Nearly all forms of crowdfunding have been greatly pigeonholed. Too many a platform and consultant in crowdfunding has oversold the market on the idea that crowdfunding is purely for startup businesses. Such an assumption is not only wrong, but it also greatly hampers crowdfund investors and entrepreneurs from using the gambit of tools available. Providing financing for startups and entrepreneurs is not only the most risky of all asset classes in crowdfunding, but also represents a small portion of the overall potential market for this new and emerging investment class.
Existing, profitable companies seeking capital represent an even more compelling opportunity beyond startups. Moreover, conservative investors are often more interested in such opportunities. Some of the greatest growth investments are typically housed in companies with existing revenues, brand awareness, suppliers and loyal customers. Instead of pitching potential investors on some of the more risky crowdfunding investing options, it will likely prove more effective to tout some of the other business financing options available through crowdfunding. What follows is a brief discussion on some creative options for making crowdfunding compelling for all investor types as well as some of the reasons to consider multiple options for crowdfund investing.
Roll-ups, Consolidation and M&A
Large opportunities exist in fragmented markets for consolidation. Inorganic growth through mergers and acquisitions can be a big boon for smaller companies looking to increase revenues and boost bottom-line profit through increased scale and improved efficiency. As with any transaction, roll-ups require capital financing. Crowdfunding can assist here. Acquisition financing is an essential component of the experienced M&A strategist.
In a typical roll-up, an initial company is often used as the roll-up entity or platform company. In such a scenario, the platform is often prepared for additional add-on acquisitions of companies in the same sector or space. This strategy has allowed for companies to grow much more rapidly than they may have otherwise been able to achieve organically. Moreover, centralized operations, including HR, finance and accounting helps to ensure a greater addition to bottom-line profits. Investors like such deals too as the accretive value-add of each bolt-on acquisition helps to boost the respective ROI of initial investment. It’s an atypical option for crowdfunding, but a creative avenue for growth for fragmented sectors.
While investors may be leery about investing in a deal that includes vague references to growth by acquisition and industry roll-up, opportunities abound for experienced transaction-makers. For instance, bringing scale and centralized management to a dispersed and fragmented industry--even if the initial business plan is somewhat vague about targets, can still be a great way to add a great deal of value to bottom-line profitability. In such instances, funding could be secured in escrow until financing was required for deal completion.
Experienced internal managers with little to no equity in a business may wish to use equity or debt crowdfunding to help lead a management buyout from the original business founders. Such a strategy can be very successful and even traditional banking lenders like these types of deals. Management led buyouts are often very compelling for investors as well.
Global aging factors are also playing a role in the number of businesses that will be up for sale. Retiring business owners may be looking to sell their equity while managers may be willing to buy using a combination of traditional lending and crowdfunding.
Private Placement into Public Equity
Private placements in public equity allow investors the immediate option to liquidate their capital, if needed. This unique asset class allows private investors to put money into a deal privately and then pull it out directly through the public market. Such a Private Placement in Public Equity (or PIPE) provides some unique options for both investors and founders alike, but the overarching feature for investors is the ability to gain immediate liquidity. There are a number of groups who have begun working in this arena. It is expected that crowdfunding PIPEs will continue to grow as a unique financing opportunity within the overall crowdfund ecosystem. It represents an area that investors are likely to take keen interest.
While the issues we have been discussing sound like a good alternative to equity startup crowdfunding, they still carry their own inherent risks. For instance, successful execution of a roll-up or management buyout can create employee and customer fallout, significantly dropping the value of a deal post closing. However, in comparison to the startup world, the downside risk is actually greatly mitigated. I expect some of the more traditional business financing will be more of a long-term winner in crowdfunding than anything related to startups. It will be interesting to see how things play out.