Gravitas Spark CrowdFunding

Tag: Irish Investors

  • A Quick Guide For Private Investors In Start-Ups

    A Quick Guide For Private Investors In Start-Ups

    One of our portfolio companies ceased operating this week. Lesson learned? Yes. Would we use the same vetting process again? Yes. And, no, Einstein’s definition of insanity is not in play here. Let’s be very clear that mistakes will continue to be made. We just can’t forecast the future. In fact, human beings are not particularly good at the forecasting thing. However, we can control the controllables,  and one of the critical things for a private investor to control is one’s investment process. Call it a check list. Then, know that we probably turn down 10 opportunities for every one we offer on the Spark platform. So here’s a quick guide as to how we compile a score card for companies seeking new investment capital. Note we will expand on some areas in later articles but, for now, this could be an outline framework used by any wannabe early-stage investor….

     

    Founders: This is probably the most fundamental factor in any company assessment. The calibre of the founders is critical to our confidence that the key people in a startup have the energy, resilience, expertise, discipline and ‘market-listening’ gene to drive a project or business to success.

     

    Solution: A laser-like focus on solving a consumer or business problem which can be clearly defined should underpin any analysis of a company’s product or service.

     

    Validation: Revenues generated by the product or service are the ultimate validation. Note business customers are ‘stickier’ than main street consumers so it is not surprising that business-to-business (B2B) investments tend to attract more investment. Other elements of validation like awards, patents or industry thought-leader financial backers can also add weight to the pitch.

     

    Market Opportunity: Huge global market spend numbers sound good but also attract plenty of competing products and services, and imply a danger subsequent funding rounds shift to the perceived ‘winners’. A niche focus on a particular segment of the market can be an easier ‘sell’ and gain better traction with both prospective customers and investors.

     

    Communication: We just mentioned customers and investors together. For good reason. Founders and startups must be on top of their communications and messaging. A poorly worded investment pitch should raise investor concerns about the primary challenge – forget funding, what about founders’ abilities to win over prospective customers?

     

    Endorsement: Many pitches feature impressive testimonials or endorsements. However, there is a higher impact endorsement – money. Typically, in a funding round we would expect founders to bring some financial/investment endorsement to the table. Think about it – if the founders can’t ‘sell’ their business to ‘warm’ friends, family or commercial counterparties, it’s going to be a lot harder to convince ‘cold’ investors to back a project.

     

    Financials: Of course, not everyone is an accounting wizard. However, returning to our comment about ‘forecasting the future’, whatever projections are put in a business plan are most definitely going to be ‘wrong’. The thing to control is unsubstantiated growth trajectories or ‘hockey stick’ forecasts. Initial projections should show an understanding that a slower grind in the early years is a better (and more credible) base case.

     

    Business Model: Company’s when first entering a market will try out different pricing strategies but there’s a bigger strategic consideration than price. The payment framework for the customer is critical: monthly/annual subscription, up front/service models, wholesale, distribution partnerships etc. Investors should be clear as to how an investee company is going to be paid.

     

    Valuation: This is another area/assessment which is going to end up being completely wrong. However, a base valuation can be derived from the projected revenues/profits in the next two forecast years (and previous 12 months if any). Also, where it is very early days with minimal revenues, a good way to think about a business is to calculate how much would it cost to build the product/company/service today. Monies invested in a company to date are a good basis for valuation. And watch out for technology overspend (so so common) and marketing waste (lots of Google ads algorithm sob stories). On the other hand, proprietary databases built in a niche area can support a business valuation.

     

    Last Mile: Very often investors see great products or services and wonder why the business ultimately does not succeed. This writer increasingly believes ‘the last mile’, aka commercial intensity/engagement, is where analytical frameworks need to beef up risk metrics. Clearly, ‘build it and they will come’ is not a business strategy in today’s world. Scaling up customer bases and revenues is a real challenge for early stage companies. Hence, investors should be very clear about what the marketing/distribution/partner strategy is for a start up business. In many ways, fuzziness on this question makes estimates on the size of a market opportunity (with juicy TAM and SAM numbers) completely irrelevant. A roadmap with milestones, skills/talent build, later funding series, and customer mix evolution should be sufficiently clear for investors to understand the plan and the building blocks required to scale.

