How do I get profitability with my investments in Equity Crowdfunding?
As we mentioned in a previous newsletter, many of the projects financed through Equity Crowdfunding are risky investments. These investments are not suitable for investors who are looking for a 100% assured return, although the risk assumed is in line with the expected return. In addition, each project may offer a different return depending on different factors. Among them, it is worth highlighting its degree of maturity, its situation and the sector in which it operates, among many other factors.
Several investors have approached Fellow Funders asking us to explain in more detail how you can make your investment in startups or SMEs profitable. There are two fundamental ways to make your investment profitable: Divestment (the sale of your participation) and the collection of Dividends.
Collection of Dividends
In the Shareholders’ Agreement that Fellow Funders requires the company’s shareholders to formalize, prior to the entry of new shareholders incorporated through its platform, it is expressly stated that the company must pay its shareholders a percentage of its profitability via dividends.
It should be noted, however, that most startups are in an initial phase, so their financial needs are very high, and they must make large investments that generate greater future value for their shareholders.
Exit o Divestment
The shareholders sell their participations and they exit to the company. In this sense, it is especially important that the Shareholders’ Agreement expressly includes the Right of Accompaniment and the Right of Drag. Fellow Funders obliges entrepreneurs to incorporate both clauses.
However, where most doubts arise to our investors refers to possible Exit or Divestment events that involve the sale of their shares / holdings to a third party. What types of Exit can be posed to a Spanish startup?
Purchase by a large fund (Venture Capital, Investment Fund, …)
It is the best-known option but also more difficult to materialize. It requires a large size and / or very disruptive business model and not all startups meet or will meet in the future these premises.
Purchase by a Corporate or Multinational
In many times the startup develops a very specific business model that would generate great added value for the activity developed by the Corporation or Multinational. Finally, the latter chooses to buy it and include it in its own structure. This case, generally very typical in the Fintech world, is still little used in Spain. One of the traditional demands of the Spanish entrepreneurs is the little support of the national Corporate who are however acquiring startup in other countries.
Merge or Acquisition with another small or medium sized company
On many occasions, synergies can be generated between two companies of similar size that eventually opt to merge their activities. And in this case, and unless new partners with enough financial capacity enter and want to take a significant stake, the shareholder may not always have the option to sell their shares. In many cases what happens is that he ends up being a shareholder in a company other than the one he originally invested in.
Quotation in an Organized Market
While for startups that are in their early stage or have a small dimension, this option does not seem possible, for companies that are already in the growth phase can be an alternative to evaluate. In several of the startups that we are advising in Fellow Funders the alternative that we are evaluating together with the entrepreneurs is the medium-term exit to MAB or Euronext Access.
Although the current MAB still suffers from many imperfections, the investor would be able to have liquidity (sale of his immediate participation through the MAB) and the entrepreneur would be given visibility to undertake new investment rounds. Why couldn’t the MAB be the specific market organized by Startups or SMEs? At Fellow Funders we believe it can be a possibility for authorities, entrepreneurs and investors.
Liquidity in a Secondary Market. Currently this possibility does not exist in Spain
A holder of a share that needs liquidity must first offer it to the rest of the shareholders and only later can sell it to a third party, but must perform the search personally. Why can’t there be a secondary market where sellers and buyers of startup shares set a price and carry out their transactions?
As long as it is a transparent market for buyers and sellers and there are sufficient legal safeguards in place at Fellow Funders, we believe it is something that should be considered by legislators, as it would help the growth and consolidation of alternative financing.
We consider that we are at a very important moment in which we must try to consolidate the Spanish entrepreneurship ecosystem, simultaneously establishing modern, transparent and stable financing mechanisms that will help its long-term development.
Entrepreneurs, Investors and Administration must collaborate in this process. The future of Spain and its future generations is at stake. Does this deserve any sacrifice on the part of everyone? At Fellow Funders we believe it does. At Fellow Funders we still think that investing in Equity Crowdfunding is an interesting product. However, we must be clear about the need for portfolio diversification and the risks involved. A holder of a share that needs liquidity must first offer it to the rest of the shareholders and only later can sell it to a third party, but must perform the search personally. Why can’t there be a secondary market where sellers and buyers of startup shares set a price and carry out their transactions?