The walls are coming down. The #NewFinance ecosystem is alive. And in this post we are going to explore how Business Model Innovation (BMi) is driving the creation of a new generation of dealflow.

+ Time for BMi – Business Model Innovation

Rigid. Opaque. Vertical.

Would be a few of many possible words that would come to mind to describe the world of Finance as we know it today.

Fluid. Transparent. Horizontal.

Is how the Finance industry of tomorrow will look.

The shakeup has begun, and while we don’t know exactly what lies in between yesterday’s world of crony capitalism and tomorrow’s world of boundless entrepreneurship, big moves are already being made.

In recent blogs, we have looked at how BMi is reshaping the food (#realfood) and fashion (#sustfash) industries, today we are going to look at how #NewFinance is the beacon for BMi among the three.

Through a combination of digital platforms and network-as-market theories, Finance is being flipped on its head. Rather than going to a bank to ask for a loan or a venture capitalist for an investment, SMBs and entrepreneurs are logging into their laptop and tapping dispersed networks of investors.

+ DIGITAL Markets

It’s faster, it’s cheaper and it’s engaging. The wisdom and knowhow of those who make the deals flow is no longer being locked down in an investment bank or holed up on the 45th floor of a skyscraper. It’s being distributed and shared, becoming accessible for the average guy and girl with a dream to start their own company.

Not to say that the old grey hairs of Finance will be left on the sidelines; quite the contrary. It’s the mechanism that will change, as the real juicy deals will originate from outside of the traditional intermediaries and be packaged in simpler terms.

And the upside will be explosive. That’s what happens when you start to open the pipelines to previously unserved markets. In the same way that a spark can set a pool of gas ablaze, it only takes a shot of capital to set pent-up demand on fire.

Using BMi as the tool, a host of impact-driven entrepreneurs are bringing their scrappy, scalable upstarts to the global stage and collaborating with others in order to reshape the financial landscape.

What is Business Model Innovation?

A business model is defined as the rationale of how an organization creates, delivers and captures value.

+ The Key Components of a Business Model

Business model innovation is the process of reinventing the business model itself. Rather than being focused on end-product innovation, like derivatives and securitized debt, BMi focuses on changes in the process of exchange across the value chain, whether it be a new pricing structure, collaborative partnership or customer channel. In the end, it is the model itself that SHIFTS, rather than simply the product or service.

How do we bring BMi to the Finance Industry?

It’s already happening.

While most of the traditional finance institutions have gone on with business as usual on a debt-driven consumption model, others are opening the door to a new model of finance based on productivity and creation. Finance BMi is being driven from the bottom up – by entrepreneurs, customers and investors alike – while in the process, the old-school economic theories about efficiency and the free market are being torn to shreds.

Because the whole industry, as we know it today, is predicated on control and ownership, neither of which are conducive to economic ‘efficiency’ in a ‘free-market’ system.

How can markets be efficient when key information is controlled by a few?

+ see The Libor Scandal

How is our system free market when a few ‘own’ and disburse key resources?

+ see New Scientist’s analysis of the Capitalist Network

If we really wanted to have a system where entrepreneurship could thrive and ‘free-market capitalism’ could flourish, it sure wouldn’t look like this.

Governments would enable global currency exchange at fair-market value. Banks would lend to growing small businesses. Investors would take chances on high-impact entrepreneurs. Communities would ‘crowd fund’ cultural and social projects. People would loan money to one another to help make important purchases.

And so that’s how it’s going down. It’s distributed. It’s disintermediated. And most importantly, it’s driven by a collective.

How do we tweak the business model to make this happen?

Click here to download the PDF. View the larger image here.

The finance business model can primarily be broken down into two main categories: retail and investment banking. The retail banking business model is built off of scale, while the investment-banking business model is more centred around dealflow depth and securitization. There are many ancillary service providers who help fill the gaps in the market via partnerships and alliances with the banks.

The primary cost drivers are: staff salaries, real estate, compliance, back-end infrastructure and front-end systems.

