David Drake

November 18, 2015: Alternative financing emerged following the 2008 global financial crisis. Two of these alternative financing mechanisms are peer-to-peer or P2P lending and crowdfunding where funds are raised online. The growth of alternative financing has been consistent since its introduction, raising $2.7 billion in 2012 across the globe by funding over one million online campaigns using all types of crowdfunding. Since then, amounts raised through alternative finance platforms each year have consistently increased by more than 100 per cent annually, reaching $6.4 billion in 2013 and $16 billion in 2014. Following this growth trend, alternative financing platforms could likely raise up to $34 billion globally by the close of 2015.

Projected growth

In 2013, amounts raised using alternative finance platforms exceeded the expected $5.1 billion mark by about $1.3 billion. A study by the World Bank in the same year projected that amounts raised via crowdfunding globally in developed economies would range between $90 billion and $96 billion over the next consecutive 25 years. This amount is 1.8 times the current size of the venture capital industry globally.

Growth in alternative finance has been driven partly by the entry of established businesses into the crowdfunding and peer lending space. At first, alternative finance platforms featured nascent firms that wanted to raise capital to fund their seed stages when it became difficult to obtain capital from conventional sources. With time, the industry took a leap and is now capturing the attention of well established businesses largely due to the cost-saving opportunities it presents and the speed at which fundraising targets are met.

Addressing a critical gap

This success is giving rise to a modern day digital investing community of investors, issuers, information providers, funding platforms and markets that are competing with conventional financing approaches. From a geographical point of view, developed nations such as the US, China and the UK constitute about 96 per cent of the crowdfunding financial market. However, none of these regions can claim sole control of the digital investing environment because generally, alternative financing operates in a global realm.

The digital investing environment today features different sectors and players that service each stage of the funding cycle online. This means that nascent companies no longer have to find seed capital from friends or family, borrow from banks, seek growth capital from venture capitalists or approach public markets to address liquidity problems.

Instead, the different players and sectors operating alternative financing platforms are creating a digitally integrated space that addresses a very specific economic gap — providing capital to expanding businesses that cannot access funding through conventional financing methods in the most affordable way. The alternative finance approach is therefore doing away with information barriers and making funding from private investments accessible for investors and issuers — a move that enhances access to various asset classes.

Entrepreneurs, who opt for the alternative financing route, are able to raise the level of product awareness and develop a customer base — something that is hard to achieve through conventional fundraising approaches.

Financing early stages

Crowdfunding for debt and equity is able to satisfy the capital gap: a critical need within the small and medium enterprises financing cycle. While angel investors and venture capitalists are increasingly seeking enterprises that demonstrate a clear exit strategy, excluding most nascent firms from accessing funding in the process, equity-based and debt-based crowdfunding now exist to provide funding for enterprises that are shifting from prototype, startup and early growth stages. In 2014, 58 per cent of crowdfunding deals were raised for seed stages while 28 per cent were for Series A stages.

The opportunity

The market opportunity for alternative financing is huge. The current addressable market stands at about $3.3 trillion with already $300 billion of early stage market having been exploited. Crowdfunding contributed some $65 billion into the global economy in 2014 from a combination of both accredited and more than 100 million non-accredited investors. From 2012 to 2014, equity-based crowdfunding rose by more than 400 per cent, representing a 351 per cent rise in quarterly revenue in 2014. In the same year, crowdfunding generated about 270,000 jobs.

In 2015, crowdfunding is likely to surpass the $20 billion raised through angel investing and $34 billion raised through venture capital in 2014.

David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City-based family office, and The Soho Loft Media Group.

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David Drake

October 31, 2014: As the biotech firm  22nd Century Group, Inc. (NYSE MKT: XXII) rang the closing bell on the New York Stock Exchange last Thursday, the multi-billion dollar tobacco industry is at the threshold of this firm’s biotechnological efforts as it went public.

