29 Jul
2019
Opinion , Technology

Growing Businesses are Left Behind

George Nicholson

 

Here, we examine how TokenMarket is helping growing businesses to escape traditional means of financing, outlining how we’re creating a revolution.

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On average, 90% of startup businesses fail. Running a business is tough. There’s no doubt about it. It is a lot harder when you are trying to raise money to develop your company. For many entrepreneurs, there comes a point when they need to have that conversation and its one that many struggle with. Who do you go to? Will they reply? What other options do I have? It becomes something of a nightmare. 

Coupled with the fact that more emerging unicorns businesses are staying privately funded for longer than ever before, you can see why the average business simply doesn’t have the access to funds if they aren’t destined for unicorn status. 

For the average business and entrepreneur, they are not in a position ask or take in hundreds of millions or billions of pounds. There are several traditional methods which a growing business can turn to. Family offices, VCs, investment and development banks or listing on traditional or alternative equity markets to name just a few. And yet, it’s just not that simple to raise funds.

Here, we examine how TokenMarket is helping growing businesses to escape traditional means of financing, outlining how we’re creating a revolution.

Venture Capital

As with any business, having complete control over what direction the company is going in is important. For the most part, VCs help this by funding the project to carry on and progress as the founders want it to. These VCs can help Startups by offering the money they want with relative ease. Yet, this is not always the outcome.

As of December 2018, the global VC industry value was estimated to be around £124 billion, trebling its value from a decade prior. With this, VCs have funded thousands of businesses, placing more money in 2018 than at any point in history. Funds such as Masayoshi Son’s SoftBank have an estimated$100 billion to spend on projects in the future. For now, it seems as though VCs will have the largest stake in the future of growing businesses.

One of the issues that have come to light with VC firms is startup business having to give away a large percentage of equity at a lower rate. In a recent research paper by TokenMarket’s Head of Research, Jay Pazos, he estimated that VCs ask for a discount rate of anywhere from 40.6%-70% when it comes to funding an early stage business. For a business in its infancy, this puts them in an uncomfortable position. Although the VC is, of course, trying to get the business off the ground, it hinders the company growth by asking for such a large discount. 

As well as asking for such a high discount rate, VCs also try and claim a large stake in the business. On average, a VC will want around 20-25% of a new business, according to research carried out by Entrepreneur Magazine. For a growing business, this can be "make or break". 20-25% is a large percentage of the business, one that the team as a whole may not be willing to do. Although unlikely, a VC owning the business it has funded is not without precedent.

Furthermore, around 95% of all VC firms originated in the United States. However, as the startup revolution has continued to expand worldwide, the number of VC firms starting up shop worldwide has not. A European business asking for United States money can often be ignored and, more often than not, VC firms are only interested in the 1% of potential unicorns which approach them.

The True Cost of Going Public

IPOs are a long and lengthy process. Before the offering is even launched, the business must undergo a planning and preparation period which usually takes around 12-18 months to complete. If you are a business that requires funds sooner rather than later, this option is simply not viable. For some businesses, coupling the time in which it takes to carry out an IPO, as well as the cost involved, creates a problem.

One of the biggest issues that the IPO model faces is cost. According to PwC, in the United States, based on the public registration statements of 315 companies, “on average, companies incur an underwriter fee equal to 4-7% of gross proceeds, plus an additional $4.2 million of offering costs directly attributable to the IPO.” Companies who are looking to go public must also hire an investment bank; a necessity that is not cheap.

In the UK, capital markets are changing, but not by much. The Alternative Investment Market (AIM) offers a lower entry point that the traditional London Stock Exchange (LSE). For the AIM market, there is no minimum offering that you need to meet to list. However, there is an advised amount of between £10-20 million. This is to pay for the cost of £250,000-300,000 that occurs in going public.

At the LSE, the minimum required to list is £700,000-900,000 however, the reality is around £100 million. A minimum of 25% of all shares need to be in public hands, meaning that the business is giving away a lot more than they might necessarily want to. Businesses also have to prove that they have made a profit for three years, another requirement that many startups might not necessarily have.

Alternative Routes

Yet, there could be a change in the tide if crowdfunding continues to grow at its current rate. In 2015, the United States alone raised$34 billion in crowdfunding, a phenomenal amount of money for a financing route that is still new to the financial world. Crowdfunding has been able to revolutionise how businesses sell their equity. 

In 2017 and 2018, ICOs alone raised over $14 billion and saw a new lease of life given to the crypto community. In 2018, there were 1,253 ICOs carried out and more than 2,000 tech startups were able to use new technology and create a huge number of investors, something TokenMarket was at the forefront of. ICOs were truly revolutionary in the way businesses were allowed to raise funds. 

STOs will dramatically build upon this work.

The TokenMarket Route

At TokenMarket, we provide an alternative route to these traditional financing methods. For many of these businesses and entrepreneurs, there is a huge disparity in the numbers they need to have to even be looked at. “Going to a VC firm nowadays is like preparing for an exam” TokenMarket Head of Research, Jay Pazos states. “What we do is prepare the business from the very first day until they are ready to reach out to VCs, or use an alternative like the STO. We are teaching them how to approach deals and advise them on the correct way to do it.”

TokenMarket offers an all-in-one integrated service from start to finish, something that many advisory services do not. Also, we help businesses to utilise the STO framework to their advantage, bringing a dedicated community of over 170,000 investors to a growing project. We help to create a new route for seed A, B, through to Z investment. Having helped over 30 digital asset projects raise more than £240 million, we have a wealth of experience and proven technology that many other businesses do not.

What TokenMarket is enabling is a level of financial independence from current methods and drawbacks. We are helping those businesses and entrepreneurs who do not necessarily have a £100 million business in their control. TokenMarket is transforming how growing businesses are treated. We are helping to facilitate a potential trillion-dollar industry, working with the business at every step of the way.

With the news that Facebook backed Libra Foundation is now launching into the world of investments via security tokens, we feel that we are on the right track.


If you are looking to utilise the STO framework and would like to find out more information on TokenMarket's STO service, please visit https://tokenmarket.net/security-token-offering.