     

    Exit: Healthy deal activity for smaller businesses, a sector’s track record of consolidation, cash-rich global players as serial acquirors, the network of the founders etc all help paint an exit picture for an investor. For investors, make sure there is plenty of colour in the answer.

     

    The above is not an exhaustive list but captures the main pillars in our analytical framework, and could become a regular check list for a private investor. Of course, each section features mere highlights and headlines but at the same time this should not be ‘rocket science’. Many of the questions you, the investor, want answered need to be answered by customers and partners too. And, we know clear communication is critical to customer success. So, understand the fundamentals of a business and that’s a decent start to building a robust investment score-card. That’s all you can control. Or as ‘Cousin’ Greg in Succession might say… you don’t need to know everything, just the key business/relationship levers which matter.

  • 10 Reasons You Might Be A More Active Investor Than You Thought!

    10 Reasons You Might Be A More Active Investor Than You Thought!

    This week Bloomberg reported an epic shift in the world of US fund management. Investor assets invested in passive index-following funds have now surpassed those invested in the traditional active stock funds. And we thought the publishing of “One Up On Wall Street”  exactly thirty years ago by the first fund manager rock star, Peter Lynch, would bring active investing to main street!

    Cue an outbreak of hyperbolic commentary predicting the pending death of active management and the dangers of everybody ultimately being invested in the same things in the same amounts at the same time. The purpose of this article is not to debate the merits of investing in low-cost passive investment instruments but rather to highlight how savers can mistakenly believe they are not really actively managing their financial future.

    Here are 10 reasons you might be more active than you think.

    1. Positioning

      2. You will frequently hear people describing their financial planning as super-safe and therefore not actively investing in anything. Let’s be absolutely clear that keeping all your long term savings on deposit in cash at the bank or under the mattress is an extremely active bet. The bet, if one is trying to preserve your wealth, is that inflation will not erode the purchasing power of your capital over time. We would suggest with the benefit of history that this strategy is highly unlikely to deliver. Furthermore, any one-dimensional approach to investment is an extremely active bet – a 100% exposure to cash, equities, bonds, crypto, property, commodities, gold or any other asset class is an active bet.

    2. Timing

      3. There is a large portion of the investing population who invest in equity funds in bull markets and then step out when things get tricky. Unfortunately, that kind of active “activity” is more often than not wealth destructive. The fund giant, Fidelity, crunched the numbers for the period 1980 to 2018 and found that missing the best 5 days of market moves would cost you 35% of your overall returns. Miss the best 10 days and your returns are halved. Miss the best 50 days and you may have to work a lot longer than you hoped…

    3. Pensions

      4. It never ceases to amaze how passive people are about their pensions. Forget the actual investment strategy but just consider the impact of fees/costs over a very long period of time. We would strongly advise a very active discussion re fees incurred in your pension arrangements. Particularly in a low returns world. Think if you’d just invested in European stocks since 2015 you’d be actually underwater in a so-called bull market. But fees and in-fund hidden fees can seriously increase the pain over a long period of time.

    4. Plan

      5. In a previous article “10 Lessons in Wealth Management” we stressed the importance of a financial plan and then sticking to it. That is a sensible active undertaking. However, doing nothing but gathering assets/savings in a random manner over time is a very active but ill-advised route to wealth creation. The probabilities are more skewed towards wealth destruction without a plan.

    5. Retirement plans

      6. No, we are not repeating ourselves. Rather we are making the point that the targeted timing of your retirement(60,65, 67…) is an active bet and therefore necessitates more thought in the context of the range of instruments you will use to invest over the decades and the shift in risk appetite required as you approach the target retirement date.