The company has developed a technology based on genetic engineering and plant breeding techniques that they say can control the tobacco plant’s nicotine and nicotinic alkaloid levels. This allows them to grow the plant and reorient its addictive nicotine components without interfering with the taste that smokers are familiar with.

Biotechnology and cigarette smoking

With biotechnology, the company increased the nicotine level in the tobacco plant that aided them in developing “Red Sun” as a premium brand.  It targets “upscale educated smokers” who are looking for a more highly differentiated, super premium brand. The premium cigarette sells at 10 to 15 percent premium than Marlboro and is top billed as the “Best Cigarette Ever Made”.

The company also developed other product offerings intended for the health-conscious populace that have developed a particular liking for cigarettes but do not want the negative effects that goes with it or plan to kick off the habit over time.

Its cessation aid product, called X-22, claims to reduce nicotine dependence among smokers.  They say X-22 smells, smokes and tastes like the conventional cigarette, although it contains very low nicotine. It is currently under evaluation by the Food and Drug Administration (FDA). Congress has given FDA the authority to reduce nicotine in cigarettes to almost zero. Thus, X-22 should have an advantage should it pass the FDA evaluation.

Its Brand A-coded product claims to have very low nicotine content.  It is undergoing modified risk evaluation at FDA so it can be marketed in the country.

Its Brand B-coded product is said to have a tar to nicotine ratio of 6:1, which is lower than the average cigarette ratio of 13:1. This means that a smoker would inhale only 50 percent of the smoke present in an average cigarette. If this is approved by the FDA, this could be welcome news to the people who are at the receiving end of second-hand smoke which causes a variety of diseases.

These three products represent for the firm $1 billion opportunities of the target market segment they are aiming for, according to company press releases.

Using its technology to regulate nicotine levels in tobacco plants, the company is also working with Anandia to come up with Cannabis varieties that they said would give a more potent form of cannabinoids for use in the medical industry. Increasing potency would aid in improving production efficiency and lower costs. The Cannabis market is estimated to be worth over $30 billion in the US.

Market spread and delivery

Growing the plant and creating the products are half the challenge. Does the company have the distribution channel and mechanism to bring them to their target market?

To gain access to more wholesalers and retailers that carry only Master Settlement Agreement (MSA) brands, in September 2014 the company became a signatory to the US Tobacco Master Settlement Agreement.

They also signed a worldwide research license agreement in October 2013 granting British American Tobacco (BAT) access to their technology. BAT’s presence in 180 countries means wider market reach for their products as well.

The firm also forged a consulting agreement with Crede Capital Group to advise on how to venture into new markets in Asia and China. Crede also invested $10 million in the company.

With good execution, these collaborations can potentially secure for them a wider market and more efficient delivery of their products.

Future outlook

Using biotechnology, the company aims to diversify its product lines in order to cater to the booming luxury market and the growing market that puts a premium on health and wellness.

Despite the possibility of their cessation aid products luring away smokers to eventually be non-smokers, the multi-billion dollar tobacco industry might still stand to profit. If their modified risk products get the nod of approval from the FDA, these new brands — with less nicotine or less smoke — could in fact create and sustain a new market out of people seeking both the smoking experience and a healthy lifestyle.

Their plans to conquer the luxury as well as health and wellness markets through biotechnology can be viewed as a strategic move as they venture into the stock market.

According to Bloomberg, the company’s loss of $6.7 million had grown to an even bigger loss of $26.2 million by December 2013, despite increased revenues from $18.8K to $7.3 million. In the same report, it says that the company has a strong balance sheet, that it has grown its cash reserves between 2010 and 2013 to as much as $5.8 million. It also highlighted that the company as among the most efficient in managing inventories. It has only 1,042.34 days of its Cost of Goods sold tied up in inventory.

With its price closing at $2.13 on the NYSE, the 22nd Century Group is an interesting company to watch.

David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City-based family office, and The Soho Loft Media Group, a global financial media company with divisions in Corporate Communications, Publications and Conferences.

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Anatomy of a real estate crowdfunding transaction 

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