You've heard a lot about crowdfunding since JOBS Act Title II passed last year. Since then, early stage companies have turned to general solicitation in search of funding. The caveat is that investment must come from accredited investors through SEC-registered intermediaries. This has given rise to many equity crowdfunding platforms. These portals, mostly online, allow accredited investors to inject capital into private businesses through lending or investment in exchange for an ownership stake. Colloquially, this is known as equity crowdfunding.
Equity crowdfunding is fundamentally different than the popular donation or rewards-based crowdfunding. With a platform like Kickstarter for example, start-ups and small businesses provide supporters with product samples or exclusive orders in exchange for financial investment. These campaigns have raised capital for products like innovative smart watches, affordable 3D printers, and virtual reality headsets.
To elaborate the difference between the equity and donation crowdfunding models, let's consider the virtual reality example, Oculus Rift, a gaming display that garnered over $2.4 million in 2012 through Kickstarter donations. Fast forward to March 2014 – Facebook acquired Oculus for $2 billion. Unfortunately due to the lack of equity stake, the original supporters that funded Oculus Rift's capital raise did not see the 200-fold return after the acquisition event.
Smart money wants to tap into the lucrative upside that comes with ownership. As a result industry and even niche specific portals are attempting to secure space. For example RealtyShares allows for real estate crowdfunding for accredited investors, Indiegogo focuses on raising capital for creative products, and IPOvillage pushes equity funding for NASDAQ IPOs, just to name a few. It is a basic financial concept that options have value, competition increases efficiency, and having platforms focus on specific areas helps reduce category confusion. Perhaps most advantageous for businesses is the ability for these portals to target a specific type of investor. This increases the likelihood of ventures reaching their ask.
Enter sports business
In May 2014, Alchemy Global extended the equity crowdfunding trend into sports and entertainment. In addition to being the space's first portal for accredited investors, Alchemy separates itself from portals in other categories by doubling as an advisory firm, chief executive Andy Brusman told me during a recent conversation.
With the rise of crowdfunding platforms, Alchemy knows that competitors will arrive in the sports entertainment niche like what has happened with other sectors. "Overall the market has different portals popping up each day," said Brusman. "The easiest way to compete is by lowering your price during the capital raise and that's just not where we want to be."
Alchemy is instead positioned to be a premium portal with value adding services "to stand above future competition."
Currently there are no other crowdfunding platforms for accredited sports entertainment investors. But there are many other sport investment vehicles and viable options for one looking to invest in this space. Traditionally, you could invest in sports in a few ways: own a team, collect memorabilia, or simply purchase stock in an allied business. In the past few years, we have seen an increase in sports-based structured investments and ventures exploring new frontiers of the space. For example, online broker Motif operates somewhere between mutual funds and ETFs, like with this sports business collection. Then there are new age asset-backed securities like debt issued on singer-songwriters and Fantex equity shares backed on athlete entertainers. Creative ventures as a whole are also on the rise. Examples include experiential entertainment like extreme obstacle races, data capture devices like sport wearables, and real-time fan interaction like innovative fantasy games.
So given other sports business investment options that exist, why should an accredited investor go with equity crowdfunding? According to research by EquityNet "About 75% of businesses seeking equity crowdfunding expect to generate revenue in their current fiscal year and a majority ... will be profitable in three years or less." The report also states that a majority will "grow 25% per year over the next five years." Investors want to know when and how they will see a return. The most common exit strategies for businesses seeking equity crowdfunding are liquidation and management buyout events.
Diversification is considered a standard investing best practice. This is true for all levels of investment experience, from the weekend trader to the most seasoned financier.
At the most basic level, portfolio diversification reduces the exposure to risk when considering long-term financial objectives by creating a more consistent portfolio performance. "We highlight companies that are worth investing in and investors are able to see the return as a result," said Alchemy Global president Peter Ruppe. "They [investors] are looking at it from a portfolio perspective. They have so much in stocks, so much in bonds, so much in real estate, etc. It makes sense to put some of the money in sport entertainment enterprises."
