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CROWDFUNDING AND VENTURE CAPITAL

STLO Asia > News & Publications  > CROWDFUNDING AND VENTURE CAPITAL

CROWDFUNDING AND VENTURE CAPITAL

Preamble 

Crowdfunding and Venture Capital are similar in the nature that both of them are purported to be a fund-raising activity.  Whereby, crowdfuding deems to be conducted in the earlier stage of a business (Start-Ups); on the other hand, Venture Capital usually be conducted in the later stage.

1.    Crowdfunding

– A type of fund-raising which is renowned in the other countries for 5 years which means that fundraising from people (“Crowd”) via the internet channel.

– Crowdfunding is so famous in the USA, Europe and the Asian countries which is the leader in technological industry.

– Crowd funding in the Northern American is ranked the highest, secondly follows by Europe. The reason why is so popular is that crowdfunding provides huge opportunity for the investor and fundraiser, also provide to the targeted entity easier and unlimited amount of investment to access fund which easier than accessing to a bank loan.

– The typical process of crowdfunding is the fundraiser shall present of its work, product or project and specified the fund to be raised.  Should such presentation product or project attracts to any crowd; therefrom, the fund shall be granted thereby.

– As per the innovation or creative business, most such businesses frequently facing hardship in accessing to fund due to said businesses has no high-value assets to be applied as a collateral for loan from a financial institution.  Furthermore, actually such businesses possesses value-added creative and intellectual property which are hardly be properly evaluated.

– In the aspect of fundraiser, not only crowdfunding is a means of fundraising, but also a method for their product / project’s market testing and product / project improvement accordingly.

– Pertaining to Thai SMEs, merely 1 of 3 could access to bank loan.  Hence, crowdfunding deems to be another solution thereto.

– The fundraising by means of crowdfunding costs less as compared to the other method. The business founder / entrepreneur does not to excessively dilute its shares; thereby,  the ownership still be maintained by such founder / entrepreneur.  Furthermore, the crowdfunding method takes less time as compared to the other means of fundraising, which usually takes around 3 months.  Whereby, the fundraising by means of Venture Capital (“VC”) shall take around 6-12 months or more.  Besides, crowdfunding shows gradual positive success rate by far.

– Crowdfunding could expand and enhance the founders’ business plan to make their dream comes true, also boost-up job opportunities and the country’s business.

– Aside from the crowdfunding’s advantage aspect; on the flipside, the drawback from crowdfunding.  Crowdfunding having some crucial risks i.e.  the risk of some illegal crowd to deceive by acting as a fundraiser, the risk occurred by business failure due to being amongst its Start-Up period and may not survive, the problem in shares sale’s liquidity due to no interested party to purchase such shares and so forth.

– In several countries there be some protective measures so as to mitigate the risk pertaining to crowdfunding.  For instance in Italy, the business which purports to be fundraised shall possess reliable qualifications such as being certified by a government authority to be the Innovative Start-ups or required to possess 1 of 3 of its employees graduated from Phd. degree or graduated from the research field or obtaining of a patent and being certified by a Chamber of Commerce.  Besides, said criteria also prescribed that there be so required to maintain not less than 5% of High Net Worth (“HNW”) or experienced investors invested therein each project in order to create some confidence on other retail investors.  Upon fulfillment such prescribed criteria in Italy, then such raised-fund shall be duly proceeded and spent accordingly.

– In Thailand, Thailand Securities and Exchange Commission (“SEC”) is studying thereon to develop such process of fundraising to be more effective and having duly compliance procedures purposing to balance between the fundraisers and protecting the investors.

2.     Venture Capital 

What is Venture Capital?

Venture Capital (“VC”) means a business investing in equity / shares onto a business which is not listed with the Stock Exchange of Thailand (“SET”) or elsewhere (“Private Equity”).A targeted company for VC usually having its high-growth rate, being in the nature of  “high risk, high return” e.g. advance technology or innovation industry, information technology industry, bio-technology industry or nano-technology industry which are required huge investments in research and development domain.

Venture Capital in The Light of An Entrepreneur 

In the light of an entrepreneur so as to access an equity to empower its business, such equity could be accessed both from internal and external sources of its business.

The internal fundraising shall mean to spend of its own kick-start fund or spend of its business’s retained earnings.  However, should the internal fund deems insufficient, the external fundraising could be a solution, which having 2 prongs as follows:

(1)    Fundraising by debt financing e.g. bank loan or the issuance of bond from a huge company, and

(2)    Fundraising by equity financing from several groups of shareholder i.e. the ordinary investors in the event of being the listed companies or from the Venture Capitalists in the event of being non-listed companies.

As per the entrepreneurs who have maintained of their business quite in a stable manner, long-lasting business operation or having sufficient collateral for a loan may opt to be financed from a commercial bank.  On the contrary, as per Start-Ups especially in the business with high-risk also does not possess any collateral for loan.  Usually in said regard, said Start-Ups could not access to a commercial bank loan and they deem to be financed by Venture Capital.

Venture Capital’s Mechanism 

Practically, Venture Capitalists (“VCL”) usually fundraise from the other investors e.g. from pension fund, endowment so as to manage such fund to gain more profit / business yield as compared to the ordinary market business ones.  In such regard, VCL deems acting as a typical Fund Manager.

Pertaining to the Venture Capital (“VC”)’s management, VC business, especially in the United States, often operates in the form of Limited Partnership with long-lasting business operation approximately at 10 years.  Upon its expiration, VC shall return funds and business yield to its investors and shall fundraise a new phase in each stage accordingly.

Apart from being as an intermediary in a fundraising manner, VCL also acts as a screener of the investment proposals by scrutinizing on the target entity’s business market potential, technology, management-team’s assessment which could facilitate some SMEs to improve their business plan and encourage them for better improvement.

Upon making any decision, VCL shall allot funds into several stages to be in accordance with the targeted entity’s business growth.  During the ventured capital period, VCL shall strictly govern and supervise the targeted entity’s managements to ensure of proper fund-spending. By such VCL being appointed as a Board of Director so as to prevent an improper spending such raised-fund otherwise.

In practical, VCL shall govern and supervise by the designation of the management’ salary and remuneration, the allotment of shares to their employees and the approval of their business plan and annual budget; thereby, being in accordance with the Corporate Governance Principle.

In the event of VCL being success, the exit period is approaching.  The renowned exit-procedures are to enlist such targeted entity with SET and undertake the initial public offering process (“IPO”); thereby, said procedures shall build up margin from the difference of said investment.  The other exit-procedure is to sell such business to the other investors (“Strategic Partner”) or sell to its management (“Management Buyout”).

Venture Capital’s Life Cycle 

The chart as foregoing illustrates VC’s life cycle that shows that typically a VC business long-lasting approximately at 5 years as from a VCL invests in the stage of Start-Up.Referring to such chart, there shows several rounds of investment in relation to the entity’s growth.  Subsequently, VCL shall consider when is the sweet-spot to exit prior to its stage of maturity.

Remark: The “Angel” in the chart means the fund-supporter in the earlier stages prior to an investment by VCL.  However, an Angel usually being acquaint with an entrepreneur e.g. relatives or university professors and so forth.

 

Copyright © 2017, STLO Asia Ltd., All right reserved.

Crowdfunding and Venture Capital are similar in the nature that both of them are purported to be a fund-raising activity. Whereby, crowdfuding deems to be conducted in the earlier stage of a business (Start-Ups); on the other hand, Venture Capital usually be conducted in the later stage.

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