India’s Largest Digital Lending Conclave 2018

alternative lending conference

This year’s digital lending conclave in India features top speakers addressing consumer lending and SME lending concerns. There will also be discussions in equity financing for alternative lenders and debt capital for alt lenders. Speakers include: Gaurav Chopra Alok Mittal Shilpa Mankar Ahluwalia Samir Bhatia And many more Location: DLAI, C/o Capital Float Zen Lefin […]

alternative lending conference

This year’s digital lending conclave in India features top speakers addressing consumer lending and SME lending concerns. There will also be discussions in equity financing for alternative lenders and debt capital for alt lenders. Speakers include:

  • Gaurav Chopra
  • Alok Mittal
  • Shilpa Mankar Ahluwalia
  • Samir Bhatia
  • And many more

Location:

DLAI,
C/o Capital Float
Zen Lefin Pvt. Ltd.
‘Gokaldas Chambers’,
#222/14, 3rd floor, 5th Main,
Bellary Road,Sadashivnagar,
Bangalore – 560 080

Date: May 3, 2018

Register here.

Initial Coin Offerings (ICO)- New Funding Source?

bitcoin market cap

For many decades, any startup looking for funding would have to go to a VC firm, the self-appointed gatekeepers to capital. Crowdfunding in general, and sites like Kickstarter in particular, democratized the funding process. It allowed young companies to get themselves directly in front of prospective consumers and raise funds from backers. Initial Coin Offering […]

bitcoin market cap

For many decades, any startup looking for funding would have to go to a VC firm, the self-appointed gatekeepers to capital. Crowdfunding in general, and sites like Kickstarter in particular, democratized the funding process. It allowed young companies to get themselves directly in front of prospective consumers and raise funds from backers.

Initial Coin Offering (ICO) is the next big thing in the world of fundraising. It combines the features of an IPO and crowdfunding allowing backers to support a startup via donations while generating massive returns on their investment. ICO is basically crowdfunding of a new cryptocurrency venture where a percentage of the cryptocurrency (and not the venture itself) is sold. This new cryptocurrency is usually sold for a fiat currency or other mainstream cryptocurrency like bitcoin.

ICO Roots

ICO, also known as crowd sale or token sale, emerged in 2013 as a fundraising option. Bitcoin, born in 2009, started gaining traction in 2013 and inspired to the birth of Ethereum and Ripple amongst the first ICOs. Below is a chart depicting the market capitalization (more than $45 billion) of Bitcoin. Ethereum had reached a market map of over $30 billion in June 2017.

One of the first cryptocurrency ICOs was by Ripple in 2013. Ripple Lab developed an innovative payment system called Ripple and produced 100 billion XRP tokens, then sold those coins to fund the platform. Ethereum sold its ETH for 0.0005 Bitcoin and received nearly $20 million on the ICO.

Comparison with IPO

One needs to granularly bifurcate the intricacies of both fundraising techniques to draw parallels between the two. The one major underlying difference is ownership stake. Under an IPO, shares released always denote ownership in the respective company, whereas ICO does not represent a stake in the company by design. With an ICO, more coins mean more voting power but, generally, tokens are used in exchange for other currencies.

Another difference is regulation. In most countries, IPOs are heavily regulated, and non-compliance can lead to dire consequences whereas ICOs are still in the regulation’s so-called “gray” area. Therefore, any project can be launched, and anyone from around the world can invest in the project. This relaxed environment no doubt presents a window of opportunity, but it also becomes riskier as compared to regulated financial instruments.

Bad Apples

As with any new phenomenon, there are bound to be some bad apples. ICOs are no exception. The ICO boom has really picked up in the last year or so. Fly-by-night operators looking to scam the general public have also entered the market. Matchpool, Bitbay and many others, have been embroiled. As the platform has matured, investors are becoming more discerning and the initial gold rush should subside into something more sustainable.

