How to fund that next round of expansion is an almost inevitable challenge faced by the vast majority of growth companies. The support of ‘friends and family’ has likely been exhausted even if borrowings have been repaid and regardless of the health of the cash flow, once it comes to finding that critical seven or eight-figure sum, difficult choices have to be made.
Handing over a large slab of hard-earned equity to an investor, who is in turn likely to take an ‘active interest in your business and management style has the potential to be a hugely fruitful collaboration – although for many entrepreneurial founders, this could prove to be a significant constraint on their own ambition.
Another option on the agenda is debt and although benchmark interest rates still sit at historical lows, bank risk managers are unlikely to look terribly sympathetically at this sort of proposition. That means either opting to post significant collateral to underwrite a loan, being saddled with a high-interest rate and a series of punitive covenants to match, or even looking at the complex task of issuing bonds. Many businesses have had to make these tough calls and although some have succeeded, questions have to be asked as to at what price – and how many have been suffocated by these constraints?
There is however a third option on offer to growth companies, allowing them to tap into the potential of institutional, sophisticated, and managed capital, not only to raise funds but also to see a secondary market exist in their securities, be they debt or equity. This isn’t a wholly new construct, but by tapping into the latest technology, processes, and regulations, CrowdX has developed a formula that offers companies the ability to grow or reorganise their cap table, whilst being accessible to all.
To that extent, we’ve built a structure that replicates what any listed company enjoys – albeit without many of the more arduous and expensive elements. Automated valuation tools and integration with the latest accounting software then supports the credibility of the offering alongside an ESG rating and carbon reporting metrics. All issuers are still subject to listing requirements and public scrutiny of their performance, but can now raise equity without the risk of being beholden to a dominant shareholder.
Any raise can be tailored to individual issuer requirements and executed in the most appropriate format. Conversely, investors get the opportunity to support one or more businesses they truly believe in. What’s more, the presence of an active secondary market fuelled by multiple API connections for sources of liquidity means that we can provide a truly differentiated proposition here, something that is often demanded by those who invested at the outset and provides an added draw for including early-stage investments in a diversified portfolio.
Historically, founders have too often been caught between a rock and a hard place. Either they were obliged to hand over control of much of their business to third parties in an equity sale, or left hamstrung by expensive borrowing and restrictive covenants. CrowdX wants to ensure growth companies of any size can tap into a vibrant market, providing benefits for issuers and investors alike, thus ensuring that the public market can always serve the public good.
Early investors in a start-up, growth and scale-up (SG&S) businesses are the heroes of our businesses: they take a chance on the founders and their vision. Crowdfunding allows many people, or entities, to invest in and support SG&S businesses, often with no known exit method. It is widely agreed that a secondary market is the natural and essential evolution of the market. A secondary market is becoming increasingly important for the investor, but what about for the company raising the money? Why should they allow their stock to be transacted on after the initial raise?
Firstly, to address a concern which some firms face; is the public nature of having your firm’s equity tradable. By doing a crowdfund, a business already moves into the public domain. Investors have paid their money across to a business they believe in, and the investors want to realise a return on their investment. As a result, the investors are well within their rights to seek information on the progress of the business and their investment. Being in the public eye is not for all companies, but it is a powerful manner in which to engage customers in the brand and generate required growth capital to help build the business. Below are some of the advantages of listing on CrowdX:
1. Capital and process efficiencies
Over and above the engagement with investors, by having a company’s equity traded in a secondary market, the business should gain some major capital and process efficiencies. The management of corporate action like dividend payments, share splits, buybacks and other events in a growing company’s life are taken care of by the operating marketplace. Processes for awarding and incentivising staff and other key stakeholders becomes possible in a fair, transparent and simple manner.
2. Fair valuation method
By having a method of valuation, driven by supply and demand, a business positions itself well for further investments, either through future crowdfunding raises or through Venture Capital (VC) or Private Equity (PE) partners. CrowdX works with the firms that will be undergoing an additional funding round to ensure there is no price manipulation prior to a new funding round.
3. Larger initial capital raises
Notifying potential investors during the crowdfunding round that they will be able to sell all or portions of their positions should result in larger capital raises. There is value in the ability to take partial or full profits at a convenient time and investors should be pricing this into their investment hypothesis.
4. Future negotiating leverage
VC and PE firms and angel investors have, for many years, been able to operate from a position of strength. They hold the money and have experienced teams that are able to negotiate what they want out of a deal. Having the equity of a firm tradable on a secondary market levels the playing field and positions the business with a valuation which is undisputed and can be used by the firm as leverage in a negotiation at a future point.
5. Staff and shareholder incentivisation
Furthermore, businesses which allow the transacting of their equity on a secondary market create an incentive for their staff and other shareholders by providing a valuation and a means of converting what is often earned as ‘sweat equity’ into real cash. Sweat equity is the non-monetary investment that owners or employees contribute to a business venture. Startups and entrepreneurs often use this form of capital to fund their businesses, by compensating their employees with stock rather than cash.
CrowdX will soon offer initial raises and secondary raises for growth companies. A retail investor can’t trade directly through our platform, but that investor can trade on our platform through their broker. If you wish to list your firm, please contact us.