The financing outlook for private businesses around the world is changing. And in the process, creating a new culture of work.
In case you’ve been living under a rock, at the end of October a new law was approved in the US that allows private companies to sell shares in their business via crowdfunding platforms. Technically it’s not a new law, but part of a phased series of measures aimed at stimulating the private company sector – called the JOBS Act (for Jumpstart Our Business Startups rather than for jobs, but I’m sure the acronym was not an accident). The most recent section to be passed is Title III, which opens up equity crowdfunding to everyone. Up until now access to this investment opportunity has been limited to “accredited investors”, which are institutions or rich individuals. Now even not-so-rich investors can participate, with limits on the amount invested. The regulations for companies wishing to raise finance this way are also relaxed – for those raising less than $500,000, a full audit (very expensive) is no longer necessary.
A brief explanation of what has been called the “democratization” of company funding: businesses sign up on a crowdfunding platform, upload their presentation, and publish how much financing they need and what percentage of the company they are offering in exchange. Interested investors pledge a certain amount, and if the company manages to raise the minimum amount needed to get the business or project off the ground, the money is collected and the shares are allocated. No drawn-out negotiations, no onerous conditions, no complicated cap tables. P2P lending, in which individuals and/or institutions lend money to businesses, is also making a big difference in the ease with which businesses can raise finance, but the impact there is limited to the balance-sheet, not culture of equity structure.
Equity crowdfunding has been a big thing in Europe for some time, raising a large chunk of the global $1.1bn total for businesses both new and not-so-new. Recent regulation in some countries tightened access for both companies and investors, but at the same time made investors, regulators and the media more comfortable with the concept of the “public” buying illiquid stakes in unproven ventures. The spread of equity crowdfunding platforms should more than double total volume in 2015, and by 2016 the overall crowdfunding industry (including reward and royalty programs) is set to overtake VC funding.
As it spreads on the other side of the Atlantic (and south of the equator, but that’s a different – and interesting – story), the changes will end up being deeper than we expect. The growth of equity crowdfunding will accelerate a shift towards a new type of business structure, based on different priorities, philosophies and management styles.
IPOs – Initial Public Offerings, or listings on a stock exchange – attract a lot of attention and generally a lot of money, too. Traditionally an IPO means that you’ve made it, you’re ready to play in the Big Leagues. When you list, you’re expected to be big and to get bigger. In a listed company, you don’t know who your shareholders are, and they don’t really care who you are, they’re just there for the share price. Your focus as a public company tends to be divided, often unevenly, between managing the share price and managing the long-term growth and sustainability of the business.
Venture capital funding also expects you to get bigger, but from a relatively small base. You care very much who your venture capital investors are, since they usually end up with a say in how your business is run, sometimes even claiming a place on your Board of Directors. There’s obviously no pressure on the share price, but a lot of pressure on growth. And a relatively speedy and profitable exit (sale, or IPO), in which the investors can recover several times what they put in, is expected.
Crowdfunding investors also expect growth. But, their investment tends to be more emotional. They like your business, they want it to succeed. They’re not there for the share price, and while a profitable exit would be nice, they recognize that the management goal is usually not share price, or rapid growth, it’s a good product. Success is measured by production, not accounting standards. Crowdfunding investors are not professionals, and although they hopefully have a diversified investment portfolio, their investment tends to be more based on gut feeling than business metrics. The due diligence on the figures is lower, and the sales record is at times non-existent. The investment is less based on statistics and ratios, than on instinct and hope.
Which is just as well, or crowdfunding private companies would probably never happen. While publicly quoted companies can and do fail, the failure rate among startups should be enough to dissuade even the most risk-friendly investors. 8 out of 10 startups fail. But the successes are spectacular, and all startups begin with expectations of riches and glory. When you invest in a startup, you’re investing in someone’s dreams, not in management goals. You’re up there, dreaming along with the founders.
And today it is much easier to feel like you know the team. Crowdfunding campaigns need to keep their funders engaged, through regular communications, updates, private emails, chats… With this constant need to communicate at all levels, company structures shift. Hierarchies relax. Open-plan offices and co-working spaces flatten chains of command, and a common purpose – to build, produce and ship a great product, and to keep clients happy – turns out to be much more motivational than the fear of losing your job.
With crowdfunding, success is not so much about maximizing value, as about strong relationships, with your clients, with your team and with your investors. More long-term, it’s usually the case that with good product, value will come. But only if relationships are cultivated and maintained.
And that is the most profound shift coming out of the new financing scene. The focus on people.
As this “new” type of business financing spreads, it could well create a new type of business. A business more connected to its financiers and investors, a business more interested in the relationship between growth and commitment, and a business more invested in people. The definition of business value could shift from accounting standards to perceived worth, with goals based on quality rather than bottom line.
“Markets” are generally talked about as being different from “people”, and whatever your views on crowd theory, in the end it’s people who make decisions and live their lives accordingly. As equity crowdfunding takes off, it will be people, not markets or institutions, that do the investing. People will have more of a voice. By participating more in the business world, they will feel more connected to founders, teams and ideas. They will feel more connected to the future, because they own part of it. And as cultures, economies and governments adapt, we could find ourselves living in a better society: more people-centric, and more value-oriented.