We’ve spent a fair amount of time discussing and dissecting crowdfunding herein. I’ve written more than a few posts about it, and we’ve reviewed the topic with guys we trust.
Dan Faiman spoke to us about it briefly in Tech Geekery and Tech Geekery – Part II. Jeff Bone gave us some pointers in Angels, Incubators, Venture Capital and Crowdfunding, and John Robb touched on it briefly in Urban Guerilla to Rural Resiliency.
Today we’ll get it straight from the horse’s mouth, with a guy who is right in there making stuff happen. We’re having a conversation with Nick Bhargava, the CEO of Motaavi, one of the first-movers, and an innovator in the crowdfunding space.
As you’ll see, Motaavi co-founder Melanie Plageman was instrumental in helping to shape some of the crowdfunding points in the JOBS Act, so Nick and his partners are uniquely qualified to give us their insights… Enjoy!
Mark: Nick, you co-founded Motaavi with 3 other friends. How was the idea for a crowdfunding site conceived? What was your motivation to get into the space?
Nick: Alex, Kaiting, and Melanie had been working on this idea for a year before I joined in September 2011. The problems they saw can be summarized as such: how can we get startups and high growth companies funded more efficiently? How do you deal with the inherent illiquidity of any equity you own in these small private companies?
They began working on a technology platform to solve these problems. The obvious first application was crowdfunding. Unfortunately, at that time, US securities laws effectively precluded crowdfunding. The JOBS Act provided a broad reformation of many of these laws, and when we saw the House pass crowdfunding legislation in November of 2011, we immediately focused our efforts on lobbying to get crowdfunding passed into law.
Our motivation is to make it easier for startups and small, high growth private companies to access capital. Startup founders have to spend a huge amount of resources getting funded, and capital only exists in disparate pockets.
Many companies which may potentially be very successful nevertheless fail to bridge the “funding gap” that exists when a company is in its earliest growth stages. Moreover, in trying to bridge the gap, startup founders frequently are presented with unfavorable investment terms. We think providing one place, where anyone can be a provider of capital, is the optimal solution.
Mark: Melanie (Plageman) actually moved to DC in November, right after hearing of the JOBS Act to head up your lobbying efforts. That was a pretty bold move for a young person with no political experience. Did she draw the short straw? She did pretty well it seems!
Nick: Melanie did a fantastic job in DC. She’s pretty fearless and a relentless networker. She made it work because she made the process her own. We didn’t have any kind of budget to hire professional lobbyists.
Our approach was to establish personal relationships with legislators and get them to understand that we really know the issues in this space and care about good outcomes. People in DC became very receptive to our ideas and were willing to give us their time. It was very humbling. Many of our ideas are reflected in the final piece of legislation.
It was crucial to get involved in the legislative process. It determined whether or not our business would even be legal. Many startups don’t realize that their business is impacted by regulation in some form, and a result, never become politically active when it might actually benefit them.
Mark: Nick, I’ve written a bit about crowdfunding, and most of our audience is pretty familiar with the way it works. The space is going to get ‘crowded’ (pun intended) quickly. How is Motaavi going to differentiate itself?
Nick: Great question. Crowdfunding intermediaries are coming out of the wood works now that the laws have been reformed. We think there will be a shakeout within the first year of transactions commencing. Not to sound petty, but a lot of the people who claim to be in this space don’t seem to have any idea about how to make this a sustainable business.
We’re differentiating ourselves in two ways.
First, we’re focused on what we like to call “exponential growth companies” in the areas of technology, life sciences, and energy. This is also a reflection of our respective backgrounds and being located in North Carolina’s Research Triangle Park.
We want companies that scale very quickly and have good exit potential, whether acquisition or VC investment. We understand how the broader private company financing space works, and are committed to making sure crowdfunded companies are in the best position to receive future investment as their capital needs grow. If the company wins, the crowdfunding investors will win.
Second, our own technology sets us apart. We have patent pending tech that allows us to create very robust markets for crowdfunded and private company securities. If you are a crowdfunding investor, you will have access to a market for any issuer that offers through us.
Mark: That second point is really the crux of the matter in my opinion. For crowdfunding to be successful there has to be liquidity for the investors and issuers.
Mark: I’m pretty familiar with the public markets, specifically with reverse mergers, filings, private placements, etc. Most of the time the deals are legit, but you see a lot of scumbags floating around, preying off of startups and small companies in general.
One of the main concerns with crowdfunding is potential fraud. Although there is still a lot of regulation applicable in the new law, fraudsters are a creative lot! How are you guys dealing with protecting your users? How about protecting Motaavi – as the platform will bear a lot of the risk it seems..?
Nick: That’s correct, there is still a lot of regulation in place to provide investors with disclosures and to place liability on issuers for misstatements or omissions.
Our own platform aims to to be as transparent as possible. The idea is that issuer disclosures, investor interaction, and market activity can be easily tracked to provide any individual investor with complete information. For any relevant issuer, the information you need as an investor will not exist in “pockets,” but in one central place. This includes what other investors are saying about the issuer. We want there to be a discourse around offerings. In this way we can truly create an environment that fosters the “social proof” that has been attributed to crowdfunding.
The legal risk we face as an intermediary is similar to what a broker-dealer faces. It can be readily managed through the same processes and procedures which BDs have employed for years.
Mark: Of course, that makes perfect sense.
What about liquidity? That’s a major hurdle for investors in private equity. Are you looking at assisting the issuers or providing liquidity for their stock in any way, or are you leaving it up to participants, both issuers and investors, to work out terms?
