IEO vs ICO vs Other Fundraising Methods
There are numerous solutions to raising investment for a project you are passionate about. Below we’ve taken the time explore & present the wide plethora of fund-raising options available in 2019, both traditional & untraditional, both onshore & offshore. This post covers everything, inclusive of Bootstrapping, US Based options, EU Based Options, Crowdfunding, seeking Venture Capitalists and the uprising Cryptocurrency based Options, such as the ICO, STO and IEO.
Bootstrapping Your Business
Exhausting all available low hanging fruits so to promote your project and make it work is basically what this option includes. It consists of functioning in the leanest of lean methods available until substantial revenue is secured. Bootstrapping entails functioning at the absolute minimum requirement so as to begin developing revenue lines. Additionally, it consists of building up an organic/partially inorganic social media presence by communicating your idea or project on platforms like LinkedIn, YouTube, Twitch and Facebook whilst heavily increasing brand awareness in a specific market segment.
Additional ad-ons to your bootstrapping strategy should include: attending conferences, networking with Research Institutions, (I.E Universities), engaging with workshops, think-tanks both regionally and internationally where you can present your project so as to increase brand awareness & develop the potential for the establishment of partnerships or deals.
Applying For A Loan
Banks are the biggest business lenders available for companies wishing to secure funding. It is important to distinguish not only between the different types of banks and their banking practices, but to also make distinctions on the various types of loans that can be available to you. There are several main steps that will be necessary to follow for your application to be approved regardless of the loan you wish to receive.
Awareness of credit ratings and how they will affect your possibilities for an approved bank loan, and also the type of loan you can be offered is essential as all money is not good money. Note that many Bank loans can also be restructured into line of credit loans, which is highly beneficial for companies as it allows for a pool of capital to be drawn from, but interest is only paid for on money drawn out, not on the complete amount available for use.
Instalment loans/ term loans are also considerations to keep in mind as they are payed back with equal monthly instalments including the interest and agreed upon term. These loans are typically monthly or quarterly. Business term loans are the most common type of loan offered, and an be quite beneficial if you have a good investment strategy to secure future capital. In America more than 3000 banks nationwide also offer SBA loans, which are loans guaranteed for by the Small Business Administration, this means that a government agency guarantees for up to 85% of the loan provided to you by the bank of choice. The purpose of the funds acquired is not heavily regulated and could be utilised for working capital, securing assets in terms of vehicles or other machinery, buying real estate or refinancing. Note that Wells Fargo have recently tried to brand themselves as “America’s leading small business lender” with 34,8 billion dollars allocated to businesses with less than 20million in revenue through the first quarter of 2015 alone. This is due to their pledge early in 2014 to spend 100 billion dollars in loans to small companies till 2020. The “Wells Fargo unsecured Business Loan” offer amounts from 10,000 to 100,000 dollars in capital at interest rates starting at 7.75 to 22.99% depending upon the circumstances of your business, with no collateral needed and is a fixed rate loan with repayments offered on a one to five-year basis. Bank of America offers a similar loan to Wells Fargo, but at interest rates starting at 5%, however the requirements are 100,000 dollars in annual revenue and a company age of at least two years.
Equipment loans where the acquired asset is used as collateral are typically easily approved. Securing investments from banks 80% to 100% of the total equipment price is quite normal and these types of loans typically require little to none personal guarantee on your side.
Getting your hands on a credit report that details your current financial situation might be one of the single most important steps if you wish to launch a successful funding campaign, not only is it a prerequisite before applying to a bank for a loan, but the added value in the critical information it provides you with for the future financial understating of your business situation is an absolute pre-requisite prior to exploring investments. Note that algorithms are taking over a lot of the loan approval/rejection processes, and if you do not have an excellent working relationship with the specific banking institution, the possibility that someone even goes through your application in person is typically very low. Understanding your credit situation might be one of the single most important factors to determine how to navigate funding institution, and which loans to apply for.
Being aware of interest rates and how they can scale through compounding, or how it might create cash flow problems if you are planning on using bank loans to pay off regular expenses instead of channelling profits from sales to cover them, is crucial to establishing a long term beneficial agreement between both your company and the financial institution of your choice, but it could also be worth mentioning that there are international funding possibilities available to you.
Floating rates are worth keeping in mind if applying for international funding, as it means that the interest rates of the country where the loan originates will be dictated by the currency exchange in this country, and looking at the long term sustainability of the country of origin is of high level importance to secure your investments.
Offshore Bank Loans
Belize has loans available for international customers and offer full anonymity and a stable currency exchange as their economy is tied to the US dollar at a 2:1 ratio. For example, via Caye International Bank, one is able to apply via a full online application form that can be found on their homepage, Cayman Isles is another offshore country that offers a broad range of international investment services through bank loans with highly competitive interest rates. Singapore and other regions of China have a huge network of international investment funds, and it could prove of interest to look at services provides by, CDB (China Development Bank) and “CHEXIM” which is the export-import bank of China. These two banks together have allocated 684 billion dollars in loans to companies between 2007 and 2014. It is no doubt that the Chinese economy is predicted to have massive growth the next hundred years.
