UPDATE (July 2011): This post is now outdated, as Grow VC has launched the free platform.
UPDATE (9th of Aug 2010): This post now includes an audio explanation of what Grow VC is and how it works. We hope you utilize this when getting acquainted with our model – it’s not rocket science, but it does take some patience. Player located at the bottom of this post!
It’s now been 10 days since the launch of our community fund model and we have been following the market response very closely. Overall the feedback has been positive and supportive of what we are doing. So let me take this opportunity to personally thank all of you for your feedback and support.
The past 20 months or so, since coming up with the core idea for Grow VC crowdfunding model, it’s been quite a big push to get to this point. First, building our great team and then starting to execute the Grow VC strategy, by designing the service with all of it’s details and then actually building it – while at the same time working through all legal matters and building our overall company structures internationally – I’m very proud of our team!
But what’s really fun, is the fact that we are only getting started. To us, we are now in the “Minimum Viable Product” stage and are looking forward to innovating and building our service even further with all of you.
In the past year or so, when we have talked about our core model with different people around the world – in person, we have learned that it takes some time to get the mind around all the details of our service. So I think now – 10 days after our community fund launch, is a good time to share more details about our service overall.
Outline of business model
Grow VC offers a platform for investors and entrepreneurs to find one another, by registering to the Grow VC community online. One can assume one or several of four roles in the community, the roles of an individual, a funder, an entrepreneur or an expert. Each role come with related features available inside the service, to manage start-up fund raising process, related activities, communications and/or portfolio of start-ups. The subscription based membership fee is based on the profile or role of your choice and additional parameters (how much capital you want to raise for your start-up or what your investing budget is). The community then facilitates the matching process.
Members who pay subscription fee can assess, evaluate and comment start-ups and related details through transparent information in the community. Direct investments (angel investments) can also be made to start-ups with funder role. There is no fees in direct investments, since fees are only in subscriptions. Subscribed members are asked to suggest investment targets for the community fund out of the available start-ups in the community, for the value of 75 % of paid membership fee, e.g. 15 dollars if the membership fee is 20 dollars. This will serve as a viable peer-rating system, in order to ensure that everyone in the community has to evaluate start-ups also as any investor would. According to the start-ups success, the members will be rewarded based on the Grow VC rating system.
This unique model of Grow VC, helps entrepreneurs to start looking at other start-ups like investor and therefore make it easier to understand what type of information funders are looking for and what it takes to find interesting start-ups. In return this will help entrepreneurs to improve their own start-ups profile to make it more complete, understandable and interesting for other funding members.
At the same time this will in addition to paying for the full-features, each member also have an opportunity earn financial rewards for finding good investments for the community fund, regardless what happens with their other activities.
Different roles in the community
The person (free)
The most basic form of registration, currently free of charge, will allow you to access the community, participate on discussions inside the service and see information on a general level. For those looking to publish their start-up the free profile also allows to start building the start-up profile. The person profile is restricted from viewing in-depth person profiles and start-ups, and cannot participate in the actual entrepreneur – investor matching. Also, the person profile will not participate in the community fund functions. This profile is mainly intended for getting acquainted with the service and choosing a role in the Grow VC community.
The entrepreneur and the start-up
The entrepreneur profile is meant for those who register start-ups to the Grow VC community and start-ups are detailed profiles of these early ventures, containing relevant, accurate and detailed information about the start-up, e.g. business plans, growth projections, sensitivity analysis and so on.
There can be one or more entrepreneurs involved in one registered start-up. The entrepreneur profile is free of charge, but can only be created once you belong to a start-up profile. Entrepreneur profiles become active once the start-up profile is subscribed and published inside the service. Start-up profiles can include relevant information of the start-up, for investors and other experts to be able to review, evaluate and help improve the business operations. Entrepreneurs choose what information and in what detail they want to share with the community. Entrepreneurs can also invite other key people (like advisory board members) to be linked to their start-up profile for free.
There is always an ongoing dialog with the community, regarding development needs and things to consider in the start-up.
Start-ups are charged a membership rate according to the amount of capital they aim to raise out of Grow VC’s service.
Funders are private individuals, commonly called angel investors or partners of a venture capital firm. Funders seek out viable start-ups and make investment decisions based on their interest or expertise. The funder profiles are always represented by real people and in order to conduct direct investments, member that applies for funder role must confirm their legality and validity to become a funder, according to their corresponding legislation per Grow VC Terms Of Service.
Via Grow VC platform, funders can extend their deal flow beyond their own markets and enter more geographically syndicated investments. The membership charge of the funder profile is based on the investment budget of the funder.
The experts are professionals specializing in various activities within the Grow VC community, ensuring that the start-ups gain the support and guidance they may need to develop into successful new ventures. The experts provide professional services for start-up companies, such as legal counseling, incubation services, consultation etc.
The expert can be invited to join a start-up for free, in order to develop the start-up further and to bring credibility to the venture. If invited, they may participate and develop only the start-up that they were invited into, agreeing on terms with the start-up, granting some sort of return for the expert himself. The expert can also be utilized, when managing investments, in strategic positions such as on the board of directors in start-ups, in order to ensure the supervision and support the start-up will need and to maximize its potential of success.
With the paid expert profile, the expert may see all start-up profiles and participate in commenting and networking within the service, in order to promote the experts services and gain an extensive affiliation within the community. The paid expert profile grants a large role in the Grow VC community, developing the start-ups into profitable ventures.