While one business model is based on scale (retail) and another more on depth (investment), both are low-margin businesses. Retail banking profitability is dictated by the spread, the difference between the cost of borrowing versus lending, whereas investment banking is a fee-based business where profitability is more related to the bank’s brand and advisory services. So while one side focuses on scaling, the other is more focused on relationships. In the end though, both fall into the low-margin categories, with retail margins originating from the interest-rate spread oscillating between 0.5 – 5 % depending on macro factors, while investment banking fees typically ranging between 1 – 10 % depending on the type of service (M&A, IPO, etc), the amount of the deal and other factors.

Banks, whether retail or investment, can become extremely profitable if they can scale their brand across a number of different channels and create a diversified product offering. That’s why partnerships are so important. Retail banks partner with (or acquire) credit-card issuers, mortgage-origination entities, loan agencies and any other organization that can help them to extend their brand and add more volume. Investment banks build back-end partnerships to source dealflow, capital and advisory services, anything that will help them land the big deals.

But it’s all changing. As these vertical, debt-driven institutions are coming to a point where their business model will become unsustainable. There is only so much ‘free money’ that can be printed, mortgages issued and fees charged. Change is required from top to bottom.

In the Market Beacons section of our #NewEraBiz research on Finance, we analyzed three companies who are breaking away from the traditional mould and finding scalability through network and transparency strategies:

+ A New Era of Business: FINANCE

  1. Seedrs
  2. Funding Circle
  3. Triodos
  • Seedrs was the first regulator-approved crowdinvesting platform in the world. Built on a nominee model, they allow companies to raise up to £150,000 from everyday investors who have as little as £10, and just recently raised £750,000 through their own platform the fund their European expansion;

+ FT – Seedrs EU Expansion

  • Funding Circle is the pioneer of the P2B (Person-to-Business) Lending market and recently raised $37 Million to expand their presence into the US and build on their momentum in the nascent SMB P2P Loan market;
  • Triodos Bank is a Dutch-based entity who are building a ‘sustainable banking model’ on the pillars of transparency and ethics, and taking a lead in the impact and SRI (socially responsible investing) investment sectors.

On a macro level, there are three key areas of focus for sparking Finance BMi:

Given that borders and institutional walls make absolutely zero sense in the Finance world – capital needs to be able to flow – technology is acting as the bulldozer to break down the barriers.

There is a distinctive difference between what is happening in the ‘emerging’ versus the ‘emerged’ economies. Emerging markets are bringing in low-tech solutions to help money move within the boundaries of their country, while emerged markets are using high-tech solutions to remove restrictions on global capital movement.

emerged

  • Crowdinvesting, where companies like Seedrs enable anyone in Europe, no longer just the UK, to invest as little as £10 in any startup company looking for £150,000 or less in Europe

+ FT – Seedrs spreads across Europe target=“blank”

  • Money Movement, where companies like Transferwise, based out of the UK, facilitate global money transfers between bank accounts, saving customers from having to fork over huge fees just to make a wire transfer through their bank

+ Transferwise

emerging

  • SMS Money Transfer, where services like M-Pesa enable everyday Kenyans and other Africans to send money between one another using SMS on a basic cellular phone

+ Businesses with Bang! M-Pesa

  • Mobile Banking, where companies like CARD Bank, in partnership with the Grameen Foundation, take advantage of existing mobile networks to build banking service solutions for the previously “unbankable” in the Phillipines

+ How CARD Bank activated 480,000 poor Savers

Taking the ‘borders-are-silly’ analogy, #NewFinance is being driven by distributed networks who are connected via platforms, creating entirely new channels for driving dealflow and connecting with customers.

In the emerged markets, this can be seen in the form of crowd-based platforms, while in emerging markets, channels are being created to help impoverished citizens and communities form networks and access capital.

emerged

  • Crowd Lending, where companies like Funding Circle create an entirely new channel for SMBs looking for a loan, making the approval process much faster and the fees lower
  • Sustainable Pipeline, where companies like Triodos help finance businesses who meet certain ethical criteria and build a community of customers around those entities, creating a new channel for ‘sustainable’ businesses

emerging

  • Crowd Micro Finance, where organizations like Aliança Empreendadora in Brazil help micro-entrepreneurs in low-income communities access to capital through their Impacto crowdfunding portal

+ Impulso platform

The movement towards new forms of currencies is in motion. Part of the transition away from the current system is based on the need to move away from purely debt-driven, government-issued currencies and create new forms of exchange between people (P2P).