    6. Life Policies

      7. These are active investments and again require advice which fits your overall financial plan.

    7. Insurance

      8. Not unlike fund managers who use different investment instruments to protect against downside risk – hedges in market-speak – your life will be peppered with a variety of hedging instruments related to your work/business, transport and property. An active approach to monitoring the fees and the actual cover provided by these insurance policies will avoid disappointment and real wealth destruction.

    8. Foreign Exchange

      9. You may over time have assets or income streams that are denominated in a foreign currency. Again be proactive in how that exposure is managed and avoid a mismatch between your domestic currency/returns requirements and the ultimate values of the foreign assets/cashflows. Doing nothing is, we repeat, a very active bet!

    9. Education

      10. No different from a business, there is an ongoing requirement to invest in yourself in a rapidly changing world. Education is a real investment that can deliver increased income and prolong your relevance in the commercial world. Be active includes maintaining an active brain.

    10. Death and Taxes

      11. We don’t need to spend too much time on the former but it is one of the two ‘certainties’ in life. So succession planning is a worthwhile proactive initiative. However, before then we’d like you to live a little and proper tax management/planning should be conducted in a very active manner. Whatever you might feel about investment fees the truly outsized costs or benefits of tax decisions render many active investment discussions moot. Attention to tax treatment of your investments can be considered an investment strategy in its own right. And it pays to be active.

    If you re-read the ten points again you will realise there actually is no such thing as a passive option. Doing nothing is simply being ‘active’ but probably resulting in wealth destruction. In fact, exactly the same point can be made with regards to the frenzied active versus passive debates consuming Wall Street right now. Time will ultimately show that passive strategies were more ‘active’ than originally intended, particularly if investors take fright along the investment journey. Remember those ten most important days(Fidelity) to stay in the market and keep our ten ‘active’ reasons in mind too. They do make a difference. You can too.

     

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  • Equity Crowdfunding – How Irish Private Investors can Identify Winners

    Equity Crowdfunding – How Irish Private Investors can Identify Winners

    With interest rates at an all-time low, Irish investors are looking for the best ways to get a return on their funds.  Investing in the right private companies can deliver high rates of returns.

    Equity crowdfunding makes it easy for small to medium sized investors to buy shares in private companies.

    Think of equity crowdfunding as an online version of Dragons’ Den where an entrepreneur is looking to raise (say) €300,000 in return for 20% of their company and ordinary individuals (i.e. the ‘crowd’) can invest anything from €100 upwards.

    The crowdfunding platform, such as Spark Crowdfunding, then pools all of these small investments into one large amount to buy the 20% share of the company on offer.

    Equity crowdfunding therefore gives small investors access to investment opportunities that were previously only available to angel investors or private equity companies.

    Picking Winners

    But now that smaller investors are able to purchase shares in these start-ups, how can Irish investors identify the best companies in which to invest?

    Here at Spark Crowdfunding, we see dozens of companies every week that are looking to raise new venture funding.  So, we’d like to share with you what are the factors we consider when deciding which companies have the highest chances of successfully raising funds from our database of investors and, equally importantly, what signals or clues emerge from the equity crowdfunding campaign itself that our investors should look out for.

    Factors we consider when trying to spot Winners

    1. Management Team

    The most important consideration for us is the Management Team and their skills, knowledge, attitude and aptitude.  A good Management Team with a bad idea is better than a bad Management Team with a good idea.  We want to know their track record in business and have they built successful companies previously.  The academic qualifications of the Management Team are also important.

    1. Results achieved to date

    We have a greater preference for companies that have actually achieved something, as opposed to a company that says it is going to achieve something.  Specifically, we like to see evidence of demand for the product in the form of Revenues from Sales.  Two investment industry buzz words of relevance here are ‘Proof of concept’ and ‘Traction’.  Evidence of both is preferable.

    1. Amount already invested by Management

    If the Management have personally invested money in the business, it tells us they have more to gain by it succeeding and more to lose if it fails.  We take comfort if their interests are aligned with shareholder interests.  The industry buzz term for this is ‘skin in the game’ and the more the better.  For the avoidance of doubt, when we say ‘invested money in the business’, we mean ‘has purchased shares in the company’, not ‘lent money to the company’.  Loans are only of interest if the management is prepared to convert them into shares at the same time as new investors are buying in.

