MicroVentures, how a microfinance approach to investment in Ireland could create jobs

I have covered the area of microfinance before, and in nations where it works the multiplier effect of the credit is said to be quite astounding, today however, we will take that concept and apply it to Venture Capital minus the multi-million euro entry fee. This post will cover MicroVenture’s.

MicroVentures, have in the past related to the semiconductor business, however, this version instead relates to the idea of bringing together groups of small investors and putting them in touch with small groups of entrepreneurs, and then allowing voluntary mentor participation. Kind of like a real life but smaller version of the dragons den. The working mechanism is below.

A microventure convention would likely need to operate as follows. Every person who wants to attend does so by purchasing a ‘share unit’ – we’ll say this is a standard price of €1,000. It is held in escrow by a solicitor or bank, and allows the attendee to go along and hear the ideas being put forward and if they like them then they can pledge their €1,000 share towards whatever idea they like, the ideas will be listed with a clearing price, so if a project needed €20,000 to get off the ground then it would take 20 tickets holders to commit, or several could purchase extra tickets/shares on the day to clear the idea. If you didn’t invest anything then you would get your money back minus a €75 holding fee (so you would have basically paid for attendance).

Projects could be listed in advance and the entrepreneur would have to present a business plan and talk about the company they plan to create and grow. Vetting in advance by financial advisers and accountants would ensure that there is at least some form of feesability check in place before this happens.

The missing elements of the company could be brought in by a standard share offering in return for time & service which would be based upon a standard service agreement- which is the same basis the entrepreneur would be operating on. The portions required for additional services would be out of their share. So an accountant might agree to do the new companies accounts but in return they get x shares, a standard amount would need to be decided upon.

The model would need to give general control to the shareholders but day to day decision making power to the entrepreneur and mentor team. So if a technology company can provide (for instance) a software solution to the start up then they must do so partly in cash and partly in return for a share percentage on the standard offering. There would be three types of provider of goods/services required to get the start up working

1. Full payment providers: for instance a stationary or print provider. They would have to be paid whatever they are due upon provision of their goods/services.
2. Partial/Mixed providers: they would get a mixture of shares/money for their goods or services, this might be – as an example – a software company that creates a web app for the company, they get some payment, and also some shares, this is necessary to ensure that they have ongoing commitment to the success of the venture.
3. Share only providers: This would be accountants, mentors, and the promoter themselves, that doesn’t mean the promoter couldn’t draw a minimal wage, but their share percentage is determined from the outset.

So we’ll run the idea now.

The convention is held and there are 400 attendents, 20 promoters with start up costs ranging from €10k to €100k, they all get an opportunity to state their case, their experience and the attendees can check the prospectus provided about the projects which have all been vetted in advance.

At the end of the talks people can then mix with the promoters to ask more questions and then they are asked to cast their shares towards whatever idea they like best. If there are over subscriptions then that is o.k. you can adjust the shareholding accordingly, if they are underprescribed then the promoter can (if they have the means) make up the difference, or one/several shareholders can opt to put in more, or the start up can fail to get the go ahead.

Either way it achieves the following, enterprise commencement at a rapid rate with indigenous start up companies which are not relying on government/state funding – which is of itself a slow process. It removes banks from the equation, in the current environment they are not lending due to bad ideas, the credit contraction is stopping good ideas from getting a chance. It allows people to take smaller measured risks on companies they can have an intimate knowledge of.

If you invest in a company on the stock market do you really know as much as you think you do? With a locally grown company you have a better chance of having intimate knowledge, especially if there was a transparency surrounding the creation of the entity which would give the shareholders better insight into the day to day operations, as well as that, the creation of the company with shareholders having the sway in voting rights helps to give some increased control to the shareholders, on the official market shareholders as a group have very little sway (unless you are an institutional one).

The repayment could work in one of two ways, in the first three years the entrepreneur could opt to convert the stock to bond debt with a par offering set in advance, or they could pay dividends, obviously this would only matter on the companies that are successful.

If there was an approved microventure scheme (for instance that you could invest via a pension and use tax relief or some kind of expansion of the BES scheme) which allowed people to invest with some of the incentives available elsewhere it could help to get it kick-started, it would also allow people to diversify their investment by opting for different types of companies, it would help to drive job creation without trying to use the current tax system to redistribute income inefficiently.

And lots of start up companies mean people would become more expert in creating trade and businesses, there are over 350,000 people without a job in Ireland right now, imagine all the raw talent going to waste? The state lead programmes require people to be out of work for 2 years before funding is available, if you are out of work for 2 years then how can your skills be current? The best choice is the people who are available now and who have the skills right now but the state sponsored bodies can’t deal with them effectively or at speed.

