By Ed Ludbrook
IN A RECENT discussion with Malaysia’s innovation czar, I explained that the clearest indicator of a failing market for innovation funding was government money. There are countless great ideas to fund and a massive pool of speculative money, so if the government has to divert the public’s tax money into supporting the innovation sector then something is obviously systemically wrong. It doesn’t happen in Silicon Valley, so what’s wrong in Malaysia?
Malaysia’s problem is the same as everywhere in the world, except Silicon Valley. Only in Silicon Valley, and a few other similar American enclaves like Seattle does the Early Stage funding ecosystem work where countless gambles are placed on exciting ideas with enough capital, managed by proven entrepreneurs who understand that, for all your checks, this is a lottery.
And over there, there is no government grant money required to drive innovation. The system works. And thus, so many of the great new high-growth companies leave their homelands to Silicon Valley in search of the financial support they need.
From a Scottish context, If we imagine innovation funding as a stairway which entrepreneurs must climb the stairs gaining funding as they go, the problem here – like all developed countries is rarely the top stairs. There is a robust ecosystem to support exciting proven companies looking for Series B, C or listed cash. This pool is swimming with venture capital. The challenge is at the bottom of the funding stairway. The area called ‘Early Stage’; series A to Seed, where success is never guaranteed. In fact, where success is literally a form of lottery.
The vast majority of VC’s hate the uncertainty of Early Stage and thus the trend is towards larger deals higher up the stairway. So, with venture capital firms still nervous and the government pouring money in without the scale or results to inspire any auditor, the last remaining pool of cash for these exciting companies is the public.
The government will say the public should never invest in early-stage ventures which is total rubbish as they will allow them to seed business and more importantly, they will gladly promote gambling with no restrictions.
So how to funnel the public’s cash into early-stage projects? The equity Crowd-Funding concept seems the solution, yet any investigation of this sector and one will see its fundamental flaws in that the platforms do nothing to protect or empower the public.
Their fundamental principle of ‘just do your due diligence’ is laughable when it comes to the public. They don’t know how. And why would they trust a platform whose interests are aligned with the issuer. And the final nail is the five-seven-year payback cycle which is well beyond the public’s investment confidence.
In Scotland, I can see a solution being delivered in the form of a new form of tokenised crowdfunding delivered by a Crowd Finance ecosystem. It’s a lot of new jargon, yet the solution takes the concept of crowdfunding and meshes it with a crypto coin that represents the innovative company’s shares, so it’s easy to buy, list and sell, and is seen as a new form of public support platform.
A platform that presents the innovative company’s offer in a way they can understand, with trusted due diligence and the education they need.
The crypto world is evolving at light speed and whilst most people remain sceptical, behind the scenes the largest financial and consumer organisations have announced their entry. Most are focused on the payment crypto space and later in 2020, you will see the other leading use cases of crypto-asset technology hit the market.
Indeed, famous football clubs will lead the tidal wave of ‘Community Coins’ – West Ham and Juventus have already reaffirmed this. Following that will be the new security token market that will transform the Crowd-Funding space and thus the funding of high growth innovative businesses.
The new Crowd Finance world from 2021 has the power to fund thousands of innovative companies at millions for each venture. It will create a paradigm shift in the raising of innovative funding.