The global sports industry is valued at over $600 billion and growing annually. You can analyze cash flow, EBITDA, net income, market cap, and ratios galore; yet perhaps the most convincing metric with sports business has nothing to do with the financials. (Let's overlook any behavioral bias), the passion from leagues, teams, businesses, management, owners, fans, and consumers is overwhelming. Live entertainment, technology, and television are the core tenets of the business of sport. On their own these verticals are highly visible and socially influential. Together these factors create significant clout, nostalgia, and a sexy investment. The bonus is the many value adding and high return opportunities that exist. What's better than the chance to invest in an area you know, follow, and love without the elevated "play money" risk? This drives investment vehicles to tap into the endearing and increasingly profitable aspects of the sport entertainment business.
The quick answer
Contemporary asset allocation in sports' derivative businesses is fueled by the high growth trajectory, positive returns, and an overall attractive value proposition.
As stated, investing in sports and entertainment offers an alternative diversification tool. Many profitable prospects exist, all of which include a very engaging and value adding pleasure factor. Also, there is a rise of exciting new areas of ventures and investment vehicles. Equity crowdfunding through portals like Alchemy Global allow the accredited investor to tap into these opportunities that many believe are low-hanging fruits.
To give you an idea of what's out there, let's look at the engagements currently seeking funding with Alchemy. These include Storelli, which produces advanced athlete protection apparel, Apera offering anti-microbial sports bags, and 110% that makes compression and cooling gear for weekend warriors. Hip and trending companies like these help contribute to the appeal for investors interested in allocating resources in this space.
Curated and different business model
The vast majority of portals will take a 'success fee' should a venture be successfully funded. The standard for this fee is between 3% and 10%. Some may charge a membership fee (i.e. you pay to list your venture), and some may take an equity interest in the venture.
For Alchemy Global, part of its differentiation is its unique business model. First, Alchemy has a proprietary and curated platform to find the highest quality companies. Other platforms let any user register their business for funding. "Most competitors focus only on the capital raise and then the relationship ends. For us, that's just where it starts," Brusman said.
By being involved in the client selection process, Alchemy finds the highest quality company and thereby lowers investor uncertainty. "In our case, we get inside these companies, we really know them in and out. We have to know there is something to stand behind and that's where the trust comes in," Ruppe told me. "If investors don't come in then nobody wins, thus trust is key."
Alchemy's revenue is sourced from value adding services like marketing, branding, securing strategic partnerships, and more. Distinctively, Alchemy focuses on growing the business long after the capital raise. Other portals are not involved in seeing the growth process through. All Alchemy board members have rich backgrounds in sports and finance and utilize their connections for the clients benefit. As a supplement, Alchemy has brought on strategic investors that serve as advisors to client engagements.
A look ahead
Right now the SEC mandated "accredited investor" regulation is the largest barrier of entry for other platforms like Indiegogo to get into the sports entertainment niche. There is little incentive for an early stage company to list with a platform lacking category expertise when the only players in the game are serious investors looking for the optimal situation. Instead start-ups turn to the vast experience from sports focused Alchemy Global to create appeal for potential investors. Continuing the example, if Indiegogo could provide equal quality advisory services then that would even the playing field – but this is not easily done. Therefore, Alchemy's expertise provides a security blanket to an accredited investor, naturally winning his business.
If the existing income requirements are lifted it would create a fun area for casual investors and sports fans to throw money at just to see what happens – and in doing so companies would likely still reach their capital ask. Barring any SEC adjustment, this may just occur. The fourth quarter under the JOBS Act will likely introduce non-accredited investor crowdfunding activity. Under regulation, non-accredited investors with income less than $100K would be able to participate. Simply, any interested party regardless of income benchmarks would be able to invest in private companies via crowdfunding portals. This would increase Alchemy Global's competitor set as alternative portals would emerge. These new portals would be able to charge a lower fee due to lowered costs (no expensive leadership team and other services). Smaller stakes sports-based companies would turn to these cheaper alternatives to secure non-accredited investor funding. Alchemy would remain a premium option.
As this democratization of equity crowdfunding nears, it remains to be seen if niche platforms will give way to wide-focused portals (like how donation-based Kickstarter hosts any idea regardless of category). If the SEC constructs a workable infrastructure, private equity crowdfunding – niche and otherwise– will only continue to grow.
With the current circumstances in today's capital market, equity crowdfunding is the future for accredited investors in sports and entertainment. That is until the (inevitable) next investment vehicle is engineered to tap into the endearing and increasingly profitable aspects of the sports entertainment business or when the SEC changes the game.