kidmercury

We recently discussed the future of valuation, and how valuation, like economics, is currently a broken science desperately in need of new paradigms. As I noted in my post on Bowie bonds, I think debt-based fundraising is favorable, and perhaps is connected to how the credit and banking industries are disrupted and re-built.

The issue has been on my mind lately, as we've decided to try raising money for my trading site. I previously tried to raise money for "the big idea," which is to create the platform that produces niche communities like my trading site, and allows them to connect and users to create an identity across all these communities. The little effort we put into raising money for the big idea proved to be unsuccessful, which in hindsight is almost certainly a blessing in disguise. My busines partner, however, has convinced me that now is a good time to raise money, as we have the model figured out and working, can now spend wisely to scale. We know what we need to spend on, we both have experience managing and building teams, so we are confident that we can execute this properly, and that if we raise a relatively small amount of money (like $1 million) we will be able to take that very far. As we are profitable and cash flow positive, we can also start issuing a cash flow back to investors soon -- hopefully from day one, as that is our plan. This element, coupled with our microfinance approach and our virtual currency, leads me to feel confident we can raise money in this environment while still hedging our concerns about dollar devaluation, which regular KidMercuryBlog readers are all too familiar with.

While we thought about debt-based models for raising money, ultimately we could not come up with a compelling enough model at this point. (However, I remain keen on the idea, and hope that in the near future I will be able to work on creating some new debt-based investment models). So, we are selling equity of sorts, although with a new model that is more consistent with microfinance, a la Kiva and Kickstarter. More details to follow in the coming weeks when we launch this initiative.

But why is it that equity financing is more appealing than debt financing for so many? Aside from the fact that the potential upside is greater, there is the issue that equity has a better sales pitch. Buying bonds is boring. There's not much of a story, there's not supposed to be much fluctuation, and you're just supposed to get your fixed payments. Personally whatever makes me the most money is what I find exciting, so the safety that bonds can afford is what I find exhilarating (although I should note that in the current environment in the US, bonds are a terrible investment in my opinion...but in a stable economy they are a nice and safe way to slowly win the race).

So a big part of why we are going with an equity-based financing route is because the story is a bazillion times better, and thus is far more likely to succeed in getting us funding. While we hope to attract those who bring the spirit of capitalism and are seeking high returns (which we of course seek to give them), we'll likely get many if not more people who just want to feel like they own the community, or who want to be a part of decision-making, or who find our business model as revolutionary as we believe it is, and thus want to be a part of the excitement of the disruptive innovations we are focusing on (virtual currencies, free publishing, and microfinance). In microfinance, I think a lot of the investing motives are not profit-based, but rather are passion-based. Of course, I don't view it as an either/or scenario; I want whoever invests to have this be their highest yielding investment (from a percentage basis), and I want them to share and help build the passion that we have. If we can accomplish that, the fundraising mission will be an enormous success.

Of course, the key to selling anything, but particularly investments, is belief: we have to get investors to believe in us if we expect them to invest their money in us. Put simply, we have to give them something to believe in. And so, the song for the post is "Something to Believe In" by Poison.