In emerged markets, new currencies are sprouting up to help spawn new digital ecosystems. In emerging markets, alternative currencies are being developed to help citizens spend their money in local businesses, as typically 90% of the money spent in low-income communities flows out to global conglomerates.

emerged

  • Digital Dinero, where currencies like Bitcoin are enabling a new method of peer-to-peer payment via a digital currency which can be exchanged for real money. Despite its overhyped valuation and flawed structure, it does provide a signal that bona-fide digital currencies will be emerging in the future.

emerging

  • Local Currency, where the Sampaio in São Paulo helps steer citizens in the urban neighborhood of Campo Limpo to spend their $Reais on local businesses and build a flourishing community

+ Catarse: Banco União Sampaio

Overall, if capital is going to flow, we can’t have a million barriers, a thousand fees and a few controllers. Thanks to technology and a growing realization of the need to redistribute dealflow, the #NewFinance movement has come to life. In both emerged and emerging markets, countless examples of BMi exist to show how a few tweaks of the BM can create big impact, both locally and globally. And the beauty is, this is only the beginning.

Have you seen any great examples of FINANCE BMi?


+ BMi: FOOD
+ Time For BMi


PLAN – the Business Model

It’s 2013 and the New Finance movement has got some serious #momo. Crowdfunding / investing, in and of itself, is one of the hottest industries on the planet this year, while the façade that is the traditional finance industry continues to erode as their business strategies (ie. currency cartels) are revealed on a weekly basis. Now that the gates are opening up and some capital is starting to flow into the New Finance ecosystem, we are starting to see money moving into the companies that actually create real value in the economy. The redistribution of dealflow has begun.

What’s driving the redistribution of dealflow?

The simple answer is demand. The bottom tier of the market, which would include early-stage enterprises and small businesses, is starved for both startup and growth capital. While certain sectors receive excessive amounts of seed and/or growth capitals (ie. social media and mobile), others are starved (ie. consumer products) and rely on a patchwork of credit products and family investment to survive, neither of which have any value-added strategic benefits.

The entire sector of the traditional finance industry, including the angel investors / venture capitalists / institutional investors / pension funds, have played a role in creating a financial system (and consequently an economy) that is over leveraged, unbalanced and out of touch with the real needs of society.

Fred Wilson himself, arguably one of the best venture capital and early-stage investors in the world, believes that the crowd-finance movement will force VCs to rethink their role in the finance ecosystem and help to reallocate capital to where it is needed most (ie. less mobile & media, more medical). Others, such as John Fullerton, a former managing director of JP Morgan, have left the mainstream investment industry all together and created firms (The Capital Institute) that are 100% focused on rebalancing the financial system and synchronizing our economic system with the world around us.

+ Future of Finance Blog (Cap. Institute)

And so we are starting to see the distribution of capital to companies that are built to solve real problems for the communities around them.

Seedrs, an online portal for early-stage investment (< £150,000) in the UK, is one example that we have talked about several times on the blog. Another example is Bolstr, the first crowd-based investment platform to launch Pre-Jobs Act, which found a way to allow small businesses in the Chicago area to raise up to $1,000,000 per year within the current regulatory framework. Investors on Seedrs get a true equity stake, whereas Bolstr’s investors get a share of revenues, but both portals are open to the crowds and allow everyday people to participate.

+ Financing Early-Stage Enterprises : The Seedrs Report

Around the world, a series of crowdinvestment-type platforms are starting to emerge to serve specific underserved sectors in the economy..

