VENUE Market Spotlight

EqUity CrowdfUNdiNg aNd VENtUrE Capital

April 2013 Edition

CoNtENtS
welcome foreword Survey Venture Capital in the room about rr donnelley about Venue 3 4 5 9 10 11

VENUE Market Spotlight: Equity Crowdfunding and Venture Capital

wElCoME
Dear Valued Reader, Its a word that hasnt even made it into most dictionaries. Crowdfunding. Though crowdfunding is relatively new, it is already drawing the attention of deal-makers, venture capitalists, and regulators. All of this makes Equity Crowdfunding and Venture Capital a worthy subject for this edition of the Venue Market Spotlight. The idea of crowdfunding, individuals joining together to raise capital to support the efforts of specific individuals or organizations online, has gained tremendous momentum over the past couple of years. During 2012, capital raised from crowdfunding increased 81% versus the previous year, reaching US$2.7 billion. Predictions are that it will reach over US$5 billion in 2013. A little over a quarter of all crowdfunding initiatives are based as social causes, with game or gadget idea funds following in second. Although crowdfunding has become a popular way to raise capital through individual donations, equity crowdfunding has emerged as a way for investors to buy small amounts of equity. This has drawn the attention of US policy makers and led them to address equity crowdfunding in last years JOBS Act. Regulators interest in equity crowdfunding has spread internationally, as illustrated by the Italian government submitting requests for public comments on equity crowdfunding just last month. As technology continues to introduce new capabilities more quickly than dictionaries can absorb them, RR Donnelley is keeping pace as we continue to aggressively invest into new technologies year after year. The introduction of equity crowdfunding may provide exciting new possibilities for entrepreneurs and investors alike and we hope that you enjoy the perspectives our respondents shared. Sincerely,

tom Juhase President, Financial Services Group RR Donnelley

forEword
in recent years crowdfunding has grown in popularity as a way to raise capital for new products or services. individuals make donations to a company whose vision they support but do not receive a stake in the company in return. as it stands now, only accredited investors can provide the financing in return for equity in the startup. However, all this looks likely to change. the Jumpstart our Business Startups (JoBS) act, signed into US law in april 2012, paves the way for small companies to offer equity in their business to non-accredited investors in exchange for financing (i.e., equity crowdfunding).
For this months Spotlight, Mergermarket interviewed lawyers and venture capitalists based in the US to gain insight into their opinions on the potential impact of equity crowdfunding on capital markets. Respondents expect that the JOBS Act (which celebrated its one year anniversary this month) will not see the section pertaining to equity crowdfunding implemented for another year (H1 2014). To gauge sentiment on the viability of the proposed funding method, respondents were questioned about the benefits and challenges for both issuers and non-accredited investors. Comments on potential fraud and the difficulty of managing stakeholder expectations and demands reflected great concern, but the potential benefits for the economy (e.g. job creation) were duly noted by several respondents. This newsletter examines key sectors for investment and also discusses the relationship between venture capital and crowdfunding. While the impact of equity crowdfunding is still to be assessed, the buzz surrounding this new form of fundraising has entrepreneurs and investors alike keen to explore the possibilities.

we are enthusiastic but are in a holding pattern until the SEC issues clear rules about equity crowdfunding.

VENUE Market Spotlight: Equity Crowdfunding and Venture Capital

SUrVEy
which of the following best describes your view of equity crowdfunding? when do you expect equity crowdfunding to be rolled out on a large scale?

8%

8%

H2 2013
33% 40% 17%

H1 2014 H2 2014 2015 and beyond

27%

67%

I think its a good idea, and as per the JOBS Act will increase entrepreneurship and employment I think the benefits of equity crowdfunding are still up in the air and will be determined once Congress establishes clear guidelines I do not agree with the approach and believe it should be left to accredited investors

Despite the lack of consensus over the concept itself, the vast majority (80%) expect to see equity crowdfunding rolled out in the future. Very few, however, are expecting this will happen in 2013.

Opinions over the merits of equity crowdfunding are divided. The plurality of respondents (40%) expect to see a net gain from the new method of fundraising, but one-third of respondents are not in favor of the approach. The remaining 27% of respondents plan to reserve judgment until formal rules are established by the SEC. A lawyer advocates the approach: Equity crowdfunding is a very good idea and will aid entrepreneurs with strong ideas in accessing capital when angels are often hard to come by and banks are loath to lend. Equity crowdfunding will make capital available for startups and will pave the way for them. Venture capital respondents are less optimistic and point to the experience needed for carefully, and skillfully managing due diligence and risk. Anecdotally, one investor explains: Funding startups and making them a success to get returns is not as simple as it looks. We ourselves have faced multiple difficulties despite our efforts and strict investment conditions.

waitiNg for SEC rUlES, but Hopeful for H1 2014

A year after President Obama signed the JOBS Act into law, there are still no formalized rules; with the SEC missing several deadlines for proposing regulations, most recently in January. But the industry infrastructure is already growing and many online platforms are ready and waiting for the regulations to take shape so they can offer this new service.

SUrVEy (CoNtiNUEd)

what do you expect to be the biggest challenge/hurdle to equity crowdfunding?

what sectors are most ripe for equity crowdfunding investment?