Legality

In actual terms, ICO legally is still undefined. Reason being, tokens, or coins, are sold in the form of digital goods and not as financial assets. That is why it is called a “crowd sale.” This has simplified the process of raising funds, but the unprecedented success of ICOs like DAO, a stateless investment fund, has caught the eye of regulators, and it will not be long before regulations kick in. The SEC is currently evaluating this capitalization method but hasn’t made any public comments. Rumors are that the SEC is contemplating whether to consider tokens or coins as securities, which will allow investors to sue issuing companies in case a project doesn’t take off and issued tokens become worthless.

Law firms familiar with securities and online token markets, however, believe that as long as token issuers follow a few simple rules, coins are unlikely to be categorized as securities:

  • tokens should be able to live independently of the emitting company
  • tokens shouldn’t represent any interest in any cash flow from the emitter
  • the emitter should pay income tax on the emitted tokens as they are the proceeds of a revenue event for the emitter

Having said that, lack of regulations gives companies a chance to go to market and innovate at a rapid speed. It gives elbow room to ecosystem participants like startups, investors, and markets-in-general to come up with their own solutions to combat unexpected roadblocks.

Not For the Faint-Hearted

The onus is on the investor to dig deep in getting familiar with a project, its future scope, founding team, etc., and the risks range from fraud management to cyber attacks. But ICOs and new cryptocurrencies have had massive successes, as well. There is no doubt that there are lots of pitfalls on the ICO road, but only an investor can decide if the rewards are worth the pain of extensive due diligence.

The below graph indicates that ICOs have had some major hits with investors making 50x to 800x returns in months. It makes you consider that maybe the risk-reward ratio is currently skewed towards the risk-taker.

Source:

Recent Successes

EOS, which “enables parallel processing of smart contracts and horizontal scalability allowing an estimated 100K transactions per second,” raised almost $190 million in its recent ICO, and Tezos ICO (“which tackles the question of governance and development in the context of a decentralized network”) has raised a record-breaking $232 million. These record-smashing fundraisings showcase that there is massive investor interest, and with hundreds of ICOs scheduled for the coming months, it is going to be a very interesting time for ICOs and larger cryptocurrency ecosystem participants.

Source: Coinschedule.com

The Key Takeaway

To say that ICO has redefined fundraising is an understatement. Emerging companies are all queuing up to raise funding and planning to develop a cryptocurrency ecosystem. More than 78 companies have raised almost $900 million as of June 2017. July 2017 has been a blockbuster, and the $1 billion mark has been broken for 2017.

Source: CoinSchedule Till June 2017 Data

The future seems to be extremely speculative for this young fundraising mechanism. Underlying all the hype, sophisticated investors and founders understand that raising capital has been changed forever in this new world order.

Full disclosure: Lending-Times’ Editor-in-Chief George Popescu is also founder and CEO of Lampix, which is doing an initial token launch at the beginning of August 2017

Author:

Written by Heena Dhir.

Preparing for an Institutional Capital Raise

ideal type of investment

Getting Started Whatever area of the financial technology sector your company may operate in, raising capital will likely be an integral part of your company’s success. Whether you are a marketplace lender, financial/insurance technology company, or trading/risk management solution provider, securing institutional funding is a potential game-changer for a business. Raising capital from institutional investors […]

ideal type of investment

Getting Started

Whatever area of the financial technology sector your company may operate in, raising capital will likely be an integral part of your company’s success. Whether you are a marketplace lender, financial/insurance technology company, or trading/risk management solution provider, securing institutional funding is a potential game-changer for a business.

Raising capital from institutional investors is no easy chore. It takes significant time and resources and therefore must be planned accordingly. Proper planning minimizes transaction costs and increases the likelihood of a successful fund raise. With that in mind, here is a checklist to help business leaders better prepare. I describe each item in greater detail below.

  1. Build a Skilled Team
  2. Determine the Ideal Type of Investment
  3. Prepare an Investor List
  4. Create a Marketing Plan and Pitch for Investors
  5. Establish a Timeframe for your Capital Raise

Build a skilled team

Without the right team, raising money will be a struggle. No good deal comes easy, and business owners need to be able trust their advisers and employees to do the work. This isn’t a skill that one can practice along the way. You need a professional team with experience at raising money for fintech and/or financial services companies. Make your fund raise a team effort, and assemble a group with the right skill set and experience. Build a team with the following tasks in mind.