One such example is Circle Up, a platform based out of California that focuses exclusively on funding high-growth consumer companies. According to a recent interview, the consumer-product segment is badly underfunded at the early-growth stage, as ~4% of total VC capital in the US went to a segment that represents 15-20% of US GDP. That’s why Circle Up is stepping in and helping companies looking to raise (roughly) between $0.5 and $2.5 million.

Taken from the Crowd Cafe

They generally only accept ~2% of applications receieved and have another level of strategic services that they offer to help the companies they source capital for grow. While not a pure ‘crowd’ platform, as only accredited investors can invest, it is a good example of how firms are using social technologies to bring capital to the companies that need it. A quick look at the companies that have successfully raised funding on Circle Up shows many upstart organic food companies (ex. Peeled Snacks), who are essential in helping to rebuild the food ecosystem.

+ A New Era of Business : FOOD

In terms of finding ways to increase lending to small businesses in the wake of the credit crisis, one great example is the UK government’s new Business Finance Partnership. They have teamed up with the nation’s leading crowd-lending platforms (ie. Funding Circle) and created a £110 million fund for the next-generation of UK SMBs. Combine that with the UK’s booming crowdfinance portals and the new SEIS program, and you can see the pieces for the New Finance ecosystem coming together quickly.

+ The Small Business Finance ®evolution

Eventually, as the regulations are hammered out and more people begin to trust these new ecosystems, private funds and public institutions will start to invest through these platforms and create their own ‘crowd funds.’ From top to bottom, the sector is being reinvented to facilitate the redistribution of dealflow to where it matters most – and everyone will be able to participate.

After all, one only needs to grab a newspaper or read a few articles online to see that the system we have in place is completely unsustainable and unbalanced. There is no shortage of great opportunities to invest in / entrepreneurs to build businesses around, but none of it matters if they can’t get the capital they need to move forward. Now that the New Finance movement is gaining #momo and the tides are turning, the time has come to rebuild the financial ecosystem and spark a new generation of enterprises.

What areas of the economy do you think need the most investment?


+ BMi: FINANCE
+ Time For BMi


PLAN – the Business Model


+ BMi Services

Up to this point, we have spent 2013 talking about impact-driven businesses, their corresponding business models, and highlighted some exciting examples from Brazil. But other than a bit of brainstorming around different models of incubation, there hasn’t been a lot of talk about how to finance them.

In our Impact-Driven Business Model post, we brought forth the financing stats from the 2012 Unreasonable Institute to show how investor appetite was growing for social enterprises with built-in business models. In today’s post, we are going to look at how crowdinvestment platforms are already being used to finance early-stage enterprises of all different varieties.

A couple of weeks ago, UK-based Seedrs, the world’s first regulator-approved crowdinvestment platform, published an infographic showing their results from their first six months in operation (July – December 2012). Despite the dealflow being slightly less than that seen in the recent JPM and Goldman earnings report, some great potential was shown : )

See full size image here

In that six-month period, £477,000 was raised on the platform by 12 startups. The size of the average deal during that period was £39,750, with deals ranging between £17,500 and £84,500. A variety of different types of companies raised capital in that period, from consumer-product startups to high-tech enterprises.

Of the 12 entrepreneurs who raised capital on the platform, 10 were male, while the average age of the entrepreneurs was 34. The average campaign took about 39 days to fund, with the fastest raise being achieved in 15 hours and the longest spanning 92 days.

Investors were getting on board with full enthusiasm, as about half of the investors on the platform made more than one investment, with the average investment being £585. Over half of the 5,507 investors on Seedrs, who ranged in age from 18 to 76, had never invested in a startup before. The reasons for investing in these companies ranked accordingly:

  • 1) Desire to help get new businesses off the ground
  • 2) Ability to access SEIS relief
  • 3) Hope to achieve meaningful financial returns

On the whole, a very good first report from Seedrs, one that really demonstrates the potential of crowdinvesting to rebuild the economy and stimulate the early-stage financing market for small businesses and startup enterprises.

