At the low end of available capital markets, there is crowdfunding, a peer-to-peer network where a person can present a product or service to the world and ask for funding. Funding requests come in various forms from loans to equity investments, to rewards, or to advanced purchases of proposed products or services.
Crowdfunding has exploded onto the scene in recent years making it vastly easier for an entrepreneur anywhere in the world to digitally pitch an idea and raise funds to start a business. The total worldwide volume of crowdfunding, inclusive of peer-to-peer lending, reached $34 billion in 2017 involving 375 crowdfunding platforms in North America alone. Like many digital platforms, crowdfunding is experiencing double-digit growth with experts projecting money raised through it to reach $300 billion by 2025.
Kickstarter, one of the most popular reward-based crowdfunding platforms, has been responsible for launching almost 400,000 projects, with over $3 billion U.S. pledged by visitors to the site. The most successful Kickstarter campaign to date has been Pebble Time which raised over $20 million in 37 days.
Crowdfunding demonstrates the democratizing of capital, allowing a person with good ideas to get the cash needed from anyone, anywhere. No surprise that Goldman Sachs described crowdfunding as “potentially the most disruptive of all the new models of finance.”
In contrast to crowdfunding, we have venture capital, a more traditional source of startup funds that has been in existence for the past five decades. Venture capital helped in the birth of household names like Apple, Google, Amazon, and Uber. Known as VCs, these type of funding sources vary from individuals to corporations to institutional investors. Most invest money in exchange for equity in what are perceived to be high-growth opportunities. Funding can range from a hundred thousand dollars during a company’s seed stage to hundreds of millions invested to support later growth-stage companies.
Here again, the world is experiencing staggering global growth. In 2017, we saw new records set in venture capital investments:
Where is this money going? To companies in artificial intelligence (AI) where investments have doubled from $6 billion in 2016 to $12 in 2017. At the same time biotechnology has experienced massive year-over-year growth from $12.2 billion in 2016 to $16.6 invested in 2017.
New to the scene of capital formation is an instrument referred to as an Initial Coin Offering or ICO. Inspired by Bitcoin and other cryptocurrencies, ICOs are a new way to crowdfund a business venture by issuing tokens that can then be used to redeem value within the ecosystem of the startup. In some cases, the tokens have a clear utility in a company. For example, they can be used to vote in a prediction marketplace. In other cases, they can be used as a security representing a fractional share of a piece of real estate listed on the blockchain, the open source secure ledger system used by cryptocurrencies. Do a good job selling a vision and people will buy the ICO tokens you issue to raise capital for a new venture. A lot of ICO tokens can be traded on major cryptocurrency exchanges which means if a project goes well, the tokens rise in value, and investors sell them for a nice profit. Perhaps best of all, for an entrepreneur, the capital that comes from an ICO is non-diluting, meaning investors gain no equity in the company no matter how much the ICO might raise.
ICOs are also famous for raising money fast. Here are two good examples:
Filecoin is a good example. It is a blockchain-based decentralized data storage network which allows blockchain participants to let third parties store their data on your computer servers. Participants receive Filecoins as a reward. When Filecoin was launched it raised $257 million U.S., $52 million in presale, and $205.8 million in the second round. It took only 30 days with $135 million raised in the first hour alone.
EOS, a cryptocurrency provider, has also seen record-breaking purchases of its ICO, Block.one, raising $4 billion U.S. in a yearlong campaign that began in June of last year.
The Wall Street Journal recently reported that the total amount invested in ICOs rose from $6.6 billion U.S. last year to $7.15 billion in the first half of 2018 alone despite regulatory uncertainty and restrictions being imposed in countries like China and South Korea. And the number of ICOs per quarter continues to grow from roughly a dozen at the beginning of 2017, to over 100 by year-end. It is no wonder, therefore, that in this unregulated environment, scammers are entering the ICO business seeing it as an opportunity to line their pockets.
When it comes to the motherlode of deployable capital, look to Sovereign Wealth Funds (SWFs) which today hold an estimated $6.59 trillion in assets. As the promise and economic potential of tech startups continue to climb, it’s no surprise that SWFs are lining up to invest in them with the goal to yield outsized returns. In 2017 there were 42 SWF deals valued at some $16.2 billion states the Sovereign Wealth Lab research center at Madrid’s IE Business School. But this $16.2 billion pales in comparison to Masayoshi Son’s the “Vision Fund,” a megafund which initially has $100 billion in investment that Son hopes to see multiply tenfold in value in the coming decade.
Why raise such an enormous fund? Son believes that the Singularity of Ray Kurzweil fame will happen in the next 30 years and so he is building an investment fund which has drawn the interest of some big money players. Starting in September 2016 he got Mohammed bin Salman, Saudi Arabia’s crown prince interested in financing technology startups. The total bin Salman investment decision was made in 45 minutes amounting to $45 billion US. Since then the UAE-based Mubadala Investment Company and companies like Apple, Foxconn, and Qualcomm have all ponied up. SoftBank, a largely one-man show when it comes to deals, has been involved making nearly 100 investments using $36 billion in capital it has aggregated for new technology startups. SoftBank’s investments include Brain Corp, Mailbox, Boston Dynamics, Improbable, Nvidia, Slack, WeWork, OneWeb, Didi, and Uber.
