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Next Gen Startup Financing Marketplaces

I enjoyed attending Tuesday’s panel, “Innovative Marketplaces Meetup: Next Gen Startup Financing Marketplaces”

Speakers:

David Rose, Founder and CEO, Angelsoft

Jeremy Smith, Chief Strategy Officer, SecondMarket
Rob Garcia, Dir. Product Strategy,
Lending Club
Slava Rubin, Co-Founder, IndieGoGo
Moderator: Nathan Solomon, SuperFluid

Co-Organizers: Innovative Marketplaces Meetup, Money Meetup, and Yale Entrepreneurs and Investors Meetup

About the Participants:

Angelsoft: For investors and entrepreneurs needing to connect and collaborate, Angelsoft powers the infrastructure for the global entrepreneurial economy. Serving over 30,000 accredited investors and 80,000 early stage companies, Angelsoft is the official collaboration platform of the World Business Angel Association, the National Association of Seed and Venture Funds, the Angel Capital Association, and national angel investment federations and organizations in over 65 countries. Founded in 2004, Angelsoft is based in New York, NY with a development center in Vancouver, BC.

SecondMarket: Founded in 2004 and with offices in New York and Palo Alto, SecondMarket is a registered broker-dealer and THE secondary market for illiquid, restricted and alternative investments. Over 20,000 investors have signed up to transact through our online platform and teams of market specialists. SecondMarket has completed thousands of transactions, representing billions of dollars in assets. Key advantages of our centralized secondary market include:

IndieGoGo: IndieGoGo is a collaborative way to fund ideas. Founded on the principles of opportunity, transparency, choice, and action, IndieGoGo launched in 2008 to provide any idea (creative, cause or entrepreneurial) the tools and process to raise money, offer perks and keep 100% ownership. IndieGoGo is in over 120 countries with over 5,000 projects.

Lending Club: Lending Club is an online financial community that brings together creditworthy borrowers and savvy investors so that both can benefit financially. We replace the high cost and complexity of bank lending with a faster, smarter way to borrow and invest.

Notes:

ROSE:

We are building the infrastructure to power the early-stage entrepreneurial finance economy.

A lot more to come in Q1. We are providing an underlying tool set and platform for any entrepreneur/entrepreneurial company that is seeking outside capital. There’s a lot of friction in this process. In a world of smaller companies that need less capital, we think there will be more marketplaces serving this world.

We are building very powerful toolkit for startup to raise capital itself.

Over 30,000 accredited investors in 65 countries are on the platform.

SMITH:

We are largest marketplace for alternative assets: bankruptcy claims, LP interests in funds, private companies (Facebook, etc.).

Founded 5 yrs ago

2 yrs ago: 2,000 buyers

Now: 30,000 buyers

130 employees, of which 1/3 are market specialists who work with buyers & sellers to educate/guide them.

We have hybrid model: online trading platform.

20 yrs ago, the public markets were working fine as a vehicle for VC-backed startups to go public. ~500 IPOs, of which ~400 were small IPOs.

In 2005-07, there were 200 IPOs/year, of which only 2 dozen were small IPOs.

You have to have >$1b market cap to go public.

So, average time to exit has gone from 4.5 yrs to 9 yrs. That doesn’t work for VCs, angels, employees.

Have done $0.5b in private company transactions in 1.5 yrs.

One of the keys to our success is giving the company control; we’re a 3-sided market.

GARCIA:

LendingClub is a financial marketplace that allows people to invest & borrow from one another directly.

Banks historically pay depositors a very low rate, and lend at a much higher rate.

Borrower gets a 5-7 yr unsecured loan, up to $20K, at a rate that is 20-30% lower than similar product at a bank, and also much lower than a credit card loan.

Investor gets a chance to invest in this security directly.

We’ve issued $190m in loans since 2007. Investors have gotten 9.67% net return (after default)

2.25% default rate, compared with 10+% that credit card companies/banks are seeing

RUBIN:

The ‘ebay of ideas’

We’re the largest international funding platform. Since 08, we’ve distributed millions of dollars to thousands of campaign owners in 135 countries.

$500 to publish a book

$20K to make a movie, set a world record, etc.

Having a campaign video increases the $ you raise by 120%

Need interesting perks other than profit, e.g., mention the investor in a book; discounts at a wine bar ($50 of wine for $25); back stage passes at a band; a reasonable goal with reasonable deadline (1-120 days out).

We track your ‘gogo factor’, which determines how much we promote you.

