Unprecedented Advantages for Venture Teams – The Beacon Model
BrightChange’s Beacon Model vs. the Traditional Venture Capital Model
A powerful magnet for deal flow
The Beacon Model (BC)
The VC Route (VC)
Permanent (sustained/evergreen) venture capitalization facilities from seed to full-blown IPO that include CDCUs, SBICs and, via Regulation A+ Tier 2, everyday Americans.
A Limited Liability Partnership (LLP) with a 10-year life that stops entertaining portfolio entries in less than three years but whose fee is 2% every year + 20% of the profits.
A wider variety of financing alternatives on VT’s terms – private &/or public, including ATM, PIPE, Reg. A (Tier 2), BDC loans and publicly advertised private placements (PP) are available on short notice to the VT that may need up to $50 million every 12 months – often more, since the venture may progress from DD to being listed and trading on the TSX-V a matter of months.
The LLP’s General Partners (GPs), their syndicated partners and investment committee dictate investment amounts, valuations and terms. Generally, there are no alternatives and the covenants enclosed by preferred shareholders preclude alternatives until the IPO, which hardly ever happens.
Much higher seed stage valuations, set by the VT, and a single class of stock, result in the VT maintaining control of a much higher percentage of the company (a typically 3 to 5 times greater percentage of all equity). The DPO (Direct Public Offering follows Due Diligence available to a large POOL of accredited and non-accredited investor members of a nationwide Consumer Coop (CC). It is likely to be fully subscribed and no individual subscriber can wrest control away from the VT.
AIs investing in a Reg. D, 506(c) PP can sell into the Reg. A Offering shortly thereafter at a profit or buy some Reg. A Units which can trade in weeks.
Seed stage valuations and the size of seed stage investments are usually tiny. If the lead GP brings in two syndicate partners and the Series A investment is $300,000, the lead-VC GPs lumped together as a group place $1000 of their aggregate money at risk – typically about $250 each per seed-stage investment by the LLP. Low seed stage valuations, eventually lead to 90% dilution of the VTs initial equity and a very high risk that they will lose their IP and an abandonment by the GPs.
LP monies in a VC fund are not liquid. They are locked in – typically for at least 10 years.
Very high odds of a successful Tier 2 Reg. A direct offering of Units to the public in 50 states (following TTW in the CC newsletter) and of those Units then trading immediately on the Montreal Stock Exchange. Typically, this can take place within 3-6 months following CC Lab’s DD.
No access to public finance unless the exit is an IPO. IPO wait-times now exceed eight years and 95% of the companies in venture capital fund portfolios today will never do an IPO, so they’ll never have access to public financings.
With the focus on helping the VT, there are DPO loans paying 8% to 10% – no preferred shares and therefore no restrictive covenants (except as may govern a cumulative convertible debt element of PP & Reg. A Units or exercise of the Unit’s EOIPO allocation right).
With the GPs’ focus being less on their VT risks and more on the risk of not getting to manage yet another billion dollar fund three or four years out, investors are now rewarded with preferred shares loaded with covenants similar to bank loans that preclude Reg. A offerings and TSX-V listing.
VTs prefer self-valuation, self-initiated, self-perpetuating, direct rounds of capital formation retaining far more of the profits and thereby keeping control over the IP. They will learn of the ‘Beacon Model’ on-line and word of mouth from CC members and prefer it to VC.
With their Associates still swamping the Partners with opportunities to filter, with funds for many years to come and with plans for continued dependence upon LPs, GPs can’t and won’t view BC as threatening. Some BDs may lobby- hence a need for a lobbying arm of BC besides a 501(c)(3).
Sales and earnings can be greatly accelerated by identifying M&A as a Use of Funds, i.e. an acquisition in exchange for the initial Reg. A’s registered TSX-V Units + At The Market (ATM) cash.
Venture-backed VTs, always seeking their next drink of LP water, seldom state an acquisition in a VT’s next Series’ Use of Funds. In M&A exits, it’s the VC-backed venture that’s swallowed up. Until then, market validation, earnings potential, and valuations all must remain more open to question.
