Startup. One of the buzzwords you read everywhere in the social media and the newspapers. Driven by technology advancements it’s probably as easy as ever to found a new company. You can find business partners from another continent and start selling your products to the world within a couple of weeks. So what’s the problem? Most of us need money to get our idea off the ground. But looking at our journey at EnergyNest so far, this process is not as easy as people might think:
- Funding gap: The best way to get money is if you make money. VC, PEs, family offices and other institutional investors will tell you that they really like your idea and what you do is great but want to wait with own commitment until you have some commercial traction – in order to fill their DCF* model. Commercial traction, by the way, requires money to build a sales team and scale up marketing. On the other hand, if you are in a stage where you just have an idea and you would like to build a prototype, you are probably good with a handful of engineers and funding from public institutions (e.g. Innovation Norway) and your network of friends % family. The issue is if you are in-between, you have the proof of concept and would like to go out and sell it to the world. There is quite a limited number of funding sources for companies right in that very spot. Actually, it’s probably a spot where you have the least options to get funding. The gap a.k.a. “valley of death”.
- The numbers game: You need to talk to a lot of people, ask for introductions, make a presentation, follow up on discussions, go to pitch events together with 100 other start-ups etc. Every investors wants to get to know the team and be treated specially: so basically organizing VIP events 24/47! That’s all fine, but at the same time you want and need to build your company. One of the bigger VC funds in Norway recently said, that the chances for getting funding from them is 1%. How much time do you have?
- The fog: You will come across some advisors from banks or other consultancy firms which offer to help you with the number game and have excellent networks from people they know since many years, went to schools etc. There are really good advisors out there – no doubt. But you never know how good their network is before you try. You don’t know what they communicate about you and your company, how professional they are in their communication, and you get filtered feedback from the discussions they have. Most of these advisors like to be the only one, which means whatever is outside of their network is difficult to access for you since you cannot hire other advisors. In short, you buy a “pig in the poke” – something for which you don’t really know how big it is, how fast it is moving, and how well it works. Feels a bit like climbing a mountain in the fog.
Crowdfunding is certainly not new and in the headlines since quite some time. Even Elon Musk is doing it – so it must be the next big thing. Forbes even think that 2016 will be the year where more the crowdfunding volume exceeds the VC funding volume. It’s almost too good to be true and we at EnergyNest had some concerns which we addressed one by one:
- Do you really want the crowd? Are we ready to have hundreds of shareholders but only 20 employees? Can we manage this administrative and Investor Relations burden? We decided that this can be managed best through establishing a Single-Purpose-Vehicle structure. There is an excellent piece by Peter Moore on the details of this approach https://home.invesdor.com/en/blog/2016/10/14/spvs-in-equity-crowdfunding
- What will others think? We had quite some tough discussions with some of our stakeholders, as in the eyes of some crowdfunding has the reputation of being the last resort if you fail on all other funding fronts. How will VCs look at our company if we have many shareholders? After looking at the numbers, talking to expert/VCs and investigating some cases we came to the conclusions that those perceptions are wrong. You need to pay attention to the (legal) details though, in order not to limit your option space going forward. Of course one can fail in the crowdfunding. In such a case it’s probably not the approach but your company which is the issue.
- Isn’t this more for consumer goods? Of course there are quite some benefits for companies with products every investor can use in their daily life – like apps, smoothies, clothes etc. Again, after looking closer we found out that there are quite some successful hardware B2B companies which closed successfully crowdfunding campaigns and even received VC funding thereafter. It’s definitely less straight forward for a B2B company, but can be done.
We started our crowd funding campaign on Oct 12th. It’s definitely too early to declare victory and be crowdfunding preacher, but still we think equity crowdfunding is here stay for the following reasons:
- It solves a real problem, by enabling company to present themselves to a larger investor audience in a very short period of time. You can address investors outside of your network and investors willing to invest small amounts only. It helps you to master the number game.
- Its fast. In general, the campaign will close within 8-10 weeks and you can move on and build your business.
- It’s a transparent digital process, and you as a company are in control for how you position and portray yourself to the market.
- It has some significant side benefits like investors becoming ambassadors for your product and increased visibility in your relevant market and the financial community
- A large shareholder base is a beneficial asset for follow-on financing rounds or even an IPO.
We recommend to pick your crowdfunding partner carefully. Its legally not straight-forward in many countries, and you want a partner which has all the required knowledge and licenses, which protects not only them but also you.
The speed of penetration of equity crowdfunding will largely depend on success cases. Platform provider should carefully examine the teams and companies they put in the limelight, and be transparent on key investment metrics like exit returns and failure rates.
We enjoy our equity crowdfunding journey so far and hope to be soon one of the biggest equity crowdfunding stories in Norway. You can help us to get there: http://www.invesdor.com/energynest
*Discounted Cash flow Model – a financial calculation that some professional investors use to help them value a company
André Korn, CFO of EnergyNest
André Korn is CFO of EnergyNest since 2015. He studied Corporate Finance and Computer Science at the University of Technology in Dresden (Germany). Before joining EnergyNest, André had senior leadership roles in Finance with McKinsey and Infineon Technologies in Germany, and was a Vice President of Asset Management for the Mubadala fund in Abu Dhabi.