The Japanese led Asian Development Bank, the World bank and the Inter-American development bank also have been lending over 700 billion dollars between them, and recently the EU has released a stream of investment projects aimed at positioning Europe as a highly competitive force for the forthcoming years, and might just be the spot for securing future investment.
“EFSI”, the European Fund for Strategic Investment might be one of the single most important channels if you are looking for investments into your company and wish to set up a base of operations in any EU or EU associate country. Their main interest is to secure access to funding for SMEs as they currently have over 5.5 billion euro designated towards this matter either through their guarantee capacity or through the funding resources of products through the European Investment Fund. This allows equity through venture capital or private equity funding to be channelled directly to high potential start-ups and growth companies, with supported loans to lesser quality projects or projects with higher risk profiles.
EU funding for companies of any sizes, regardless of the sector or industry, including larger and medium to small companies, start-ups and entrepreneurs can also be achieved via Microfinancing options, Financial Institutions providing bank loans or by connecting your project directly to venture capitalist firms or Angel Investors.
Note that the decision for EU funding is made by respective local financial institutions, however, securing EU based monetary support also opens up further doors to traditional bank loans & private investors, as these institutions & private individuals typically look for Social Proof, meaning that previous investment suggests a project that is worth looking into.
You have a legal right to be provided with feedback from credit institutions in this process, and you should refer to Article 431 of the EU Capital Requirements Regulation in your request to obtain this information. Not only is the information on your current credit ratings useful on a personal level but having the correct information regarding your credit situation will allow you to further your understanding of the financial market and hence be invaluable in your further operational scaling.
The COSME programme can typically supply you with a maximum of 150,000 Euro, and their aim is to assist smaller to medium sized companies with funding in all stages of development. The program Is designed specifically to provide equity in the growth and expansion stage. This program currently funds the “Enterprise Europe network”, which helps connect SMEs internationally with Tech based businesses, or Service Partners purposed to expand your current network. They also have helpdesks for specific EU regulatory inquiries and currently also finance a number of IPRs, hence “Intellectual Property Rights”.
COSME is currently operating with a budget of 2,3billion euro, and are set to be provided with additional funding following the next budget allocations in 2020. COSME funding is responsible for around 83 percent of all new jobs created in Europe and is considered a backbone of job creation in Europe.
One can apply for COSME related funding via the EASME “The executive agency for small and medium sized enterprises” website, where applications can be made through their “Participant Portal”.
The “InnovFin Programme” is available to small and medium sized enterprises under the European research and innovation programme called “Horizon 2020”. Regardless of the current size of the company, Innovfin financing can provide companies with financing for research innovation purposes. They provide several different solutions depending upon the specifics of the project and can tailor make specific financing to suit your project through equity type funding, guarantees or bank loans. Typically, funds will be transferred through an intermediary like a bank or a fund.
The “Horizon 2020” programme has an available budget of around 80 billion euros and is the biggest EU research and innovation project currently underway. They are able to provide funding to all EU states and associate countries, and are purposed to increase the Financial Competitiveness of Europe, with an overall aim of allowing Europe to produce cutting edge and world class science, and to help reduce barriers between Innovation and collaboration between the private and public sectors.
The Horizon 2020 programme is available to anyone. Note that, from 2014 till 2016, the programme received over 115,000 application for funding with a total of over 182 billion euro. Of the aforementioned applications half were evaluated to be of high quality, and one in four of the high quality proposals was funded, 90,5 percent of grant agreements were signed within 8 months.
All applications are made online and will be reviewed by an independent panel, with step by step instructions being available through the Horizon 2020 online application manual.
“EaSI” programme; European programme for Employment and Social Innovation is a financing instrument aimed Microfinance and Social enterprises, with a goal of promoting high quality and sustainable job opportunities for vulnerable groups and combat poverty, social exclusion and improve working conditions. They are operating with a total budget for 2014-2020 of 916,469,000 euro, and applications can be made through three different portals depending upon the specific nature of you desired project, “EURES axis”, “PROGRESS axis” and “Microfinance and Social entrepreneurship axis”. They have micro loans available of 25,000 euro for micro-enterprises and groups or sectors that are especially vulnerable but wish to set up companies. They also have up to 500,000 euro available in loans for social enterprises. Most notably might be that 96 million euro is specifically designated for microcredit providers and social enterprise through “EaSI” guarantee, the European Investment Fund is designated to implement this guarantee, with applications being available for direct or counter-guarantee directly of the European Investment Funds website.
“CCSGF” programme; The Cultural and Creative Sector Guarantee Facility provide guarantees to financial intermediaries, like banks, who are offering financing to cultural or creative sector initiatives. This Guarantee facility has been set up to assist SMEs in the cultural or creative sectors to access financing and was launched in 2016 with a budget available of 121 million euro. An additional 60 million euro was added in December 2017, and the overall budget is expected to be increased to 181 million euro, with a predicted 1 billion euro in loans generated for thousands of SMEs.