From the beautiful infographic, there were three things that stood out the most to us:

  • 1) Investors trust the platform – the years of regulatory hurdles (ie. FSA regulation) and platform design decisions are proving worthwhile, as money is flowing through the platform to its intended target;
  • 2) The Concept is Working – The Seedrs model, which targets early-stage enterprises (deals < £150,000) and investors of all types (no need to be accredited), looks like it is hitting the sweet spot;
  • 3) SEIS is Having an Impact – the newly minted SEIS (Seed Enterprise Investment Scheme) program was ranked as the #2 reason by investors as to why they are investing in startups.

While it is still very early stages, these results are very promising. The crowdfunding business model takes a lot of time and investment to reach a level of scalability, but once it hits that level the growth-rate is tremendous (see Kickstarter). The key for Seedrs is to prove their model under the microscope of the FSA, so that they can build trust and credibility in the market. After six months of operation, it looks like they have achieved that and then some.

+ Business Model Breakdown : Crowdfunding

Last year, we wrote quite a bit about Seedrs, which allows everyday UK investors to invest between £10 and £150,000 in startup enterprises, as it was the first crowdinvesting platform to launch with regulator approval. The platform is targeting a very important gap in the market and helping to resolve the biggest problem facing entrepreneurs, raising early-stage capital.

+ Finance 2.0 – Wall Street Meets the Web

+ The Small Business Finance ®evolution

Equally important, was the creation of the SEIS program, which essentially curbs the risk investors’ bear when investing in early-stage enterprises by offering an instant tax credit and capital gains exemption.

+ SEIS – How it Works

We have been talking a lot about the what so far this year – the need to create enterprises with built-in business models that focus on impact. A key to making the what come to fruition is figuring out how to finance those enterprises – that’s a big part of the how. While crowdinvesting is still only available as an option in a select number of markets (UK, a little in the US, etc.), it will eventually make its way into every market in the world.

In the interim, if you have an early-stage idea but can’t use equity platforms, traditional crowdfunding platforms, which collect funds using donations instead of equity, may be worth exploring as an option:

+ Strategy Sessions : Crowdfunding + The Social Enterprise

+ Strategy Sessions : Crowdinvesting + The Entrepreneur

Overall, the Seedrs report is one of the first concrete examples to show how crowd-based financing will help bring badly-needed capital to the entrepreneurs who need it most. At a time when banks aren’t lending and the world needs impact-based businesses, the time is ripe to learn about how to make the crowds work in your favour.

Would you consider crowdfunding/investing as a way to raise capital for your enterprise?


+ BMi: FINANCE
+ Time For BMi


PLAN – the Business Model


+ BMi Services

Energy – it powers our society and fuels the advancement of civilization. But in our world today, it’s not sustainable. We continue to burn fossil fuels at an unprecedented pace, while the global energy industry continues to push the exploration of coal, heavy oil, and shale gas reserves. The time for change has arrived – and thanks to the advent of crowdinvestment, we can make strides towards reinventing the way we produce energy and move towards a fully sustainable model of consumption.

“If we don’t do something about this (energy) it could take your future away” (29:15)

Former US President Bill Clinton kicked off last week’s One Young World summit with a bang. In the midst of a hectic Democratic campaign schedule, Clinton arrived in Pittsburgh, USA to shed light on the biggest problems facing the world in front of 1,300 youth delegates from around the world. The basic roots of the problems relate to one of three core issues: inequality, instability or unsustainable development. While the challenges may seem daunting, each presents an extraordinary opportunity, in particular the latter:

“Changing the way we consume and produce energy and use local resources could be the greatest economic opportunity this world has ever seen” (29:30)

The question is how?

Clinton gave three high-level examples of countries that have undertaken sustainable development agendas in the Western Hemisphere:

  • Mexico – the rapid development of the eco economy in Mexico City
  • Costa Rica – a hydro power program that provides the country with 92% of its energy and a future green car industry
  • Brazil – ‘the worlds finest biofuel, cane ethanol,’ which apparently has limited negative environmental affects

While these are great initiatives, they are top-down government lead initiatives and only represent a tiny fraction of what will be required in the future. Luckily, many factors are starting to align that will help bring renewable-energy initiatives to the masses, including the democratization of finance through crowdinvesting.

