The crowdfunding world is teeming with websites that connect newly formed startup companies with potential investors. Examples include Kickstarter, RocketHub, SeedInvest and CircleUp.
Fewer sites cater to slightly more grown-up companies with more complex capital-raising needs.
Optimize Capital Markets launched an "institutional crowdfunding" marketplace in August for capitalization deals of $2 to $20 million (the average deal is around $5 million). More than 25,000 high-net-worth individual investors, 8,000 financial advisors and 2,000 institutional investors have signed up. The average amount invested is $500,000. Typically deals take about three months to complete; Optimize Capital averages about three new deals per month.
"We're excited about that," says Matthew McGrath, president and CEO. "The ability to close on deals is something we've been very encouraged by."
The site raises financing for young companies that are already generating revenue or close to it, mostly in the technology and life-science sectors.
One notable client is tree-free paper making startup Prairie Paper, which is fronted by actor Woody Harrelson. The company, which creates paper from agricultural waste, is currently raising $5 million through the site.
The Optimize site is respectably high tech. It hosts an online data room, an online pitch room and promotional videos. There are online Q&As with startup management teams, there's a tool for setting up calls and another for making bids.
But so far, investors have shown they're not quite ready for a completely do-it-yourself experience.
The principals at Optimize Capital, which is a registered investment dealer, are often asked to join conference calls and webinars, to make the investors feel more comfortable.
"In the crowdfunding industry as a whole, this is a paradigm shift, but I think we have to walk before we can run," McGrath observes. "The comfort level is definitely growing and I'm always surprised by the types of investors we're attracting. But like any new industry, or any service that goes online, at the initial stages you've got to do a bit of a hybrid service between traditional and online delivery."
The company has actually turned off some automated features investors weren't ready for, such as bidding, short-listing, investment tracking and automated payment tools. "We quickly realized people aren't ready for a purely automated, anonymous transaction," McGrath says. "When they're cutting a check for $100,000 and want to make money, people want to hear the crackling of the person's voice over the phone or see the whites of their eyes in a webinar." Within about two years, he believes this will change and the company will be able to turn those features back on, hosting deals that are 90-99% automated.
He believes institutional crowdfunding is the next generation of corporate finance for deals in the small to mid-size market and that the days of the corporate finance firm doing "road shows" are on the way out. "Fast-forward 10 years, and nine times out of 10, you'll see this form of capital raise," McGrath says.
Optimize Capital was founded three years ago, doing what it called at the time "online business funding." It began with the idea of raising small amounts of money, such as $100,000, for small businesses like restaurants.
"We went through that iteration and realized our specialty was in that quasi-institutional space where we're raising $5 million instead of $500,000, and we're getting investors that are cutting $300,000 checks as opposed to $3,000 checks," McGrath says.
In addition to restoring some of the features it has turned off, in the next upgrade of its site Optimize plans to add tools to handle funds transfers and the payment of bonds or debentures.
Penny Crosman is Editor in Chief of Bank Technology News and Technology Editor of American Banker.
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