The colourful world of crowdfunding

We recently wrote about how crowdfunding was getting under way in Hong Kong. Last week, another site, Bigcolors.com went live. "The reason we call it Bigcolors is that we love big ideas, we love big inspiration, and we want to make colourful ideas reality," says co-founder Australian James Giancotti.

Giancotti has a law degree and worked in management consulting in Australia before coming to Hong Kong where he joined JPMorgan before spending three years with Goldman Sachs. He credits Goldman with teaching him about risk, a key element in investing in start-ups.

He has been involved in start-ups for some years and invested in what has been a Hong Kong success story - 3-D printing manufacturer Makible. He invested HK$200,000 for 13 per cent of the company and it grew in a short period to become a US$30 million to US$40 million company.

Giancotti started Bigcolors because he was getting requests for funding from start-ups but he turned down a lot of them because he did not like the concept or feel passionate about them. But he realised others might feel differently about them.

There are other Hong Kong-based crowdfunding sites such as Fund2.me Bigcolors differs in that Giancotti is himself an angel investor, that is, one that invests at a very early stage before the company has been formed.

Bigcolors will raise a maximum of US$100,000 for an idea, and for that entrepreneurs will give up 20 per cent of the company. But they can alternatively just raise US$25,000 or US$50,000 and part with respectively 5 per cent and 10 per cent. When the idea is posted on the site, it then undergoes a two-week due diligence process by Bigcolors. Once approved, the idea is open to funding for eight weeks.

In a novel variation, should the funding be completed ahead of this period, investors can trade options, that is, trade the rights to own shares in the future company. Giancotti says this is a grey area and there are no regulations in the city that prevent this. At the end of the period, if the company reaches its target, those holding the options become shareholders. At this stage, only accredited investors can invest. Under Securities and Futures Commission regulations, they are required to have assets of HK$8 million with revenue of about HK$2 million a year, and must also be conversant with the risks of investing in start-ups.

The US Jumpstart Our Business Startups Act will, when fully enacted, enable retail investors to invest in start-ups. Other countries are expected to follow and Giancotti is optimistic that Hong Kong will adopt this approach in two or three years.

Bigcolors takes a 5 per cent commission for every successful funding and charges US$2,000 for setting up the company. It takes a 2.5 per cent commission on any trading profits made on the platform. Interestingly, the company does not adopt the Silicon Valley approach to valuation. "Valuations in Silicon Valley are ludicrous. You can get companies valued at US$30 million to US$50 million which haven't earned a cent of revenue," says Giancotti.

Bigcolors gives every idea the same value of US$500,000 so the fledgling companies get to justify themselves and also give good returns to inventors.

One problem with start-ups everywhere in the world except Silicon Valley is that once companies are up and running, funding is limited and they end up going to Silicon Valley for more. Enterproid, an enterprise mobility management software firm that makes the Divide application, was started by ex-Morgan Stanley people in Hong Kong before getting a US$25 million injection from Silicon Valley.

Giancotti thinks Hong Kong has the potential to be a start-up hub for Asia. "It is the richest city in the world in terms of the number of millionaires. So there should be a lot of money available for investing in new ideas." But there is a shortage of quality ideas in the city and that is something he hopes his platform will correct. "We're hoping to create start-ups that set themselves up in Hong Kong."

He says there will have to be more good quality start-ups that achieve a "big sale" before local investors will get involved. Giancotti says Bigcolors will invest in every idea open for funding. "I want to be part of the risk journey. I want all of them to be successful."

This column was updated at 11am on Nov. 19, 2013 to correct the URL of the website fund2.me.  

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