Crowdinvesting, unlike crowdfunding, allows individuals and investors to take an equity stake in a company. While the donation-based crowdfunding model is useful for a variety of early-stage creative, social and entrepreneurial projects, it is not ideal for projects that require a large amount of invested capital, like a renewable energy project.

+ Strategy Sessions – Crowdinvesting + The Entrepreneur

As crowdinvesting becomes legalized, new opportunities will be open for everyday people to help bring renewable energy projects to life. What type of projects are we talking about?

Wind, solar and hydro projects are the earliest examples. Abundance Generation in the UK, for example, has created a unique crowdinvestment platform (using convertible debentures) that allows UK citizens to invest as little £5 in renewable energy projects. How does it work?

Project creators post their project on the platform and define the amount they are looking to raise. All of the information related to the potential investment is posted on the project page, allowing potential investors to evaluate the merits and drawbacks of the investment. As an example, two projects are open on the site right now, a solar project (seeking £500,000 to £1,000,000) and a wind project (seeking £300,000 to £1,400,000):

https://www.abundancegeneration.com/projects/

If the posted projects get enough of the crowd’s support, then the project creator receives the funds while all of the ‘crowd investors’ receive their stake in the project, in this particular case a percentage of future returns. It’s a new model of investment for energy, where rather than raising large amounts of capital from a few funds, energy entrepreneurs can raise small amounts of money from a large number of people to fund future-focused endeavours.

And this is only the beginning. We need to think bigger, much bigger.

Trillion Fund, a new crowdinvestment site in the UK, is in the process of creating a large-scale platform for renewable energy projects. Trillion’s mission is to bring renewable energy to the same scale as fossil fuels over the coming decades:

“we aim to influence a trillion dollars of investments – a mind boggling number, but we believe this is the scale of ambition and investment required for the cost of renewable energy to reach parity with fossil fuels.”

It’s a bold vision, but it is exactly the type of scale we need to strive towards in order to become a sustainable economy. Beyond the large-scale economic potential, we have an unprecedented opportunity to shift our antiquated industrial production methods towards a brilliant clean-energy future.

While government and large-scale initiatives like the Clinton Global Initiative are a good start, we need to get the crowds involved to bring it to the scale the world requires. As the democratization of finance continues around the world, we will finally be able to work collectively to move sustainable development beyond concept status. 2013 will be a big year for these types of initiatives, so look for energy-focused crowdinvesting platforms in an economy near you.


+ BMi: FINANCE
+ Time For BMi


PLAN – the Business Model

Strategy Sessions are open to community feedback. Leave a comment, Tweet us (@LumosBusiness) or send us an email if you have any ideas related to the topic.

Many are calling this the lost decade – facing a grim economic reality, many are reeling at the prospect of an extended downturn. But in times of turbulence come the greatest opportunities. The entrepreneurs who are able to rise to the top and capitalize on their bright ideas in this market will reap the benefits for decades to come. The problem is that while many people have ideas, few are actually able to effectively test them in the marketplace. That’s all about to change thanks to the removal of arguably the biggest barrier for the entrepreneur, raising early-stage capital. That’s why we are dedicating this Strategy Session to the entrepreneur and the newest tool to be added to his/her toolkit, crowdinvesting.

Since our inception, we have been big backers of those who devote themselves (see our first blog post The Love of Lumos) to creating real value in the economy. Being entrepreneurs ourselves, we love nothing more than working with the people who can make things happen, whether that is culturally, economically or socially. While we have soured on the ‘startup’ community a bit thanks to the more-sizzle-than-substance culture created here in North America, our love for pure entrepreneurship will never change.

For this reason, we are thrilled about the emergence of crowdinvesting as a tool for the entrepreneur. Starting in July, entrepreneurs around the world will be able to watch companies use crowdinvesting, where investors (ie. anyone) can buy equity in a startup company for as little as $10, as a way to raise seed capital. That’s because Seedrs, the first regulator-approved crowdinvesting site in the world, will open its doors to the public in the UK in July.

So what is the significance of crowdinvesting for the entrepreneur?

