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Raising Capital: Alternative Sources

Discover the decline in IPOs and public companies and explore alternative sources for raising capital such as fintech lending and crowdfunding.

jamesralvarado
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Raising Capital: Alternative Sources

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  1. Raising Capital: Alternative Sources Sanjai Bhagat Provost Professor of FinanceUniversity of Colorado

  2. Decreasing Number of Public Companies in the U.S. In Any Given Industry: Winners Take All Source: Doidge et al (2018)

  3. Where have all the flowers gone

  4. Where Have All The IPOs Gone? Source: M. Lowry, R. Michaely, and E. Volkova (2017)

  5. Number of Start-ups that raised at least $150 M, 7 years after first round Source: Ewnes & Farre-Mensa (2018)

  6. Round up the usual suspects…

  7. Sabanes-Oxley Act 2002 Dodd-Frank Act 2010 Perhaps not … Decline in number of IPOs, and number of public companies long before 2002!

  8. NSMIA National Securities Market Improvement Act 1996 Federal pre-emption of states’ Blue Sky Laws Allows investors to raise unlimited amounts of capital from “accredited investors” Used extensively by Venture Capital and Private Equity firms Changes to Investment Company Act of 1940 Exempts from registration/disclosure private funds with 100 or fewer investors

  9. VC and non-VC capital to late-stage startups Source: Ewnes & Farre-Mensa (2018)

  10. New sheriffs in town…

  11. Diversified Private Equity Funds Historically in LBOs; Now in “growth-equity” investments Mutual Funds, Hedge Funds Historically, active IPO investors Now, investing in private VC-backed startups

  12. Non-VC investors in late-stage startups Source: Ewnes & Farre-Mensa (2018)

  13. Source: Chernenko et al (2017)

  14. Source: Chernenko et al (2017)

  15. Source: Chernenko et al (2017)

  16. Source: Chernenko et al (2017)

  17. New kid on the block?

  18. Regulation A+ offerings, or, Mini-IPOs; 2015-2016 SEC qualified 81 offerings: 62% had zero revenue; 73% had negative income

  19. Founders equity after first-round of VC financing Source: Ewnes & Farre-Mensa (2018)

  20. IPO Valuation • Positively related to post-IPO ownership of • CEO • VC • Officers and Directors • Other Blockholders • Negatively related to stock-sales during the IPO of • CEO • VC • Officers and Directors • Other Blockholders • AuditAnalytics (2018)

  21. Given, IPO Valuation is Positively related to post-IPO ownership Negatively related to stock-sales during the IPO Founders looking for equity capital should assure hedge-fund/mutual fund/private equity group: Founders will continue to own significant equity after the equity capital has been raised

  22. Traditional consumer lending based on credit score. • FinTech lending: Peer-to-Peer lending based on online platforms that connect individual borrowers with individual lenders. • Fintech lending considers alternative data • bank deposits and withdrawals • payment history (utility, phone, PayPal, Amazon) • insurance claims • social network • education and occupation

  23. Jagtiani-Lemieux (2018)

  24. Jagtiani-Lemieux (2018)

  25. Jagtiani-Lemieux (2018)

  26. Jagtiani-Lemieux (2018)

  27. Keeping default risk constant, LendingClub charges a lower interest rate than banks. LendingClub ratings are good predictors of future loan delinquency. Some consumers with low FICO scores are identified as low risk by LendingClub (using additional data), and get access to (more) credit. Traditional banks are incorporating credit analysis innovations. Some banks are partnering with fintech companies.

  28. Germany: Auxmoney (P2P) lending is increasing De Roure et al (2018)

  29. Germany: Auxmoney (P2P) lending has small market-share De Roure et al (2018)

  30. Germany: Auxmoney (P2P) interest rates are higher De Roure et al (2018)

  31. Germany: Auxmoney loans are riskier De Roure et al (2018)

  32. Germany: Auxmoney interest rate slightly higher than bank mid-term rate De Roure et al (2018)

  33. Crowdfunding Efforts by entrepreneurial individuals and groups (cultural, social, non-profit) to fund their ventures by drawing on relatively small contributions from a relatively large number of contributors using the internet, without standard financial intermediaries (VCs, investment bankers). Mollick-Kuppuswamy (2014)

  34. Crowdfunding Patronage/charity crowdfunding: Funders are like philanthropists supporting a humanitarian/art project. Lending-based crowdfunding: Funds are offered as a loan. Reward-based crowdfunding: Funders receive a reward for backing a project. Rewards: Credited in a movie Have creative input Opportunity to meet creators of the project Funders are early customers receiving better price/features. Equity crowdfunding: Popular in U.K., not so much in the U.S. (only allowed since 2016). Mollick-Kuppuswamy (2014)

  35. Lukkarinen et al (2016)

  36. Mollick-Kuppuswamy (2014)

  37. Mollick-Kuppuswamy (2014)

  38. Mollick-Kuppuswamy (2014)

  39. Mollick-Kuppuswamy (2014)

  40. Crowdfunding Success Factors Has title video Details (words and pictures) Updated (regular postings on project status by founder, preliminary results, project bumps-on-the-road being solved) Smaller pledging goal Number of backed projects by the founder Number of friends (on Facebook) Koch-Siering (2015)

  41. Equity Crowdfunding Success Factors Equity retention by entrepreneur Presence of an institutional investor (VC, angel, mutual/pension fund) Team quality (qualifications and experience) Team members in full-time commitment Information disclosure (updates, Q&A) Percentage funded in the first week Correia et al (2019)

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