13%

Fraud by issuers
Percentage of respondents 33%

60% 50% 40% 30%

53% 47% 40%

21%

Management of multiple investors post-issuance Limitations on amount of capital raised per year Compliance with the securities laws (once established) property/ publishing rights

20% 20% 10% 0% Real estate Energy

20% 13% 7%

33%

There are always risks when investing, and respondents expect parties on both sides to have concerns they must consider before engaging in the equity crowdfunding marketplace. From the investors point of view, there is the possibility that the funding will be misused and fraudulent issuers may use the platform to raise capital for illegitimate companies. From the entrepreneurs corner, while the access to capital may be attractive in the short term, the time-consuming nature of managing multiple investors post-issuance is unknown. Equity crowdfunding may attract new investors, with varying expectations of the shareholder role. One-fifth of respondents point to the limitations of capital raised (capped at US$1m per year) as the biggest challenge. As one lawyer explains: Equity crowdfunding is only suitable for very small scale startups and will not be of use for those which have multidimensional expansion plans.

A slight majority of respondents (53%) expect the consumer sector to offer the most attractive equity crowdfunding investment opportunities for the masses. One venture capitalist explains the tangibility of the sector: People understand consumer products because they shop for them directly and understand their viability. Consumer products companies can achieve positive cash flow relatively fast giving the possibility of quick returns.

CoNSUMEr SECtor MoSt rElataBlE to CrowdfUNdiNg iNVEStorS

Another investor adds: Entrepreneurs in the TMT sector are widely using online funding platforms to facilitate access to finance for small businesses and to fund specific creative projects and equity crowdfunding is among the top priority.

VENUE Market Spotlight: Equity Crowdfunding and Venture Capital

Pharmaceuticals, medical and biotechnology

Technology, media and telecommunications

Business Services

Consumer

Transportation

do you expect equity crowdfunding to crowd out traditional venture capitalists/accredited investors?

How do you expect Nasdaqs recent announcement to partner with Sharespost and start an exchange focusing on the nonpublic market to impact traditional secondary equity markets?

Yes
33%

No
40%

33%

It will take capital away from other secondary markets It will help companies prepare for IPOs later down the line Limited to no impact

67%

27%

Respondents do not expect venture capitalists to be crowded out by this new process, although most acknowledge that there will be some effect, if only marginally, in the short term. There are niches in the market that can be fulfilled by different investors. One lawyer explains further: Equity crowdfunding will be limited to a specific segment which will be for very small companies and its idea is significantly different to that of venture capital or accredited investors. Another attorney who also agrees that the market is big enough for both types of investors expresses cautionary words: Equity crowdfunding will link inexperienced investors with the most speculative ventures in the market. The critical concern is that equity crowdfunding will be used predominantly by companies that venture capital firms have already shunned as too risky or unfit.

Two-thirds of respondents expect the recently announced partnership between Nasdaq and SharesPost to have a limited or positive impact on secondary equity markets. They say it will provide a market for the otherwise illiquid, high-risk asset class, and help prepare private companies for IPOs.

New partNersHip eNables early casH out of otHerwise illiqUid iNVEStMENtS

CrowdfUNdiNg will Not Crowd oUt VENtUrE Capital

The remaining one-third is concerned. One venture capitalist states: There will be a big impact on the secondary markets as they are already struggling for survival and a regulated exchange focused on the non-public market will certainly drain the secondary equity market. Through this new exchange supported by Nasdaq, a number of small companies will be able to get exposure and market themselves better in front of the investors.

Venture Capital in the room

Venue data room: A special report
Cyan. Inc. IPO
April 5, 2013
Counsel: Wilson Sonsini Goodrich & Rosati (Cyan, Inc.) and Cooley LLP (Underwriters) Underwriter: Goldman Sachs & Co., JP Morgan Securities LLC, Jefferies and Pacic Crest Securities LLC Industry: Computer Software

Tableau Software IPO

April 3, 2013
Counsel: Cooley LLP (Tableau Software) and Fenwick & West LLP (Underwriters) Underwriter: Goldman Sachs & Co., Morgan Stanley, Credit Suisse Securities, JP Morgan Securities, UBS Securities, BMO Capital Markets and JPM Securities Industry: Computer Services

Riverwood Capital
March 19, 2013
PE Houses: VantagePoint Capital Partners and Riverwood Capital LP Industry: Industrial Automation, Engineering Services

announces Series E Funding led by

Liquid Robotics

Facebook, Inc. Atlas Solutions from Microsoft Corp.

February 28, 2013
Financial Advisor for Seller: Citi Counsel for Buyer: Weil Gotshal & Manges LLP Industry: Computer software and Consulting

acquires

Ambit Biosciences Inc. IPO

February 21, 2013
Counsel: Cooley LLP, Latham & Watkins LLP (Underwriters) Underwriters: BMO Capital Markets, Citigroup Global Markets Inc., Leerink Swann & Company and Robert W. Baird & Co. Inc. Industry: Biotechnology

Model N Inc.
February 14, 2013
Counsel: Fenwick & West LLP, and Wilson Sonsini Goodrich & Sosati PC (Underwriters Council) Managers: JP Morgan Securities and Deutsche Bank Securities Underwriters: Stifel, Nicolaus & Company, Pacic Crest Securities, Piper Jaffray & Co. and Raymond James & Associates Industry: Computer Software

IPO

investment

Axiom attracts from Carrick Capital Partners

February 6, 2013

YuMe Inc. acquires Crowd Science Inc.

January 16, 2013

Avis Budget Group Inc. acquires

January 2, 2013
Counsel for Seller: Latham & Watkins LLP Financial Advisor for Seller: Morgan Stanley Counsel for Buyer: Kirkland & Ellis LLP Financial Advisor for Buyer: Citi Industry: Automotive

Zipcar Inc.

Buyer: Carrick Capital Partners, LLC Industry: Business support services

Industry: Computer Software, Media

For more information: Please contact your RR Donnelley Sales Rep. Call 1.888.773.8379

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aBoUt rr doNNEllEy
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VENUE Market Spotlight: Equity Crowdfunding and Venture Capital

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VENUE Market Spotlight: Equity Crowdfunding and Venture Capital