Wednesday, July 29, 2009

Financing model with bounce...

Jumping into a funding model for the online age, by Emma Jacobs FT. Earlier this year, Trampoline Systems, a London-based technology company founded in 2003, realised if they were going to further expand the business, they would need some more money. So they sounded out a few venture capitalists. But, says Charles Armstrong, one of the company’s founders “it soon became clear that it would be tough to raise finance this way”. So Trampoline hit upon another route: “crowdfunding” – raising small stakes from a large group of investors, particularly through online communities and social networks. The crowdfunding concept derives from “crowdsourcing”, whereby organisations ask the public, usually via the internet, to do jobs typically done by their employees. For example, The Guardian newspaper’s website recently asked readers to trawl through 700,000 expense claims by British MPs to unearth foibles and misdemeanours. Crowdsourcing and crowdfunding could, in theory, occur without the internet, says Jeff Howe, the man who coined the term “crowdsourcing” and wrote a book on the subject, but “it certainly helps to accelerate the process”. Trampoline was encouraged by the crowdfunding successes of the likes of SellaBand, a site which connects music fans with unsigned artists looking to record albums. Musicians post their profiles and songs, and ask the site’s users to buy shares, at a minimum of $10. As soon as an artist sells 5,000 shares, they can record the album and the proceeds are then split between the artist, SellaBand and the artist’s supporters, or “believers”, as the site dubs them. Trampoline’s effort is unusual, however, because the company is already established – it employs 15 and raised £2m in seed capital from venture capitalists when it launched. But, says Mr Armstrong, with traditional venture capital funds battening down the hatches in the current downturn, it seemed like the best option. Deloitte’s Global Trends in Venture Capital 2009 report notes: “The classic Series B round where a business is still finding its legs...carries more risk given higher burn rates and the climate’s uncertainty around future financings. So, we’re seeing reduced investment levels as firms either invest smaller sums in very early-stage companies or invest traditional sums in fewer and much later-stage companies. The middle ground has been largely vacated.” Trampoline hopes crowdfunding will circumvent these obstacles and create new opportunities. “A typical venture capital funding would be half a dozen investors. I suspect there’ll be about 60 or 70 investors,” says Mr Armstrong. “The benefits of such a large investor network is that it will bring in new contacts and experience and will build a stronger support ecosystem.” The company is considering ways to harness the “collective intelligence” of its investor group. This might include an idea rating system, virtual working groups, voting systems and monthly “investor meet-ups”. But this system poses its own challenges. “I would be wary about conflicting agendas of many investors and it might be difficult to manage their expectations if the company doesn’t do as well as they hoped,” says Nathan Williams, a spokesman for the British Venture Capital Association. The investment stakes for Trampoline are much higher than SellaBand. It is asking investors to stump up a minimum of £10,000 and they hope to raise £1m in total. They have not put a time limit on when they hope to achieve their target. Asking for such large sums requires greater regulation, and creating this new funding model has involved lengthy negotations with the UK’s Financial Services Authority and lawyers. However, if Trampoline believes they need only create a website, adhere to the regulatory requirements, sit back and wait for the money to roll in, they are wrong says, Dagmar Heijmans, one of the founders of SellaBand. He says crowdfunding relies on “networking, good contacts and a good product”. The people who succeed are the ones that communicate with their contacts and promote themselves. Some bands busk to drive people to their online profile. Andy Baio, chief technology officer of Kickstarter, an online platform which raises funds for creative projects through crowdfunding, agrees: “The success of projects hinges on two factors: first, rewards for supporters. It doesn’t need to be financial, it can be a phone call or a credit on a film, or an exclusive update on the project. Second, their ability to promote it to their social network.” He cites the success of Allison Weiss, a singer from Athens, Georgia. She was hoping to raise $2,000 in three months to record an EP – she hit the goal in eight hours. Mr Baio put this down to her wide network of supporters and connection to the audience. “She recorded a video, explaining what she wanted to do and what everyone received in return. It was very sincere, and people connected with it.” Mr Heijmans has observed a pattern in crowdfunding. “We find that once people have reached 75-80 per cent of their target then the momentum really picks up.” He adds that it is important to get some investors before going public. “As long as no one invests in you, no one will follow. We suggest people get family and friends to invest to start the process off.” Mr Armstrong acknowledges the importance of marketing the business to his personal networks. He is optimistic crowdfunding will provide a successful venture capital model for established businesses. “We want to encourage other entrepreneurs to be innovative in raising finance,” he says. “I don’t have a stake in selling the model – it’s a way of making a contribution to the small business community.” Copyright The Financial Times Limited 2009
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