Recently the Libra Internet Bank of Romania secured the European Union support through the CSSGF programme for their loan portfolio of over 200 SMEs in Romania in the cultural and creative sector, include gaming and editorial publishing.
Raising Capital Through Crowdfunding,
How many articles or people have you heard discussing crowdfunding or referencing some out of the box project that secured thousands in funding due to a successful Kickstarter or Indiegogo campaign? Now it so happens that while Kickstarter might be the biggest crowdfunding platform in the world, many parts of the world have now created their own national or international crowdfunding platforms as well, severely increasing your rate of success if listing on several sites due to the huge regional differences in preferred platforms, of course depending on the specifics of your project, tailoring a proposal for a demographic that might be more inclined to be interested in your proposal is pretty low risk investment of your time.
The crowdfunding concept is as old as human cooperation but can be defined easily as “small or varying amounts of capital or resources allocated from a large number of individuals to finance/support a business venture or project”. The main upside to crowdfunding is of course that likeminded individuals might be more inclined to support your project through investments, and presenting your proposal on an crowdfunding platform might not only make it easier for you to connect and get feedback from investment circles, but also create more transparency which can enable potential investors who are interested to react quicker with getting involved. In addition to the above, crowdfunding also entails the fact that no equity must be given in return for the funds collected, therefore giving companies full autonomy once the funds are raised
Venture Capital Investment
Venture Capital Investment is contrary to the above, and typically entails projects granting equity to investors in return for funding. This typically removes the autonomy-based factor however gives rise to further opportunities. It can be done an excellent trade off if the right VCs have the right amount of Equity.
Venture Capitalist normally operate with investments in medium to large scale business organisations, that are cash flow positive and scalable, typically with a minimum of over one hundred thousand dollars in annual return. Though Many exceptions can of course happen depending upon the circumstances.
On average in America 3700 companies get VCI funding each year, with the main proportion of investments being done in California, with a national average at around 20 billion dollars per year being recorded through the mid-2000s and post financial crash of 2008. However, in 2018 Venture Capital activity in US has reached its highest point since the turn of the millennium with venture capital funding in total of 99.5 billion dollars, which is the second highest recorded in history, only overtaken by the well-known dot.com explosion in the early 2000s. During the “dot.com bubble” over 184,100 million deals where completed, a record-breaking number, with internet companies not surprisingly taking the largest share of the investments at around 36,7 billion dollars, closely followed by Health and Mobile & Telecommunications at 20.3 billion and 14.8 billion dollars respectfully.
Crypto Fundraising Methods:
The Initial Coin Offering Fundraising Method is a new however, highly effective method of raising capital. Within 2018 alone, a total of 1258 ICOs had taken place with a grand total of $7,852,477,041 being raised. It requires time & and a considerable sum upfront, however if done right and with the correct network, it could be the most viable way for your project to raise the funding it needs with the least amount of commitment in terms of equity or stakes. It entails attaching a token to your business plan, and thus developing a tokenomic model, that would be used not only for commercial use, but also for speculative purposes. The ICO model is highly alike to the Crowdfunding Model in terms of it requiring a notable community, however much stronger in raising capacity. Note that projects of all industries have the ability to raise anywhere from 2-20mil USD in the span of 3-4 months. Note that the Jurisdiction of your business can play a major role on as to whether you are legally able to launch an Initial Coin Offering for your project.
The Security Token Offering is a tried & applied concept that was established in 2018 following the steady decline of the 2017 ICO Hype. It was is variation of the ICO differing in whether the tokonomic model is classed a Utility or Security. Classifications differ worldwide depending upon the operating Jurisdiction; however, the Howey Test can be excellent benchmark to utilize so as to understand the class of your token. In many cases, the STO does entail the giving of equity or dividends in return for the sought-out investment. This is typically done automatically via the programming of a smart contract purposed to automate the process and therefore solidify the barriers that are associated with Investor Trust & Security.
The Initial Exchange Offering is a concept that arose in the early April of 2019. It is a blend of the Initial Coin Offering and the respective ability of Cryptocurrency Exchanges to connect projects to immediate liquidity. This fundraising method consists of pairing your project to an exchange via their respective Launchpad. The exchange then vets your project based on the use case of your token, your team, your raise, your community, and your assumed ability to make the business work. Their preference lies in projects/tokens that are major, transparent, and that have the potential & willingness to actually develop their product/service line after the initial raise. The price for listing ranges anywhere from 80,000$ to 150,000$ and is steadily increasing day by day as demand for IEOs increases too.
It is important to note that projects are currently raising amounts as big as millions in as little as seconds, as this development is a long awaited one.
BitTorrent raised $7.2Million in 18 minutes.
Fetch.Ai raised $6Million in 22 seconds.
If you are unsure which method is most suitable for you project or require more information regarding how you and your team can use one of the aforementioned methods above, feel free to schedule a call with our consulting team. We’d be more than happy to learn more about your project and advise on the most suitable path.