As a general rule, founders generally don’t get much sympathy from the public. We live in an age where entrepreneurs are celebrated and even lionized and their success stories are widely reported in the media. There’s nothing wrong with that, but focusing on founders who quit and pocketed life-changing cash in the process can obscure that running a company before a liquidation event doesn’t necessarily make you rich. It is especially convenient.
“Entrepreneurs are often good on paper,” says Tristan Schneig, co-founder and partner at Collective Equity. But they may not see any cash flow until they sell their companies.
And until then, as Schnegg said, founders live under a lot of pressure. “There is a continuing danger,” he added. “You have to meet milestones. Double your workforce. Change your business model. Find ways to monetize your operation.”
So is there a way to make that risk feel a little more urgent? I’m speaking with Schneig and Mike Royston, co-founders of Common Inquiry. The two men are from different places. Schneig is an academic who studies entrepreneurship and related wealth management issues. For his part, Royston has spent many years at the sharp end of corporate finance, running pioneering crowdfunding platform Crowdcube.
Different perspectives perhaps, but their experiences led to the same conclusion. Founders use some methods to hedge their financial risks.
The solution they came up with was common equity. Basically, it’s a crowdfunding platform that allows founders to invest up to 10 percent equity in their own companies in a mutual fund with other founders. The idea is to operate something like a VC fund. When a portfolio company has a liquidation event, the other founders take a share of the proceeds.
So what problem does this actually solve? Well as Mike Royston puts it, founders keep all their eggs in one basket. Crowd equity, he said, allows investors in multiple companies to mirror the practices of professional investors, such as VCs or angels. “Professional investors don’t invest in one company,” he says. “They will have a portfolio of companies.”
Apart from enabling founders to spread their risk, the fund is also positioned to address the associated problems, which founders often lack of hard cash. “Founders can make bad decisions because they’re short on cash,” Royston said.
In addition to financial incentives, Royston said businesses will also benefit from networking opportunities. Of course, there are more networking opportunities than the average founder can shake a stick at, but Royston says collective equity offers something a little different. Because they have a common interest in each other’s company’s success, they are incentivized to cooperate, he argues.
“Founders love the idea of investing equity to share in other people’s journeys,” says Royston.
Equity is at the beginning of its own journey. The first fund is closed, with 11 companies and 19 partners – founders, investors, husbands and wives – on board. The stock is valued at “3.76 million.
This seed fund is made up of companies that have already raised equity crowdfunding on Crowdcube. The second focuses on climate-related businesses. The third fund will be.
Becoming an equity investor involves a selection process. First of all, a business must meet the concept of the fund. Applicants must raise finance from VCs or institutions. Common equity performs due diligence. There is also investigation on the part of the founders. Schneig says the funding is transparent. Applicants can judge by looking at other companies.
The first fund – and this can continue – is deliberately designed to include businesses at different stages of development. Its purpose is to ensure the flow of liquid events over time.
Will there be demand for this type of fund? Schneig and Royston say they’ve contacted more than 100 founders and the response has been overwhelming. And it is true that the first fund closed with a suitable trading quorum on board. As with any investment platform, long-term adoption depends on the success of early funds in delivering the fruits of co-investment to participating founders.