7 minute read 26 Apr 2018
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When traditional funding fails you, what are the alternative paths to growth?

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US Americas

Multidisciplinary professional services organization

7 minute read 26 Apr 2018
Related topics Growth Start-ups Innovation

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Funding options are widening beyond traditional institutional funding, bringing new growth opportunities for early-stage businesses.

Sometimes the road less travelled can be the most rewarding. Alternative funding, such as peer-to-peer lending, invoice trading, crowdfunding and corporate venture, can offer entrepreneurs flexibility, autonomy and speed to market. And for investors, in addition to the commercial reward, it can offer the opportunity to play a part in a founding story that might resonate with them personally.

One business that got its start from non-traditional funding is IRIS (Image Retrieval Identification System) Corporation Berhad, a Malaysia-based company known for its secure-identification products. “Our road to fame is that we invented the electronic passport in 1998,” says Tan Say Jim, Managing Director of IRIS.

Tan, who founded the company in 1996 with two partners, faced a difficult battle to convince investors to back a Malaysian technology company; he was forced to fund growth outside of traditional financing routes.

Initially, he approached a local conglomerate for corporate venture backing. Although Tan got funding for the manufacturing facility, he still needed funding for research and development.

Round two: Wall Street

In his attempt to secure additional funding for R&D from an investor on Wall Street, Tan was told, “If only you were not a Malaysian company, this thing would have flown.”

According to Tan, part of the issue was that investors were skeptical of a technology company from Malaysia. At that time, the country didn’t possess the reputation of being rich in technology talent, like Japan, Germany or the U.S. “I could have just folded up and collapsed,” Tan says, recalling the rejection.

Instead of folding, he used his existing resources to move ahead. Borrowing funds, Tan engineered the purchase of a company, which he listed on the Malaysian stock exchange. He then possessed enough funding to finance R&D for IRIS.

Slow sales

Another issue that restricted the growth of the company was the slow sales in its nascent days. This meant there was little profit to reinvest in the business. Tan speaks about the reluctance of immigration heads to buy the IRIS electronic passport program technology. “A lot of immigration heads came to visit Malaysia and to visit IRIS. They came, they saw, I didn’t conquer.”

Tan attributes the initial slow sales to the technology being unfamiliar and new at the time. Most immigration stakeholders didn’t want to risk being the ones to test out the technology. But instead of giving up, he adjusted his strategy. Rather than focusing on international travel hubs that had the added complexity of Visa Waivers to consider, such as the US, the UK and Japan, he turned his efforts toward developing countries.

It’s always about improving something and coming up with innovations.
Tan Say Jim
Managing Director, IRIS

Equity crowdfunding grows as an alternative financing option

While IRIS used different means of alternative funding to develop the company, today’s start-ups have the fortune of having innovative financing options, including a variety of regulated online crowdfunding platforms. The growing popularity of crowdfunding is undeniable. In 2015, US$34 billion was crowdfunded globally. According to a 2013 study, the World Bank predicts that crowdfunding could reach up to US$96 billion globally by 2025. 

One of the reasons behind crowdfunding’s surging popularity is because of its democratization of the fundraising process for those entrepreneurs who lack a bulging contacts book or have a disruptive idea breaking ground that would have trouble getting funding from traditional lenders, explains Luke Lang, the Co-founder of Crowdcube, a leading crowdfunding online platform in the UK, established in 2011.

Darren Westlake and Luke Lang, Crowdcube

Darren Westlake (left) and Luke Lang (right), co-founders of Crowdcube

Three of the most successfully funded campaigns on Crowdcube that have resulted in exit paths to larger corporations include the sales of e-commerce site Wool and the Gang to BlueGem Capital, electric car rental business E-Car Club to Europcar and the UK-based craft beer company Camden Town Brewery, which was acquired by Anheuser-Busch InBev.

The acquisitions have allowed these start-ups to use their parent-company resources to expand: for example, Camden Town Brewery has been able to fully fund the building of its state-of-the-art London brewery, which it had partially funded using Crowdcube in 2015.

Another UK-based craft-beer company that has found success in alternative funding to scale up is BrewDog, a Scottish craft beer company. On it most recent crowdfunding campaign Equity for Punks IV, the craft brew company broke a crowdfunding world record by raising US$23,180,000 (£19 million). “Pretty much everything we have achieved so far is down to our [crowdfunding] community,” says Co-founder James Watt.

The company’s growth has been directly funded by crowdfunding, powering the company’s reach to 55 countries, opening 44 bars across 11 different countries and most recently, funding the construction of their flagship American brewery in Columbus, Ohio.

No risk, no reward

Whether you crowdfund or borrow from a peer, alternative funding isn’t without its challenges. The bottom line is that to raise funds: “You must have belief,” IRIS Co-founder Tan advises young entrepreneurs. Financing a start-up or expanding operations is not for the uncommitted.

And while alternative financing can certainly support accelerated growth and provide more flexibility by allowing the business owner to select a finance program that accommodates the particular needs of the enterprise, “There’s no guarantee you will succeed,” Tan says.

However, those who are willing to fund outside of traditional boundaries and remain determined in the face of rejection, have a stronger chance of forging a clear path to growth.

Summary

Alternative finance, such as crowdfunding and peer-to-peer lending, isn't without its challenges. But it can pay off for entrepreneurs who are determined to succeed.

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By

US Americas

Multidisciplinary professional services organization

Related topics Growth Start-ups Innovation