Since Sept. 2013, VTs can advertise a private placement to Accredited Investors worldwide under the new SEC Reg. D, 506(c). No limit on how much can be raised. Better seed options may be available via the CC POOL.
VTs depend upon GPs and their syndicate. The seed rounds are typically less than $0.5 million. Since most VTs get “abandoned” vendors are cautious – less cooperative than those in the Buyers & Producers coop BrightChange will establish.
More than anything else, what entrepreneurs share is a quest for autonomy. The ‘Beacon Model’ preserves their control.
Entrepreneurs are almost certain to lose control. Indeed, odds are that they will be fired. IP is lost when ventures are abandoned and liquidated.
To track the ‘Beacon Model’, VTs must set aside cash for CC Lab’s customary DD fees.
GPs use Rolodex advisors. BEST is unavailable and so is “the FIRM” (McKinsey).
Growth rates get a major boost from liquidity, PIPEs and high P/E ratios (a “Public Premium.
With no market liquidity, P/E ratios are as imaginary as stock option liquidity.
The venture’s Internal Audit Office works for the Board and feeds Directors ideas – opportunities and strategies. Actively engaged, Directors are then better boosters. Ventures outperform. Pivots aren’t as awkward when a new direction would make sense. Audit Team training will be offered at the Consumer Cooperatives’ facilities.
AAll GPs sit on many Boards. Without the benefit of an Internal Audit Office, pivots are rare and lost opportunity costs are frequently incurred. GPs are specialized and most promise their LP investors that 90% or more of the fund will be invested in their specialty. Accordingly, VTs are in a rut. They can’t even join the consumer coop (CC).
Beacon advisors can recruit world-class CxOs and Board Directors because, from the beginning, they can all understand that by the time their stock options vest, the shares can be registered and trade.
Unless the ‘exit’ occurs, stock options are perceived as hypotheticals, or as “Phantom money” – unlikely to ever become ‘cash equivalents’. Leadership may be subprime.
A Coop or ESOP component of the “Beacon Model” is very attractive to local Economic Development Commissions, civic groups, local schools and Mayors. Of course, it is also a means for the company to raise capital from its employees. Local goodwill can often help the community to succeed along with the company.
Venture-backed companies tend to cluster near to venture capital funds concentrated in Silicon Valley, Silicon Alley & Cambridge, MA. Elsewhere, cities & states seek job growth by emasculating their tax base. Even those in ‘free states’ have yet to learn of a BrightChange ahead.
It takes a global Ecosystem focused on the VTs needs to assure an exceptionally high success rate such as that experienced by Mondragon coops.
Venture capital fund GPs focus on LP-relations aimed at garnering assets to manage, not on most Venture Teams (VTs) in their portfolios.
Glossary of Terms Within this Document
AI – a U.S. SEC ‘Accredited Investor’ (one out of 12 million millionaires worldwide)
AIR – international Accredited Investor Registry that gives a ‘thumbs up’ for VT’s PPs.
aiWeek – online publication for a million AI members of AIR
ATM – equity offered At The Market
B&P – Buyers & Producers international purchasing cooperative for VTs, BEST, and Discovery Ctr. Members (including thereby all AIR members too), BC BoA and BC & VTs’ Directors worldwide.
BC – BrightChange, Inc – (www.BrightChange.org) a public charity registered in Colorado, US. whose shareholding in AIR will let BC administer 3 cooperatives: BEST, Discovery Centers Worldwide and Buyers & Producers (B&P)
BD – Broker Dealer / Investment Banker. Venture-backed VT’s and others not tracking the ‘Beacon Model’ don’t set their own valuations. Rather than low-cost DPOs introduced via ads in aiWeek and BEST DD to registered AIs worldwide, they are introduced to AIs by one BD or BD syndicate.
BDCE & BDCW – planned ticker symbols for two BDCs to be externally managed by BIP.