We take a % of the fee you raise: If you hit your goal, we charge you 4%. We charge you 9% if you don’t hit your goal. This motivates you to hit the goal.

20% of your campaign money will typically come from strangers.

Have a good pitch, be proactive, have a communications strategy.

Have done 13,000 campaigns.

Q: How does transparency play into your market?

ROSE:

Transparency increases your success in fundraising

SMITH:

We’ve brought more transparency to all our markets, but we’re doing it in a very measured way, so that the companies don’t get scared off.

Everyone in the startup world wants data about the other players, but doesn’t want to share their private data

Q: What are next stages?

GARCIA: All of these markets show that these transactions can happen in a safe & controlled way. We’ve been trained to think you need a big bank as intermediary, but it’s demonstrably not true.

We could expand to mortgages, insurance.

SMITH:

When the crash came, a lot of liquid markets suddenly became illiquid. People became very scared of something illiquid.

Q: Can SecondMarket be a vehicle for all of the other players on this panel?

SMITH: Historically, we formed our markets from scratch. In next 12 months, we have an initiative, SecondMarket Nexus. This will turn us into a nexus for all alternative investments. We’re a metamarket. We’ll get you into anything that is non-exchange-traded: wine, art, loans, etc. Only a minority of all the markets we offer will be run by SecondMarket.

RUBIN:

We’re toolmakers. None of these ideas are new: we’re just making them non-local, automated, easy.

ROSE:

Globalization and democratization of access.

I run the finance & entrepreneurship track at Singularity University; go out to CA to teach there.

Our internal modeling is based on 100m entrepreneurs

RUBIN:

Sample story about internationalization: Indiegogo is based in SF. We have a client who created a campaign to do a movie about the last record store in England. One of the perks: for $2,000 you could be an Associate Producer of the mo
vie. A guy in NC bought that perk for his brother in Iraq.

RUBIN:

We think the market will get more educated about the way they can use these tools.

We do 100s of A/B tests every day to see what gets you more money.

When you press ‘how much do you want to contribute’ on indiegogo, if we say, ‘the average amount contributed is $____”. You get a lot more $ if you can share that statistic. So we do that all the time.

ROSE:

All of us are very new. The number of people we can pull in is much much greater, using social media. Average $ invested per transaction will accordingly drop.

Average arms-length angel deal is $25K now; that will drop to as low as a few thousand.

Average time to exit of any kind is 9 years.

Matt O. Brimer:

What is future of startup investing?

RUBIN:

27m small businesses start every year in the US

Indiegogo is like America: equal opportunity, unequal results.

GARCIA:

About 10% of our loans are for small businesses

We currently have a $25K limit on our loans (self-imposed).

ROSE:

Sea change going on in access/globalization

I’m going to do a blog post/book about ‘reintermediation’.

Q: how can you get angels to update their investment info?

ROSE:

We’ve been working with angel groups to date, as a way of getting to angels, who are historically very low profile.

In Q1, we’ll come out with tools for individual investors/entrepreneurs.

Teten:

Investors like the fact that you lower origination costs; you give them more investing options at a lower cost. However, that implies that the expected return on your platform is lower than the expected return on less liquid markets. How do you balance that tension?

ROSE:

In a perfect market, there’s no profit.

The differentiation will always be shrinking. Democratization of capital will have a much larger effect.

Ex: when trading world moved to decimals instead of 1/16th, that got rid of a big profit margin for a lot of people.

SMITH:

We bring efficiency/more players.

Buyers always think they’re the top-quartile player, so they like our system.

GARCIA:

The financial crisis created a perfect storm for us.

ROSE:

150 people have tried to do what we’re doing, and failed.

We now have >150,000 people on the platform.

We spent 6 years doing nothing but marketing.

RUBIN:

We didn’t spend a dollar on marketing for 1st two years. Our campaigners do all the marketing for us, because they’re highly motivated.

The biggest challenge on the net is user experience.

Indiegogo wouldn’t exist without social media.

A solicitation email gets you more $ per email opened than a Facebook message (today).

SMITH:
We didn’t pursue carbon credits because it was clear that some very big players were already in that market. In fact, that led us to SecondMarket Nexus.

Regulation isn’t bad; bad regulation is bad.

GARCIA:

We don’t allow just anyone to get a loan. You have to have a good credit history to get a loan on our site.

SMITH:

We have the most interest from HNW individuals, but most transactions that close are bought by institutions

Avg. transaction size for private cos. : $2m

For some other markets, it’s $5-10m.

GARCIA:

90% of our buyers are retail, with account values of ~$150K

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