Son has plans in the future to establish a second Vision Fund, followed by a third and fourth every few years. His ultimate goal is to have a technology investment fund of $880 billion U.S. by then to place well-qualified bets on the best new ideas and inventions rising from entrepreneurial minds.
No one in Silicon Valley comes close. Neither Sequoia Capital or Silver Lake, the two California-based heavyweights.
So no excuses, entrepreneurs. If you’ve got an idea there is no capital-related excuse to put off pursuing it to its ultimate success.
I am sure, other than point #1, most of you haven’t encountered these other sources of capital. That’s why I hope if you are budding entrepreneur, visiting this blog site, that you use the information below to help you get the funding to achieve your next moonshot.
Global crowdfunding has exploded onto the scene, and crowdfunding websites make it easy for anyone to market their ideas and get funded. The total worldwide volume hit $16.2 billion as of 2017, with 375 crowdfunding platforms in North America alone. The World Bank predicts that crowdfunding investments will be a $96 billion per year market in the Developing World by 2025.
Kickstarter, one of the most popular reward-based crowdsourcing platforms, has launched almost 400,000 projects, and over $3 billion has been pledged on the site. The most successful Kickstarter campaign to date, Pebble Time, raised over $20 million in 37 days, with $7.4 million in the first day alone. Even Oculus Rift, the product responsible for making VR a household name, was funded initially on Kickstarter.
Equity crowdfunding is also taking off tremendously, with worldwide volume exceeding $4 billion in 2016 and expected to grow $20 billion by 2020, surpassing worldwide angel capital.
What crowdsourcing does is democratize funding, allowing any good idea, regardless of its origin, to become realizable. As such, Goldman Sachs has described crowdfunding as “potentially the most disruptive of all the new models of finance.”
An Initial Coin Offering (ICO) or Token Generation Event (TGE) is a new fundraising tool from the cryptocurrency realm. In some ways, ICOs and TGEs are like crowdfunding campaigns, but instead of offering a product or shares of equity in a startup, companies offer “coins” (for ICOs) or “tokens” (for TGEs), which allow buyers to access blockchain-based software services. Rather than pitch to a venture capitalist to fund an idea, programmers may host a TGE and sell a fixed number of tokens to the open market (usually in exchange for Bitcoin or Ethereum). Consumers buy the tokens with the hope that, over time, the software or service will become widely used and increase the token’s value. This route is especially popular for companies that aim to create decentralized platforms because, by definition, no one owns these platforms or directly profits from them.
Nearly $2.3 billion has been raised to date in ICOs, with the large majority of that taking place in the first half of 2017 ($800 million in Q2 2017). In fact, in Q2 2017, ICOs outcompeted VC funding in virtually every regard as it relates to funding Blockchain projects (see chart).
Recently, an Ethereum startup and incubator called ConsenSys has been raising eyebrows in this exciting market. ConsenSys’s MTP is creating simplified and automated decentralized applications to facilitate peer-to-peer transactions and exchanges. They hope to spearhead this revolutionary idea into the mainstream. In September, the company launched a $50 million venture fund for startups working in blockchain technology.
I’ve noticed an uptick in funding to promising startups from Sovereign Wealth Funds (SWFs). A source of over $6.59 trillion in assets, SWFs are investing in early-stage ventures that hopefully will yield outsized returns if the funded firms experience exponential growth. Globally, there were 42 SWF deals valued at some $16.2 billion in 2016 based on data from the Sovereign Wealth Lab research center at Madrid’s IE Business School.
The largest technology investment fund ever, Softbank Vision fund, is backed by two sovereign nations: Saudi Arabia and the United Arab Emirates. The $100 billion Softbank Vision Fund plans to invest over $1 billion in Uber when it goes public. The fund recently bought Boston Dynamics (the robotics company) from Alphabet.
In addition to the Vision Fund, Saudi Arabia has also made recent headlines with its Vision 2030 initiative which describes a prosperous and sustainable future for Saudi Arabia as the Kingdom prepares for new technologies to replace the oil market that the current economy relies upon. Saudi Arabia has announced plans to invest $1 billion in Virgin’s space tourism companies as just one of many SWF investments.
Other SWF examples include Ireland’s “Strategic Investment Fund” and Australia’s “Future Fund.” In fact, many countries are so convinced that the future belongs to powerful entrepreneurs with massively transformative purpose, that they are pooling together billions of dollars to help them go for it. They see the potential of exponential technology coming from do-it-yourself innovators, and they want a slice of the pie. Perhaps your startup could be the next to catch the imagination of an entire country.
