October 26, 2015

Crowdfunding Matrix


The Crowdfunding industry has grown from $16 billion in 2014 to an estimated $34 billion in 2015. However, many still wonder, what is Crowdfunding? Crowdfunding is the practice of funding a project by raising contributions from a large number of people, typically via the Internet. The market is flooded with various types of Crowdfunding options like donation, reward, lending, equity, royalty, and even hybrid versions.

The two most popular types of Crowdfunding methods are Reward and Equity. For Rewards based Crowdfunding, entrepreneurs pre-sell a product or service to launch a business, and some times even in return for gifts or thank you notes. E.g. Pebble Technology Corporation used Kickstarter to raise $10.3 million in order to develop the Pebble smart watch and pre-sold it to contributors.

For Equity Crowdfunding, the backer receives share of a company, usually in exchange of the money pledged. E.g. Neil Young used Crowdfunder to raise over $6 million in order to continue development on PonoMusic. In case of NIN.VC, it would be limited partner interest in the NIN Ventures Technology (QP) Fund.

So what is the difference between direct investing in a company using a Crowdfunding portal and NIN.VC?

01. Diversification
As a fund NIN Ventures Technology (QP) Fund makes multiple investments in companies in different sectors (i.e. 3D Printing, Cloud Computing, Education Software, etc.) during Series A and / or B financing, this strategy helps diversify the fund’s portfolio, which is not the case when one invests in a company directly. Think of it as investing in a Mutual Fund vs. Stock.

02. Low Risk
Given the diverse portfolio the fund reduces it’s risk, where as direct investing in a company exposes that investment to higher degree of risk, an appropriate analogy would be to put all your eggs in one basket.

A logical follow up argument would be, what if one makes multiple direct investments in companies of their choice using a Crowdfunding portal over investing in NIN.VC? Given 90% of the startups fail, even if one invests in several companies via a Crowdfunding portal, it becomes solely a numbers game i.e. Quantity over Quality. On the other hand the fund management invests in an Entrepreneur because Entrepreneurs build companies and not the other way round. We (NIN.VC or any venture fund) not only provide adequate financing (including follow up financing rounds and access to our syndicate partners), but also lend our domain expertise and network of partners to help companies with recruitment, PR and marketing, and a viable exit strategy. 

03. Professional Management
Direct investing in a company requires time, expertise, due diligence, constant follow up and / or monitoring. On the other hand NIN.VC acts like a financial advisor and works for the investor and in the fund’s best interest. The fund also provides quarterly audited financial statements to the investor on the progress at the fund.

04. Board Representation
A $1,000 direct investment in a company using a Crowdfunding portal does not give an individual enough rights, while as a fund we take board seat on all our investments. Thus we are in the loop with the company management when it comes to keeping tabs on the progress at the company and are in a position to help / make suggestions on several occasions. And also in a position to gauge and be a part of the valuation process when it comes to addressing dilution and follow up financing rounds. 

05. Liquidity at Exit
When one invests in the NIN Ventures Technology (QP) Fund, they are locked in with the fund and the management for a good 10 (+2) years. Redemptions are extremely rare and liquidity happens as and when the fund makes an exit in a company via an IPO or M&A transaction. On the other hand direct investment in a company can be offered in the secondary market for a transfer of ownership, but valuation, timing, and the choice of investment will dictate that transaction.