Today, everyone wants to be a startup investor.
From Coinbase’s IPO to Grab’s SPAC merger, startups are dominating the market headlines. Undeterred by the high-risk nature of venture investing, individual investors are hungry for the chance to invest in startups.
In the name of democratising ownership, startups themselves are becoming more receptive towards equity crowdfunding campaigns. Last month, US-based Gumroad, a startup that helps creators sell their works, allocated US$5 million of its funding round to anyone who was willing to invest a minimum amount of US$100.
However, Daniel Lin, co-founder and CEO of FundedHere, a Singapore-based licensed private equity and lending-based crowdfunding platform, is quick to point out that such a model could easily burn the pockets of retail investors.
“The idea of democratising ownership is a beautiful thing but we must also be equally aware that investing requires a healthy combination of discipline and knowledge,” he told e27.
Below are edited excerpts of the interview.
What are the key challenges for individuals looking to invest directly into startups? How does transacting through a crowdfunding platform solve these?
There are three main challenges for individuals who are professional investors.
Firstly, individuals do not know where to look for these promising startups as they are not in the industry.
Secondly, conducting due diligence on these startups is difficult, as founders are unlikely to entertain individuals who only put in smaller amounts, compared to ultra-high net worth individuals and institutional investors.
Lastly, the expected investment quantum is usually at least S$50,000 (US$37,500). This is largely too high for most professional investors and hence prices them out of good opportunities.
A crowdfunding platform can help professional investors overcome these three challenges.
A platform that is licensed would have the capability to conduct due diligence to ensure that only the most promising startups are featured. With the use of technology, platforms could provide a seamless investment process that involves discovering the startups, completing transactional documents and transferring the investment funds.
The biggest advantage is that investors can now directly invest in a startup at a lower investment size. This is important as it provides an opportunity for younger professional investors to gain access to interesting opportunities without being overweight in a high-risk high-return asset class such as startup investing.
How does a due diligence process for a startup looking to crowdfund on FundedHere look like? What are the key metrics you focus on?
We start the process by getting startup founders to fill up a scorecard. This scorecard takes into account 20 variables that would inform the platform on whether the startup is within the ballpark of being investment grade.
For successful startups that clear the scorecard requirements, they will usually go through a consultancy phase called the “Discovery Phase”, where our team will work closely with the founder to equip them with three crucial documents essential for fundraising.
This includes a comprehensive valuation report with stress-tested underlying financial assumptions, a fully verified online data room with due diligence conducted and to be made available to prospective investors, and an investor memorandum to summarise the unique selling points of the startup.
Thereafter, we will conduct an onboarding assessment by incorporating comments and views from industry experts covering business, tech and commercial factors.
The potential to scale, the competitive advantage that a startup has, the competency and experience of the founder and his team, and the valuation of the startup are key factors we look at when deciding when to run a fundraising campaign.
How do you consistently source for startups to be listed on the platform? On average, how many crowdfunding campaigns do you run in a month?
We have spent the last five years building a thriving ecosystem out of Singapore. This includes partners such as Institutes of Higher Learning (IHLs), syndication platforms, angel investment networks globally and mentors and investors — each of them providing an extensive pipe of potential startups.
We also engage the community through mentorship, startup competitions and conversations with entrepreneurs so that we become the go-to partner for fundraising.
On average, we try not to run more than three campaigns in a month so that investors do not have to choose between startups. We ensure that startups running their campaigns concurrently are not within the same sector to ensure compatibility and a better selection for our investors.
Do you see crowdfunding extending past the seed/Series A rounds and catering to Series B and above financings?
Rounds after the Series A round usually require institutional funding as the quantum of fundraising is usually much larger. Unpacking the complex nature of multiple revenue streams across multiple geographies becomes a more challenging endeavour.
Crowdfunding platforms in countries with a larger population could provide access into Series A rounds and beyond if they have a vibrant retail investor ecosystem but this would be more of an exception than the rule.
FundedHere focuses on startups in their seed round and pre-series A round. The key to our value proposition is providing access to non-accredited investors to fund rounds that are up to US$1 million as it can be done in a swift and systematic manner.
How has investor behaviour/preferences changed in light of the pandemic and its economic challenges? What are some metrics investors are paying more attention to?
The pandemic has built a large amount of uncertainty in the markets and the natural reaction is for investors to shore up cash. However, sophisticated investors see this as an opportunity and are still on the lookout for good deals. Investors tend to look at how a founder manages its cash flow, how he responds to crises and how adaptable he and the startup can be.
Valuation tends to be more modest to account for a more conservative outlook and founders who are able to price that into the valuation tend to receive the funding they need.
Gumroad, a US-based startup, recently announced it was looking to raise money from unaccredited investors as part of a crowdfunding campaign. Could you see this funding model be replicated within Southeast Asia?
Yes definitely, but it does not come without challenges. The idea of democratising ownership is a beautiful thing but we must also be equally aware that investing requires a healthy combination of discipline and knowledge.
The traditional benchmark of requiring a certain amount of affluence before investing in alternative products is increasingly less relevant as the investment sizes are now significantly smaller.
We can still apply the same principle of investor protection by capping the amount that each non-accredited investor makes and that not more than a fixed percentage of his or her annual income is invested in the alternatives so that the investor’s risk-reward investment portfolio is still properly managed.
At FundedHere, while we are able to raise funds from retail investors, we have opted to keep the minimum investment quantum to S$5,000 (US$3,800) and make it accessible only to investors who earn in excess of S$100,000 (US$75,000) per annum.
The underlying hypothesis is that this provides a fair balance of ensuring that the investor is protected and yet at the same time, has access to these interesting opportunities.
Image Credit: FundedHere
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