I always recommend having an investment banker and/or someone on your staff delegated to spearhead the capital raise. That person can promote the company prior to bringing in the senior management team for the initial meetings. The leader/founder of the organization can do the final meetings and close the deal.

Determine the Ideal Type of Investment

Educate yourself on the types of investments available and determine what form of investment is right for your stage. See the table below for reference.

Prepare an Investor List

Create an initial “buyers list” in a spreadsheet or other software package. Focusing on too many is a mistake, so research investors and build a quality list. Then pare down that list to better prospects. This will save time in the long-run, likely resulting in a more positive outcome. Here are certain characteristics to distinguish investors.

Create a Marketing Plan and Pitch for Investors

At this stage, the company establishes who works on the project, the type of investment, and what investors to approach. Now it is time to create the marketing materials and assemble documentation for distribution. Here are a couple tips to that end.

Developing a Company Narrative

When communicating with institutional investors, companies have the tendency to mire themselves in too much detail. Avoid confusion by creating a narrative that is simple. Overly complex story lines are a big mistake. The best company pitches describe the market opportunity and how the company is positioned to benefit from it. Since the investor is already pre-qualified, these high-level details along with a brief description of operational metrics is all that is needed to get through the first screening.

Having a Value Proposition

What is it about the company that drives success? How does the proposed investment address the needs of the business and increase shareholder value? Will the capital infusion pay for itself? Does the management team have a strong track record? Are there processes and procedures in place that reduce risk for the capital provider? Answer these questions and find your company’s unique value proposition. Then sell that rather than the amount of money or terms being discussed. Do not be shy asking for the right amount. Present the company as equipped to build a business that will earn a return on investment. If your company’s proposition sticks out, the money will be available.

Seek outside advice

If the company has not done so already, consider hiring an investment banker to prepare materials and offer objective advice. A good investment bank should open doors with investors. They may also provide guidance in determining the best type of investment, and provide details on comparable transactions. If you decide not to use an investment banker, there are other outside companies that may help polish the company story and supply professional marketing materials.

Establish a Timeframe for your Capital Raise

It’s been said that time is the enemy of all deals. You want a deal done as soon as possible. However, the process will take at least a few months. Preparing the investor list and marketing materials, and contacting investors, all take time, as does negotiation and due diligence. Realistically, expect a period between six to nine months for most capital raises.

Keep the Deal on Track

Capital raising campaigns are sales efforts done over a span of several months. That means ups and downs along the way. It’s okay to get excited about positive meetings and disappointed when things don’t go as well. That is human nature. But remember that institutional investors are being pitched all the time. If it has been weeks since the last meeting, rest assured the investor has seen other companies.

Even if the company did an excellent pitch, do not expect the investor to do the follow-up. Many investors are large institutions. Managers of these organizations have responsibilities including management and board meetings, other deals, and their own investors to deal with. Ultimately, it is your company’s responsibility to make the deal a priority. Appoint someone to lead the effort and hold everyone accountable. Have the leader commit everyone to a time frame. This should smooth out the deal highs and lows and keep the momentum going until financial close.

Avoid Lapses

Prevent periods of “going dark” by scheduling around the two times every year when raising institutional capital is exceedingly difficult. These are from mid-July to September 1st and Thanksgiving to New Years. Even if your point of contact is in the office, one of the key decision makers is likely on holiday with their family. That makes getting a deal during these times very unlikely. Potentially worse, the period of inactivity may derail any momentum. Plan the timing of important deadlines prior to these natural breaks, or better yet, avoid these time periods altogether.

Conclusion

Capital raising from institutions is tough business. It is a Herculean effort no matter which part of the financial technology sector you operate in. Do not let this discourage you. Use the five tasks I outline above to organize the business prior to marketing the raise. Know that it will be a challenge and plan appropriately.