  • you can raise seed capital for your new venture or small business quickly (realistically in between 15 and 90 days) and efficiently from your networks online
  • when legalized in your geography (right now in the UK, soon to be launched in the US), you bypass ancient securities regulations; therefore, legal costs will be greatly reduced and restrictive shareholder limits will be lifted
  • you get great exposure for your new product/service, build social capital and you can use crowdinvesting, or crowdfunding (where funds are raised on a donation basis), to test market demand for your venture (see the Pebble case study)

How does the process work?

While there may be certain platform-specific requirements, the following are the general requirements to launch a crowdinvesting campaign:

  • video – a video will help give potential crowdinvestors a feel for the team behind the venture and what the company is all about
  • business plan – founders will be required to disclose at least the basics of their business, especially the business model and how they plan to make money
  • financial model – investors will want to know what their capital will be used for (projected expenses) and the founders need to know how long the capital they raise will last (revenue projections)

(Seedrs, the FSA-regulated crowdinvesting platform in the UK, does not require companies to post financial projections)

Once you have these components, and get approved to launch your campaign on the crowdinvesting platform, then the campaign is ready to go live and the real fun begins.

If the crowdfunding industry has given any indication, then many entrepreneurs seeking crowdinvesting capital will greatly underestimate the effort required to successfully raise the required funds. To successfully execute a crowdinvesting campaign (see blog post Strategies for a Successful Crowdfunding Campaign(Strategies for a Successful Crowdfunding Campaign))), the following factors need to be taken into consideration:

  • valuation – how much are you valuing the company at given the amount of money you are asking for?
  • capital raise – how much do you need to startup versus how much can you realistically raise from your network?
  • communication strategy – what is your communication strategy during the campaign to ensure that you raise the required capital?

With crowdfunding, where the money is raised via donations, almost all successful campaigns require at least 30% of the initial capital to be raised via friends and family; therefore, it makes sense that anyone who wants to go out and raise crowdinvestment capital have a strategy to raise at least the first 30% from the 3Fs (friends, families, fools) before even launching the campaign.

Beyond that, there are a few other important factors that need to be taken into consideration:

  • shareholder management – how will you manage a multitude of shareholders?
  • future capital considerations – how will you ensure that you don’t over-dilute your initial crowdinvestors in future capital raises?
  • legal backend – how will any legal disputes be resolved with shareholders?

Using Seedrs in the UK as an example, the company acts on behalf of the crowdinvestors as the shareholder representative to ensure that the best interests of the crowdinvestors are fully taken into consideration. They deal with all the legal backend as part of their fee (7.5% of funds raised on successful campaigns) and also own a part of the company (7.5% taken from investors) to ensure their interests are aligned with the success of the company.

And remember, crowdinvesting is an ‘all or nothing’ proposition. You either raise all of the required capital or you get nothing. Unlike crowdfunding, you cannot raise more than the amount of capital you seek, so it is important to evaluate crowdfunding (see post Strategy Sessions: Crowdfunding + The Social Enterprise) as an alternative strategy if you are an entrepreneur.

At LumosForBusiness, we have spent all of 2012 studying the crowdfunding movement. It started in January with a two-month trip to study the cultural and social dynamics behind crowdfunding in Argentina and Brazil (mycrowdfundingstudy.com). More recently, a trip was made to London (see post Finance 2.0 – Wall Street meets The Web) to talk with Seedrs and study crowdinvesting. With Obama approving the JOBS Act and the seeds planted in Ontario to bring crowdinvesting to Canada, we believe that crowdfunding/investing will become the new strategy for the entrepreneur. If you need to be convinced, just check out the recent article in The Economist.

So that is Strategy Session number two! Let us know what you think … it is a very deep topic, one that will be talked about much more in the future. Any feedback from entrepreneurs of all shapes and sizes would be appreciated.


+ Building Blocks for the New-Era Business
+ Finance 2.0 – Wall Street Meets the Web

Crowdfunding Strategy – Summary


Trends and Research – Summary


PLAN – the Business Model