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Tuesday, June 5, 2012

Two may be company. Three or more may make a paying crowd


We had a chat some time ago in my office about what banks could do to shore up potentially interesting early-stage technology projects in Russia which failed to get angel investors on board. Certainly, no matter how developed a business angel community may become in a Russian region, there will always be less angels than innovators that seek funds to avoid their ‘valley of death.’ To tell you the truth, I’m skeptical about the Russian banks in this context; but not about some unorthodox ways of helping innovators.
     
Personally I don’t think banks are going to change very quickly in Russia because I don’t believe that the Central Bank rules are very conducive to small business enterprise. Until those rules are dramatically changed to encourage the diversification of banking resources, which are competing against each other to get good clients from SMEs, I don’t expect banks to lead any changes in this country themselves. This will only be led when the laws and regulations guiding the Central Bank are dramatically altered to focus on small and medium-sized business development.

In the meantime, however, let’s look at international economies. We can look at examples in the United States.

Kickstarter.com is an American start-up only probably two years old. This is a website which uses crowdsourcing and crowdfinancing to help raise small amounts of money for small early-stage technology and IT projects. It started out just helping musicians raise money to make an album.

But just over a month ago there was a great milestone for Kickstarter when a project called Pebble Watch was launched and their goal was within two weeks to raise $100,000. But the community of social networks of young start-up innovators across the United States—there are millions of such people—saw this product idea, they saw the background of the people, they read their business plan that was offered on Kickstarter.com, and they were shocked: it’s a great idea!

And after an hour the company founders—who only wanted to raise a hundred thousand so they could make a prototype for the idea and had allocated two weeks to raise this amount, according to the rules of Kickstarter—had $100,000 contributed to this project!

These guys from Kickstarter in New York went out to celebrate and got a beer at a local pub. They came back later that night and checked their website—they’d raised over $500,000 by midnight. Within 24 hours they raised a million dollars; within a week they raised more than $5m, expecting to top out at about $10m in the end to make their Watch. So, instead of just making a prototype and trying to find a strategic investor they now have the money to build the factory.

And what does Kickstarter do?

Kickstarter gets a 5% commission. So if they’d raised $100,000 Kickstarter as a company would have $5,000; but since they raised up to $10m, they got a $500,000 commission on that!

A new angel-friendly business model

As I said earlier, I don’t think banks are in any way in Russia ready to compete against each other for SME clients. Kickstarter is a new business model which raises money from crowds. I think this is the mechanism which is going to help Russian innovators. And I think this is the mechanism which is exactly going to help reduce the risk barriers for Russian business angel investors because I believe angels will look at projects that are able to raise money at the initial start-up phase from crowdsourcing and that will prove that the risk is lower on those projects.

For every 20 projects that go live on Kickstarter probably more than half fail and don’t raise the money; maybe the statistics is even worse. But who does raise money proves that the market likes that project idea. And this is the key indicator to reduce the risk for angel investors.

I believe this will be a fundamental factor which will increase the flow of angel investors coming into the market in Russia, and angels will join forces together with organizations like that US company called Kickstarter. From my standpoint, I absolutely believe this market is going to evolve extremely rapidly within the next 36 months.

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