Author:

Written by Phil Toth, Managing Director, Oberon Securities

What is 506(c), and What Does It Mean for Fundraising?

recorded capital commitments

Regulation D is a set of rules under which an issuer can sell its securities without having to register with the SEC. Rule 506 under Regulation D has been the most widely used means of raising capital in the US. Rule 506 was basically bifurcated into two separate rules — 506 (b) and 506 (c) […]

recorded capital commitments

Regulation D is a set of rules under which an issuer can sell its securities without having to register with the SEC. Rule 506 under Regulation D has been the most widely used means of raising capital in the US. Rule 506 was basically bifurcated into two separate rules — 506 (b) and 506 (c) — after the passing of Title II of the Jumpstart Our Business Start-ups (JOBS) Act in September 2013. 506 (b) is merely the extension of the old Rule 506, and 506 (c) is the new section that has completely revolutionized the world of private investing.

Under rule 506 (b), companies are free to accept backing from accredited investors and 35 non-accredited investors for an unlimited amount. Under rule 506(c), companies can sell to accredited investors only. On top of that, they need to verify that each investor is accredited.

An accredited investor is one who has a net worth of $1,000,000 excluding his primary residence, or if he has made $2,000,000 on an annual basis in the past two years.

So what is the advantage of this new rule? It allows for general solicitation.

506(b) does not permit general solicitation. The issuer needs to prove a pre-existing relationship with investors. This reduces the pool of investors a company can target. With general solicitation allowed under 506(c), start-ups can leverage the internet, TV, radio, and other media to attract a larger base of investors. This has “democratized” investing and the ability to raise capital. A company offering securities need not have any prior relationship with investors. Rather, they can publicly promote their capital-raising offer.

Crowdnetic, now FinMkt, tracked 6,063 investment crowdfunding private offerings under JOBS Act Title II 506(c) rules, which have combined recorded capital commitments (“RCC”) of approximately $870.0 million in the two years between September 23rd, 2013 (when Title II rules went into effect) and September 23, 2015 (the date of the report).

There is not an ounce of doubt that Rule 506(c) has brought a lot of upside for the issuers as they can broaden their reach by advertising their offering. The issuing company can raise more capital at a much faster pace without relying on the traditional gatekeepers that earlier helped them to find suitable investors. From the perspective of the investor, under rule 506(c), the advertised offering benefits them, as well. They now have a much larger choice available and can get on board a startup much earlier in its life as compared to waiting for an IPO.

Effect of 506(c) changes

There is an additional burden of verifying investors and making sure they meet the SEC’s definition of “Accredited Investor.” Many companies have sprung up to help start-ups outsource this tedious legal due diligence.

Startups have been using social media to attract users and customers since at least a decade. Now, they are able to leverage their skill set to attract money for their ventures. We are used to hearing about CAC (i.e. Customer Acquisition Cost); we will soon be reading about CAI – Cost of Acquisition of Investor. This metric will become a key success factor for start-ups looking to grow aggressively, and it allows them to even sidestep venture capitalists for funding.

Research by Crowdnetic shows that investors are comfortable investing in startup equity, thus highlighting that markets and investors have accepted this new rule with open arms.

What does it mean for alternative lenders?

This rule is a boon for marketplace lenders. They have proved adept at bringing thousands of lenders onto their platforms. P2P lenders have generally been a happy lot due to higher risk-adjusted returns they’ve been able to generate through platforms. The company should be able to tap this base for equity fundraising, as well. If you’ve invested $50,000 through SoFi, you might be predisposed to invest $10,000 in its equity.

And not only start-ups, even VCs and accelerators are taking note of the rule and its implied implications. 500 Startups has recently filed a Form D under 506( c ) for a fintech fund targeting a raise of $25 million. It is a prominent accelerator and has invested over $350 million in 1800 companies. This shows that the entire ecosystem of fundraising is poised for an upheaval with the 506(c) rule.

Conclusion

Rule 506 will break the hegemony of investment bankers and VCs over the fundraising process. A startup doing well can target its own user base for accredited investors rather than having to pay sky-high fees or dilute control to VCs. The startup community has been extremely receptive to the change, and you can see multiple platforms launched for the sole purpose of helping thousands of start-ups raise funding from a wider pool of investors. It is easy to see that 506(c) has been a win-win for all involved.

Author:

Written by Heena Dhir.