the actual sales are lower than the projected sales, then the business has the right to pay a lower annual royalty, on condition that the entrepreneur show the audited financial statements.
In other words the investor/lender does not have to be involved in the bookkeeping of the business.