Raising capital and funding start-ups
The peer-review system
As members pay the membership fee, 75 % of that fee is allocated for them as a budget in Grow VC community fund, for fund to invest in any of the community’s start-ups. These micro investments are small by themselves, but as a whole they are of great importance and fuel the whole community. If, for any reason, that investment is not made, the capital will remain in the community fund for future investments.
These investment selections serve as a peer-review system for the community’s start-ups and since members are making these selection with Grow VC’s real money with potential credit and rewards, they will pay attention to choosing the most promising start-up for community fund to invest in.
As the community proceeds with its selections, the most popular start-ups become of increasing importance and attention, even for investors outside the community after they have undergone a process of scrutiny by the Grow VC community. This peer-review system of micro funding could result in a better success rate of start-ups and therefore a higher rate of return on investments, if the community is able to develop and pick out the most promising start-ups.
The three ways of investing in a start-up
The Grow VC community allows those with membership profiles to view different start-ups, review and search out promising start-ups. Those with funder role may conduct a direct investment to the start-up. Actual deals are managed through one of the Grow VC certified partners.
If, for some reason at any time, the funder wants to cancel the investment, he or she may do so before the actual closing of the deal is done via certified partner. All activity is shown in the investment history of the users profile.
“Sweat Equity” investments
In addition to purely monetary investments, users with Expert role who possess expertise in some area of interest for the start-up, can invest their time, or sweat equity into a start-up. This investment can improve the credibility and attention of the start-up, as well as increase the likelihood of success and the pace of development of the business model and logic.
Even as this sweat equity investment is not in monetary terms, it may benefit both parties involved, as well as all the start-ups stakeholders, as the venture develops through and with right balance of experts and professionals.
Community fund investments
Community fund (that is owned and managed by Grow VC), makes its investments based only by the selections made by all subscribed members. Subscribed members may access, evaluate and comment the start-ups and then with their own budget of the community fund (equal to 75% of their paid membership fee) decide for community fund to invest in the most interesting start-up company. Actual investment by community fund are made by Grow VC and managed by Grow VC or via agreed third party (like expert, lead funder or certified partner)
When a start-up is created the entrepreneurs assign a target amount of capital for that start-up to raise. The entrepreneurs may attract investments to the start-up by providing extensive information about the start-up, e.g. business plan, projections or cash-flow analysis, by boosting credibility by involving professionals, e.g. consultants, lawyers or entrepreneurs with good track records and so on. The start-up may attract community members, who may choose to make direct investments, use their budget of the community fund or their own time and expertise depending on their role, or offer suggestions and comments in order to develop the venture further. There success of the start-up is up to the entrepreneurs.
When this target amount is reached, either through micro-investments by the community fund or through a combination of direct and micro-investments, the target start-up is then moved into closing proceeds to a third party where the actual deal is done and financial operations are conducted. Only then will the financial transactions take place. As the community fund investment is transferred to the start-up, Grow VC acquires a set percentage of ownership in the start-up company and a professional agreed by involved parties may take a board seat in the start-up.
If, for some reason, users back out and cancel their investment during the closing process, then the target amount of capital is no longer accomplished and the target start-up becomes open for investments once again.
ROI, community rewards and rating system
Some start-ups will fail, losing all the invested capital, while others will be successful, generating a return on investment for the investors. Funders that have made direct investments with their own capital will get their own ROI directly. Return on investment made by Grow VC community fund investments will be divided in accordance to the Grow VC rating system, between the members who made the original community fund selections. Grow VC rating system ranks the members with a certain set of parameters, including, but not limited to the timing of the investment (e.g. first, among the first, the last to invest) and the relative amount of capital invested from their available budget. The members, who gain the best rating in accordance to this system, have earned a larger portion of the return than those who are rated lower according to this system.
The timing of the selection is determined by a set of parameters, ranking the member on how early on he or she was able to identify the successful start-up. The score decreases as the investor follows other members, motivating the individual members to seek out the promising start-ups as soon as possible and as efficiently as possible.
The relative amount of their budged used will be determined by a set of parameters, judging the members on the “gutsiness” of his or her selection, i.e. how much of the members budget was targeted in the start-up. This will serve as a rank rating the amount of “quality certainty” in the investment decisions, encouraging the members to conduct an extensive review of the start-ups, comment and help them develop their ventures.
Combining this rating system with the community reward will encourage funders, as well as other members, to seek out start-ups early on and conduct a thorough screening of the business plans, concepts and ventures in general. In addition to the community reward being distributed according to the rating system, the system itself becomes a sort of merit for community members. Grow VC may even encourage this process by awarding the highest rated members in the community with additional acknowledgment or prize at a certain time.
Grow VC model is complemented by some fundamental values that bring credibility and conviction to the concept and business model. The core fundamental value is transparency. Transparency in the community and all operations will provide the community with a sense of trust in the system and a conviction of how things are conducted. As financial platforms online, especially in the investment community, value honesty and transparency, it is of utmost importance to provide these to the community, with e.g. transparent term sheets and community investments. When dealing in such a professional niche, it is perceived as most important to make clear the operating systems and ground rules of the community, also to provide the community enough transparency to be able to enforce rules on its own.
So there you have it in full detail. Let us know what do you think?
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This entry was posted on Friday, February 26th, 2010 at 1:51 am and is filed under Business Education, Entrepreneur Inspiration, Private investors, Startup Investors. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.