BEST – BrightChange Executive Service TaskForce (Coop) – international crowd-sourced advisors to VTs. The BEST Cooperative acquires founders’ shares when Beacon-Model-tracking VTs re-charter in Delaware.
BEST DD – independent, globally-crowd-sourced-team Due Diligence reports on VTs offerings.
BEST IR – an Investor Relations (IR) person/firm approved by BEST to take advantage of the opportunities to serve VTs having the distinction of tracking the ‘Beacon Model’ of sustainable finance and so in line for permission to access (via aiWeek Media) up to 1 million AIR member millionaires.
BIP – Beacon Investment Partners LLC (DE) (www.BBDC.us)
BoD – Board of Directors
CC – a nationwide Consumer Cooperative comprised of members of local coops and CUs and customers brought to the CC by any and all retailers seeking far better rates than Visa, MC …
CDCU – Community Development Credit Union
DD-Blog – a blog for ‘wisdom of the crowd’ comments/updates by VT-invited AIs having ‘thumbs up’ from AIR. Participation restricted to the BEST DD team, the VT and said AIs who have digitally signed the standard BC non-disclosure/non-compete agreement before viewing the DD report.
Dir – Director, member of BoD
DPO – a Direct (Public) Offering such as a Reg. A Tier 1 or Tier 2 not requiring the expense of a Broker Dealer (BD) underwriting. Not restricted to accredited investors (AIs). Tier 2 offers are covered securities – not subject to any state’s Blue Sky laws. Max = $50 mm / 12 mo. period.
EOIPO Allocation Right – an ‘equal opportunity’ for early investors in the VT’s PP and Reg. A Units – the right to another common share at the IPO Offering Price (opening bell price) on the NYSE or NASDAQ. This allows early investors to accomplish a ‘full blown’, form S-1 Initial Public Offering on the NYSE or the NASDAQ as a DPO by simply exercising their rights without waiting years for “the IPO window to open” or being dependent upon a BD.
ESOP – (U.S.A.) Employee Stock Option Plan means for the VT’s workforce to purchase 20% – enough equity to be sure the company won’t leave town for Viet Nam (wages there are 80% less than in China). See brightchange.org/virtuous–circle/ Mayors and Governors in ‘free states’ can skip the tax giveaways since no VT anywhere is holding off (until taxes come down) launching and creating jobs in any ‘free state’.
Free State – DC, NY and other ‘SEC coordinating’ U.S. jurisdictions coast to coast where John Q. Public (the ‘everyday American’), can hear TTW ads, request an Offering Memorandum (if there is a Reg. A offering after TTW) and invest any amount in the Units. Ex: each block of 100 Units might require a direct investment of $20.
GP – a General Partner – Venture Capital funds typically have about four GPs who found a new fund every four years. Each GP invests 0.25%. The LPs invest the rest. GPs charge 2% / year.
Internal Audit Office (IAO) – an audit and strategy team working directly for the Directors
LP – Limited Partners put up 99% for 10 years starting in the “vintage year” of each new VC fund – LPs are union pension fund managers, endowments & other asset managers (see VC).
NFCDCU – National Federation of Community Development Credit Unions
PIPE – Private Investment in a Public Entity
PP – Private Placement of securities – Ex. a SEC Reg. D, 506(C) private offering advertised to AIs
Reg. A – an SEC exemption for U.S. securities offered to the public, i.e. ‘everyday Americans’, i.e. John Q. Public residing in a ‘free state’ like NY. Short for ‘SEC Regulation A’.
TTW – Test The Waters – general advertising (ex. radio) testing interest in a contemplated Reg. A offer of securities to adults residing in a ‘free state’ like Washington.
UA – Unfair Advantage of a ‘Beacon Model’ tracking Venture Team (VT) vs. a ‘venture-backed’ VT
VC – Venture Capitalist General Partner (GP) or a VC fund for seed and/or early-stage growth VTs. VC funds typically liquidate in 10 years whereas BDC funds on the NYSE or NASDAQ are evergreen and pay yields of 8% to 10% per year over time.
VT – Venture Team