There has been a lot of talk about the decline of the VC ‘industry’ in Europe and the US recently and the vast plethora of options that have opened up for entrepreneurs from crowd-funded sites like KickStarter that offer people the chance to purchase goods in advance to crowd funded equity sites like Seedrs in the UK and the vast array of US startups that have been enabled by the passing of the JOBS Act.
Some companies will always value venture funding from top quartile investors, not just for the money, but for the significant value that having such a firm on your side brings – both in terms of a network of useful people and in terms of the message such funding sends to the market. There is a huge difference between funding something on KickStarter, where you are doing the funding because you like the idea and want the product and ‘investing’ in a company for a return. Given the current, ahem, frothiness in the market, it is highly likely that some people will be investing in what they believe will be the next Facebook with no realistic understanding of the risks involved. Caveat emptor and all that though this is an interesting post on the Great crowd funding train wreck of 2013. Makes some good points.
Another alternative form of fundraising a few companies are looking at is a bond issue. A bond offers a company the opportunity to raise money without selling equity, you are offered interest on a loan for a fixed term at the end of which you get your money back. Clearly, this is not a very viable option for a startup company – there is no way you can have any visibility on their ability to have the cash at the end of the term, but for a more established company looking for growth capital, it seems to be an increasingly common option.
I caught up with Ed Orr, co-founder and Chairman of Mr & Mrs Smith at an excellent networking event held by Scottish Equity Partners recently and here he explains the thinking behind the bond that they have just offered to their members. It promises to pay a fixed interest rate of 7.5% in cash, or 9.5% in Mr & Mrs Smith tokens over a four year term. Bond issues are still subject to FSA regulation.
Broadly, the alternative options for them would be venture funding which would cost significant equity, an AIM listing – costing both equity and huge advisory fees (Ed used to be a broker so he knows the drill!), or a partial sale of the business. All of these options would mean there was less control in the new entity for the founders, higher advisory fees and potentially significant management time involved in managing the process.
For relatively stable companies with predictable cash flows, bonds may become increasingly common as a form of financing growth.
Our next BLN CEO Tales in London on 31st May with Ken Segall is proving exceedingly popular. Not only is Ken sharing one of the few ‘insider’s views’ on why Apple has been the phenomenal success over the past 15 years, his book, ‘Insanely Simple, the obsession that drives Apple’s success‘, has just hit the New York Times bestseller list with some rave reviews.
Ken will talk about his experiences at Apple as well what that means for any technology business trying to emulate their success. You would be simply insane to miss it. More info…