Neil Sequeira wants $40,000 (about Rs 20 lakh) to expand his business. The 31-yearold entrepreneur began BuzzFactory.net, a social media marketing solutions firm, in Pune last year.
He has a team of six, including a member in New Zealand, who works mostly out of home. BuzzFactory's objective is to promote online visibility for clients and cut through the clutter to reach their target audience. "We need funds for the next two or three years to increase our marketing capabilities," he says.
Since Sequeira is no stranger to start-ups-he has worked with several since 2000, including one headquartered in San Jose, California-the venture capital (VC) community is not unfamiliar to him. But a VC was not quite what the doctor had ordered for BuzzFactory.
"They were interested in the idea, but were keen to invest amounts more than my requirement," explains Sequeira.
"We are here to fix the traditionally opaque start-up funding system." JOUKO AHVENAINEN, |
Sequeira got in touch with Grow VC just when it was looking to recruit software developers and content managers for building its global portal. Today, BuzzFactory manages the online content for Grow and is also registered as an expert service provider on its global Website. For his funding requirement, Sequeira will enlist himself as a start-up to seek funding from Grow's Indian network.
Grow is based on the concept of crowdfunding, which enables entrepreneurs to tap into a stash that is created with contributions from virtual strangers. Thus, the Grow Website brings together start-ups, experts, investors and various other entities on a single platform. Along with funds, it offers tools and expert advice to startups. Since its commercial launch in February 2010, Grow has attracted 3,358 registered members, with a funder-tostart-up ratio of 55:45.
"We are adding 400 new members every month," says Jouko Ahvenainen, chairman of the Hong Kong-based Grow VC International. "Right now, we have tapped only the Internet-savvy people, but with more members and word-of-mouth publicity, the growth will be exponential," he adds.
For entrepreneurs who can make do with under a million dollars at the start, an online platform with a community-based approach to seed funding may be a more practical alternative than either venture capital or private equity.
Both VC and PE financing are complex and expensive. "It (VC and PE funding) is not optimal for startups. A combination of social networking and a marketplace helps in creating a positively disruptive platform," the Grow VC International chairman argues.
Ahvenainen should know-he has seed funded seven companies over the past nine years. Then, in 2008, he got together with Valto Loikkanen, now Grow's CEO, and began working on the social networking concept. The duo launched Grow's global portal in February this year after successfully rolling out its beta version in September last year.
Earlier, in August 2009, the Pune-headquartered IndiaCo Ventures, an investment management firm listed on the Bombay Stock Exchange, picked up a 4 per cent stake in Grow VC for an undisclosed amount.
"The model cannot be sustained only on an online platform." SATISH KATARIA, |
While you can register for free on the portal, you need to be a subscribed member to upload a startup profile or to access such profiles. The subscription fee varies from $20-140 (Rs 920-6,440) a month, depending on the amount of funding the start-up is keen to raise or the quantum of investment one is keen to make through the platform. Lawyers, accountants and consultants can also hop on to the platform for business opportunities.
The revenue model for Grow revolves around the subscription money that members pay, but there is a slight twist. Of the total amount that goes towards fees, 25 per cent is taken by Grow to recover administration costs and the rest is earmarked for the members to allocate to the start-ups of their choice listed in the network. This portion is held separately in a community investment pool, which now totals $12.75 million or about Rs 60 crore.
Investors in successful ventures get a share of the gains at the time of exit. This share is decided on the basis of level of involvement. For instance, the member who spots a start-up and invests first could get 10 times more than the one who is the last to invest. Here again, Grow takes away 25 per cent of the gains before distributing the balance among eligible investor members.
In a way, Grow has turned the VC/PE model on its head. While VCs/PEs look to have a smaller cut (2-3 per cent) of a larger investment pie, Grow takes a larger share (25 per cent) of a smaller investment pie. And as Ahvenainen points out: "We make money only if our members make money."
"This is a novel concept," says Jacob Mathew, managing director of Mape Advisory Group, a Mumbaibased investment banking outfit that works closely with private equity investors. Mathew points out that the social networking model works well for early-stage funding, which is not a viable area for an investment bank.
"The efforts that go into funding a start-up are no different from those involved in making a growth investment. The latter is, of course, more remunerative because of its larger ticket size," explains Mathew.
OFFLINE TRACTION
When the funding commitments to a particular start-up breach 110 per cent of its targeted requirement, the model moves offline. "Offline traction is essential because companies function in the real world," says Rahul Patwardhan, vice-chairman and MD, IndiaCo Ventures.
The founders of Grow realise the importance of an offline presence. They are planning to have four or five local partners across Grow VC's global network. In India, Grow has already roped in Mumbai-based Springboard Ventures, a start-up incubating firm, as a local partner. Springboard Ventures also offers mentoring services to start-ups, apart from investment management services for investors in the firm.
"The model cannot be sustained only on an online platform," says Satish Kataria, Springboard's managing director. "We have a lot to offer to both start-ups and investors," he adds.
While Grow is the first-of-itskind platform to facilitate funding for start-ups, there are similar online models that have been launched for entrepreneurs. Set up in November 2005, Kiva is the world's first online micro-lending platform. As of November 2009, Kiva had facilitated $100 million (Rs 460 crore) in loans, often small amounts, with the minimum amount loaned being $25.
"Venture capitalists were keen on the idea but wanted to NEIL SEQUEIRA, |
But how successful can this model be in creating sustainable businesses? "The main focus of social crowding is initiatives and projects, not necessarily launching new companies," says Donie Lochan, head, Asia-Pacific IT Practice, Bain & Company.
"The worry with crowdfunding is that it could lead to herd mentality and, therefore, investors could skip the analysis that goes into making an investment in a company," says Saurabh Srivastava, cofounder of Indian Angel Network, and chairman, India, CA Inc, a business software company.
Also, by nature, start-ups are high-risk investments, with nine out of 10 destined to fail. "The risk involved in being an entrepreneur and a business failure does not go away," admits Ahvenainen.
Another problem is the prospect of business plans being copied. Start-ups have to be careful to reveal only enough to get investors interested in the project. Revealing too much can run the risk of their plan being hijacked.
Yet another worry is that as smart ideas will always find avenues for funding, there is the danger of only leftovers subscribing to such platforms for investments.
Yet, Grow's power lies in the platform. "The concept of socially validating a business idea will certainly alter the way investments find their way into start-ups," says Patwardhan.
"Social networking has already changed the way people behave. We are here to fix the traditionally opaque and mysterious start-up funding system, as the next big thing is out there and shouldn't slip away into the cracks," adds Ahvenainen.
BuzzFactory's Sequeira agrees. "These $5-20 investments can help start-ups like ours, which are looking for smaller funding to reach the next level," he says.
