'Blockbuster' Finance And Equity Crowdfunding

Posted: Dec 23 2013, 10:16am CST | by


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'Blockbuster' Finance and Equity Crowdfunding
Photo Credit: Forbes

“I’ve been frankly confused by this fascination that everybody has with Netflix …Netflix doesn’t really have or do anything that we can’t or don’t already do ourselves.”

When Blockbuster Inc. CEO Jim Keyes provided the bulletin board material above in a 2008 interview, he had no idea that just over two years later, Blockbuster would file for Chapter 11 bankruptcy, and less than one year after that, Blockbuster would sell off its remaining assets, marking a stunningly swift fall from grace for the company that was synonymous with movie rentals and whose market cap was over $5 billion in 2002.

It took Netflix 12 years from launch to Blockbuster bankruptcy. Borders Group, which once employed nearly 20,000 people, won court approval to liquidate in 2011, 16 years after the launch of Amazon. In 2006, Tower Records files for Chapter 11 for the second time, with its final stores shuttered late that year, just three years after Apple launched the iTunes Music Store.

Blockbuster, Borders and Tower Records’ failures all share a common theme: each company was too slow to respond to disruptive innovation in their industries, and the innovators

(Netflix, Amazon, iTunes) ultimately delivered a better product at lower prices with a significantly better user experience.

So why am I bringing up these stories of disruptive innovation? Because I believe equity crowdfunding will be the Netflix to the “Blockbuster” that are traditional investment banks. When companies set out to raise money through traditional investment banks, they find a process that is incredibly inconvenient (road shows that require the executive team to take their eye off the business), expensive and inefficient (how many investors can one company possibly meet with)? And therein is the problem with “Blockbuster” finance, it is the Blockbuster model —inconvenient (driving to the video store), expensive (late fees, anyone?) and inefficient (how many movie titles can one brick & mortar retailer hold)—applied to capital raises.

Contrast this to equity crowdfunding, which is convenient (the management team never has to travel around the country to meet with potential investors), less expensive and more efficient (one company can access thousands of investors on CircleUp). Critics of equity crowdfunding will scoff at the notion that crowdfunding could disrupt finance on the scale of Netflix-Blockbuster. They’ll say that investment banks add more value to both companies and investors, that these companies will be the lowest quality companies, and the investors will be unsophisticated and exposed to fraud.I believe online capital raises, such as what you find on CircleUp, are  a better solution for both investors and companies.  Companies can help decide who sees their information and who is able to invest, helping the company to decide which investors may add  value.  They also have access to templates and third party data sources, including third party growth and valuation data, that typically exceeds what most investment banks have.  Some of the best equity crowdfunding sites also have created other ways to add value to those companies that raise capital on their platform.  In CircleUp’s case we have partnerships with world renown companies like General Mills, P&G and others that work with our companies after they raise money.  Perhaps most importantly, in an online process helps Companies continue to focus on their business. On CircleUp, the average company takes 61 days to complete its raise- months fewer than the average in the ‘offline’ world.

The online experience can also be better for investors.  Investors can have access to more choices and  more data. As I’ve written about previously, although there is no guarantee investors will receive a return on their investment,  the Kauffman Foundation found angels in the consumer space have seen average returns of ~3.6x their money in ~4.4 years.  Impressive especially when one considers how hard it is to source dealflow as a private investor.  Equity crowdfunding presents more options- helping the investors to decide amongst a wide range of opportunities.  In addition, the best equity crowdfunding sites provide additional third party data to help educate the investors. One way we do that at CircleUp is through a partnership with SPINs- a provider of retail level sales data.  Now investors can evaluate the consumer products companies on our site and compare their performance to their respective industries.

Clayton Christensen, renowned innovation guru (Disclosure- he is also an investor in CircleUp), notes, “an innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.” Christensen goes on to note that in their early stages disruptive businesses will have lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions—all criticisms currently levied against equity crowdfunding.

Equity crowdfunding is in the top of the first inning of its history today, and what the future holds is anything but certain. Today, critics of equity crowdfunding would laugh at the notion that the disruptive power it holds could possibly put a dent in traditional finance. However, if you would have told Blockbuster, Borders and Tower Records that 12, 16 and three years after no-name competitors launched they would be toast, they would have laughed too. But as you stream House of Cards tonight, read on your Kindle before you go to bed or listen to your iPod on the way to work tomorrow, remember which companies are having the last laugh.

Source: Forbes

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