Microventures would be one arm of an overall solution to the Irish economic woes, but it should also be something that is inherent in the country if we hope to create a sustainable knowledge based and export driven economy. There is nothing stopping this country from becoming the ‘home of the start up’, investors are also more protected than they are on the open market, promoters get the chance to reduce their start up risk and still pursue their dreams. Sometimes everybody wins.

Comments

  1. Some really great ideas in this post, Karl.

    What are the next steps, how does something like this get up off the ground?

  2. basically you get some people together who are willing to put the work into doing it!

    after that the work would be spreading the word and getting some official backing in the form of people being allowed to invest with some incentives.

    it is a totally achievable concept which is the main thing!

  3. Brilliant idea.

    I’ve got some experience in setting up a microfinance venture.

    Would be happy to put some time in to help get this moving.

    H.

  4. Thanks Helen!

    If this is something that goes ahead then I’ll count you in too!
    I figure we’d need to get a fair few volunteers to get something meaningful going. I checked out your site too, I think you’d likely have some great talent to put in! talk soon
    karl

  5. I would believe that in the current economic climate, some investors are scared to invest (or spend some money) could easily see potential in such micro venture idea. This very well may be a solution to help small companies who do not have the expertise or time to attract and secure large investments.

    I would say that the good thing with this is that anyone can become an investor and put their weight in what could be the recession solution.

    Very optimistic but also very plausible and possible.

  6. There are a few issues with this approach.

    1. The amount of investment required to run even a small software company is substantial.

    2. Most profitable ventures require multiple rounds of finance and if later rounds are down rounds then these early investors will get wiped out unless they can follow their money.

    3. Giving away stock for services looks good at the start, but looks dumb when success rears its pretty head. Then you realise twenty percent of your stock is owned by a stationary company.

    4. Most service providers will not take stock as payment

    5. With that many shareholders any corporate action becomes a logistical nightmare with signatures and legal documents requiring review by all parties. This is often the reason VCs walk away from a deal.

    6. The assessment process by third parties would be worthless as the investigating parties would be able to offer any kind of warranty. This kind of investments are *always* caveat emptor.

    Having said that this kind of financing would work well in any busy that requires small amounts of capital and can be immediately cash generative. Unfortunately that is not the software business.

    For software I would run it as a MacroVenture model. The investment chunks would be 5-10k and BES would be in place for all companies. BES is the only legal cover you need as it entails some kind of proper oversight by EI and a nice tax rebate for the investing individual. Most importantly the investors need to be briefed about the requirement to follow their money for at least two more investment rounds to ensure they are insulated from a down round.

    Joe.

  7. Enda Munnelly

    achievable, easy to setup, immediate & more important, proof of current talent available in the country! matched with drive & ambition which is in abundance due to job layoffs & redundancy. At this stage people are eager to write the wrongs of sustained greed without holding a thought for hind-sighted monetary protection of ones business model.

    ’09-10 is all about reinvention. Previous models, whether average or poor have been dragged through the hell of the last 2yrs. Therefore going forward excitement would surround a fresh structured approach to new business (micro)Ventures. New ideas & fresh impetuous is needed to stimulate the previous models into renewed actions & remove the stagnant Irish mentality of open your business door will auto guarantee you custom! New Economy needs New Ventures – people will look for change going forward

    “We want to change our lives, but refuse to change our thoughts, therefore we remain bound.” – James Allen

  8. Hi Joe,

    Thanks for your insight on this, I appreciate your comment, in particular from the perspective of your experience in this field.

    1. This idea is not necessarily for software companies, it is open to any type of company.
    2. Future rounds of finance could be an issue, the only way to avoid that would be to really nail down financials from the outset, but even at that I suspect you are right and i’ll have to get back to the drawing board on that.
    3 & 4: The ‘stock for services’ would only apply to certain partners, namely financial/software suppliers – I think most accountants would be happy to do what might amount to ‘pro bono’ work on a small scale in return for stock, there are enough accountants out there that taking on one client in this manner would be possible, I spoke to my business partner who is an accountant and he talked to a few of his friends and they said that they would participate, regarding the software houses echolibre have said they’d get involved and others might too, stationary suppliers would have to be in the realm of ‘paid cash’. Strategic partners are really the only ones that would be paid by stock.
    5. The initial agreement would need to be structured whereby the promoter is given free reign as long as they company performs within certain parameters, too much input by shareholders would not be of benefit, except where required. for instance, If i started a software/web app venture and you were a shareholder it would be to my benefit to get your advice, but for the most part the two must be separate. One element of the local investment is that it might garner local support, if (for instance) one idea was -hypothetically- a discount coffee n’ donut shop and it was invested in then the shareholders would likely make an effort to bring their custom to it and promote it to others.

    thanks again for your thoughts, seems I have some kinks to workout.

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