We need more heroes!

 "Entrepreneurs are the true heroes in a free enterprise society, driving progress in business, society and the world". Conscious Capitalism - John Mackey and Raj Sisodia.

These heroes undertake risky voyages of discovery which they bravely navigate with great skill, and sometimes resulting in abject failure. Indeed up to 90% of all startups fail to find land.

After conceiving of their journey, the first resource every one of these heroes needs access to is funding. Funding to get things done. Funding levels to make things happen fast! Funding levels that compensate for some level of (smaller) failures along the way. The number 2 global reason that these voyages impale themselves on rocks is the lack of finance when they need it.

Investment in early stage ideas is not like getting a bank loan. These are high risk voyages of discovery. Taking new ideas to market is about trying new things, doing things in a new way, being disruptive and being exposed to the full volatility of the market forces that surround a status quo or change in behaviour. They do not have reliable predictions for revenue or cost lines. Any financial model does not stand up well to rigorous dissection.

You can try to analyse the potential of a new idea, but until it's given a run at the market the simple truth is that you never know how it's going to work.

Building a successful ecosystem starts with building a density of early stage ideas. The more the merrier! If 9 out of 10 will fail, you can't get traction if only 4 ideas are funded in 12 months. 400+ ideas and the ecosystem is starting to go somewhere.

At this stage in its evolution, Portugal needs more seed funding. Lots more. 10x! 100x! Keep on climbing. Web Summit will be a catalyst for many to look here. But when they look they will not throw in money regardless, they will respond to the grow curve and potential future growth curve of the ecosystem.

To accelerate the local market from its current standing we need not just local entrepreneurs but foreign ones to come here and give their idea a run. We need more heroes!

Costs are lower in Portugal. Salaries and space are a fraction of London, Berlin or San Francisco. Lifestyle, nurtured by a temperate climate, is also a huge factor. So is the rich vein of the highly skilled work force - that loves being in Portugal - but that is currently unemployed. These are all very attractive considerations. 

But what will these visitors make of the investment regime? Tax on investments, and their respective gains, is comparatively high and it means the domestic investment market has a conservative bias. Lower valuations and less investments at early stages are therefore the norm.

Given these factors, foreign investors will most likely look to domicile the company in a more favourable territory rather than expose themselves to an inefficient dynamic in their portfolio.

To speed up the investment framework for early stage ideas, the model of crowdfunding is being embraced. After a staggered start, the government is now looking to launch the framework which will enable regulation of this market in Portugal and this part of recent announcement is warmly welcomed.

In case you haven't read much about it yet, at a basic level there are two types of crowdfunding - equity and rewards. These are covered in more detail in a previous blog post.

The world leading market for equity crowdfunding is the UK. This is already regulated by the FCA and is growing strongly. The top two platforms - Seedrs and Crowdcube have raised over £300M for British businesses between them in the last 5 years.

Most importantly, they are doing it fast! The world record now stand at 1M in 96 seconds on the Crowdcube platform.  

This has been fuelled , in part, by forward thinking tax legislation. In the UK, the SEIS (Seed Enterprise Investment Scheme) regulation enables up to 150K to be raised for early stage ideas. For each investor they receive 50% tax relief on the investment as it is made. They also (subject to a few conditions) receive 100% tax relief on the capital gain upon exit. If the company fails, the investor is then able to investor is then able to write off the remaining 50% of the investment in their next tax return.

The market is showing that investments of this type are successful, with two case study exits already available showing positive returns for investors in the last 6 months.

Everyone can get involved. Sophisticated or otherwise, an investment under this banner is worth a go particularly on the backdrop of such low interest rates on deposits provided by UK banks. 

The amounts are increasing. No longer just the scene for seed funding, the equity platforms are raising at multi million pound levels for companies such as Just Park. This model is now disrupting series A investment and helping to compensate for the series A 'crunch' that is felt globally.

So is the power of crowdfunding that it taps into unused investment sources? Or is it the speed to raise cash? Or is it the ability to find investors more easily through these aggregation points? Or is the true power in reducing the overall overhead of raising funds and the negotiation with angels - a historic pain point for many early stages investors?

It's all of those things, of course, but for me, the true power of crowdfunding is that it is democratic! It is a form of voting. It proves market fit for ideas very simply. With crowds of 150K+ involved in the investment evaluation, if there is not the appetite to fund then the idea isn't ready for the market. Simple! Fail fast!

This kind of feedback is good for our hero. This voyage has not left the port yet. Many lives have been saved. It's time to rethink and find a new reason to go to sea. This approach gnaws at the number 1 global reason for startup failure - that the market doesn't need or want the startup brings. 

Behind this democratic investment approach there is a hidden social impact of great significance - particularly important for a raising ecosystem. The trickle down effect. Not often considered by entrepreneurs, this is something that must be thought about early by governments and regulators as they build regulation, change tax regime and invest Euros in their local ecosystem. If they don't, their success will simply perpetuate the wealth of other regions.

Traditionally early stage investment is the exclusive purview of sophisticated, high net worth individuals. They can 'afford to take the chance' and feel that they understand what they are getting in to. When the rewards come, they are then received by the few. In a world where the divide of wealth has never been greater, this is an illogical trend to perpetuate.

When a wide range of people (including retail investors) get involved with equity crowdfunding they all have a chance to share in the ultimate rewards of any success. Typically a seed raise of 200K Euros will involve around 150 people. Should that new startup go on to sell for $100M+ then the trickle down to the economy through that group will be significant. 

As the true heroes of a free enterprise society, entrepreneurs are bringing about change that infuse new flavours to our world every day. Think about the impact to our society of ideas like the iPhone, the microwave, Uber and Facebook. Look at the different filters with which digital natives view the world compared to a member of the baby boomer generation. Simply startling. 

What needs to wrap around future innovations is democratic thinking to ensure that successful ecosystems are engaging for a large, diverse group of people. Such thinking will reduce startup failures and maximise the social impact from startup success.   

With this kind of thinking we will encourage a surge of new heroes and they will have the opportunity to shape the new world. With such tools at their disposal they may also have the chance to slay a dragon and rescue a damsel in distress along the way. 


Stewart Noakes


(image borrowed from here)