    1. Scale Potential / International Potential

    A business has ‘scale potential’ if it can increase revenues exponentially without a commensurate increase in costs.  Tech or digital businesses are more likely to have this feature, whereas ‘bricks and mortar’ retailers tend to have limited capacity and growth potential.  We prefer companies that have ‘scale potential’, especially those with international scale potential.

    1. Use of Funds

    The use to which the newly raised funds will be put is another important consideration.  We prefer to see as much of the funds as possible going directly into areas that will generate Sales Revenues quickly, as opposed to building an infrastructure.  Related to this is the length of time before the company stops burning cash and becomes cash-flow positive.  We don’t like to see a prolonged period of cash-burn.

    1. Any Patents or other forms of Protection

    We look for businesses that have some protection from competitors or operate in industries with reasonably high barriers to entry.  A Patent can give companies a head-start over the competition, but other equally valuable forms of protection include specialist industry expertise or signed long-term contracts with major clients.

    1. Is the company an Enterprise Ireland Client?

    Companies that are clients of Enterprise Ireland tend to have been through a prior screening process and we take some comfort from this.  Equally valuable is a previous investment in the company from an experienced investor, other than a friend or family member.

    1. EIIS approved

    Our investors can reclaim 40% of their investment in the form of a tax rebate by investing in companies that are EIIS approved.  Clearly, these companies have a higher appeal to our investor database and are more likely to achieve their fundraising target as a result.

    1. B2C or B2B Company

    Crowdfunding investors have the potential to support companies in ways other than just making an investment.  This could include purchasing the product, making introductions to new sales channels or simply offering advice.  B2C companies tend to be more suitable for this.

    1. Exit Plans and Timeframe

    Investors in private companies typically look for an exit within 5-6 years and would expect to receive a multiple of the amount they initially invest.  What this multiple is depends on the risk profile of the investment.  For low risk investments a minimum of 3x would be expected while 10x would be expected for high risk investments.

    1. Realism in Financial Projections and Pre-Money Valuation

    We understand and appreciate entrepreneur ebullience and optimism more than most.  However, we also need to ensure that the Financial Projections and related Pre-Money Valuation are credible and based on realistic and assumptions.  Companies without a defensible valuation rationale will not succeed in achieving their equity crowdfunding target on Spark Crowdfunding.

    These factors highlighted above are what we consider before a campaign goes live on the site.  But once a campaign goes live, there are clues and signals that a savvy investor should look out for, in advance of pledging funds to a campaign.

    Signals that emerge from the Equity Crowdfunding Campaign that Investors should look out for

    1. How much is the Management Team investing at the current valuation?

    The best proof that Management believe the valuation represents a good investment opportunity is if they are also investing in this current fundraising round.  It is a very positive signal if Management are investing a meaning amount.

    1. How much are other investors investing? Sophisticated Investors or mugs?

    The beauty of an equity crowdfunding campaign is its transparency.  Everyone can see how much has been invested at any given point in time.  If others are investing, then the campaign is worth exploring further.

    1. How quick does the Campaign Promoter respond to questions about the fundraising?

    Questions arise during every crowdfunding campaign and can range from simple issues, like the number of employees, to more complex ones, like the strategy for international market penetration.  Investors can learn a lot about the CEO of a company, not least his or her communication skills, by the speed and depth of the answers.

    In conclusion ………

    Picking winners is difficult, particularly with early stage businesses.  But the landscape has changed and through equity crowdfunding, small and medium sized investors can now sit at the same table as the private equity and venture capital investors.

    As Ireland’s only equity crowdfunding company, Spark Crowdfunding is democratising finance by creating new investment opportunities for small and medium sized investors.  To receive announcements about Irish start-ups looking to raise funds from Irish investors join Spark Crowdfunding for free today.

    You don’t want to miss the next Uber!