Nick: As you can probably guess from my earlier responses, we are providing a market to access liquidity for crowdfunded and private company shares. Issuers and investors will not be left to their own devices.
We have a very real, very usable market where you can access liquidity, even in inherently illiquid environments, while still finding good prices. This is no small undertaking, as it took a long time to figure out how to make a market that works. The crowdfunding legislation actually gives issuers a lot of flexibility in their offering, including what terms attach to the securities. We have taken this all into account.
Mark: Do you put any restrictions on offerings? Things such as enforcing existing legislation… or will you be leaving that up to issuers to decipher and abide by on their own?
Nick: We will put only those restrictions on our offerings that we think will enhance the safety and soundness of our market. We do have to ensure that the statutory requirements are met. Issuers are not left on their own to figure out how to structure the offerings. Though issuers can tailor an offering to suit their needs, the options and features are thoroughly explained in the issuer facing portions of our platform.
Mark: OK. let’s cut to the chase with the question on everyone’s mind – how are you guys going to make money? My interpretation of the law is that portals like Motaavi cannot charge issuers or investors. This is the question I get asked most by those interested in the space… You guys aren’t philanthropists, so what’s
the business model?
Nick: We will be operating as broker-dealers and taking transaction-based compensation. If you look at the fee schedule of most discount broker-dealers, you’ll get an idea of what it costs to transact with us.
Mark: Short and sweet answer. Given that you’ll be new competition in what’s already an incredibly competitive space, what’s the brokerage community feedback to Motaavi thus far?
Nick: Most broker-dealers seem content to watch on the sidelines and see what innovation develops in this space before deciding how they want to participate in crowdfunding. That being said, when we do have conversations with broker-dealers about our particular solution, the responses have been positive.
Mark: Have you been approached by traditional VC’s and PE firms to work with them? I can imagine some of these guys wanting to get a ‘first-look’ so to speak at specific types of opportunities.
Nick: Yup! That’s all I can say about this for now (laughs and smiles).
Mark: Well, we will have to take that conversation up again at a later date then!
Nick: Of course!
Mark: OK, so take us through the process of becoming an issuer on Motaavi.
Nick: To become an issuer on Motaavi you must first register a profile with us.
The user experience is similar to many social networking sites. You will have to provide basic information about who you are, your company, details of your incorporation, details about your basic business model, and the kind of raise you are looking to do. You will also be asked for more specific information in order for us to do a background check.
From there, you will be asked to complete a formal listing profile which includes the statutorily required disclosures, such as the issuer’s financial condition, business plan, use of funds, and more complete details of the offering. You must also determine what it is you are offering and at what price.
Once the statutorily required disclosures are met, your profile goes live to potential investors. You give people notice about your offering and begin interacting with the crowd, addressing any issues they bring up. It is an iterative process. Once the amount the issuer seeks has been fully committed, the offering may close.
Mark: How about the investor, what do they need to provide?
Nick: Again, the analog is registering for a social networking site.
Naturally, the requirements are much less detailed. However, an investor must provide his or her actual contact information and must indicate his or her annual income or net worth. This is because investors are limited in how much they can invest in crowdfunded companies in a 12-month period based on their income/net worth.
Once an investor has supplied that information they are given a profile page through which they can interact with issuers and other investors.
Mark: You touched on your issuer target market a moment ago. Can you elaborate a bit more?
Nick: We are focused on tech, life sciences, and energy. We understand the unique needs these issuers have. They are typically capital intensive and have some IP at their core. They are looking to do a larger raise.
We are focused on this segment because members of our founding team have worked in these kinds of companies in the past. We think we are in a unique position to help them and that our solution is particularly valuable to them because of the potential for investors in such companies to desire a secondary market, or for the company itself to pursue another round of funding.
Mark: I’ve heard a lot about how great the work environment is at Motaavi. It has to be exciting, as this is really a brand new space you are playing in, and you have a chance to be an instrumental part of it. What’s it like for you and your staff on a daily basis right now?
Nick: We are based in Durham, NC, part of North Carolina’s Research Triangle Park. It’s an area well known for entrepreneurship and there is a burgeoning startup scene here. It’s very refreshing.
We work in a building which houses many startups and we are constantly surrounded by creative people with unique ideas. It greatly helps us understand who our customers are and what we need to do to better serve them. I don’t think we could be doing this in any other kind of environment.
Though we have doubled down on development now, we still spend a great deal of time speaking to potential issuers and investors in this space. We learn something new with every conversation and that helps us create a better product. Though risky, it’s hard to beat the dynamic nature of being an entrepreneur.
Mark: You won’t find an argument from us on that point Nick! Thanks for taking the time to brief our readers, we know you’re super-busy right now.
Nick: You’re welcome. I look forward to future dialogs.
That interview helped answer a few questions that our readers have hit us with regarding crowdfunding.
Clearly Nick and his team have a good understanding of the market and a plan to monetize the opportunity.
Chris and I have invested some time and resources into an incubator that is involved with a crowdfunding technology platform. We’re pretty excited about it for many of the same reasons Nick and his team are.
We’ll revisit this topic periodically herein.
“We need to modernize and tweak outdated rules to allow Americans to invest in promising small businesses. Access to capital is becoming much more difficult and we need to identify and develop effective and modern ways for entrepreneurs to connect with potential funders.” – SBE Council President & CEO Karen Kerrigan