Crowdinvesting in Russia: the StartTrack Experience

Crowdfunding collect money for a new gadget or any other project, crowdsourcing get the knowledge and experience of many people. Like many other Anglicisms, both terms designate long-existing phenomena: a group of people throw off money to implement a project or help its development as much as possible. Volunteers joined forces and to the digital era, the advent of the Internet only simplified this process, lowered the threshold of entry and the minimum participation.

Similarly, crowdinvesting is raising capital in small businesses from a large number of micro-investors. As in crowdfunding, participants collect cash, but in return receive not electronics, a film, a video game or some kind of bonus, but a share in the company. In case of success, the Kickstarter backer will receive pre-ordered goods and warm thanks from the authors of the project, crowdinvestor will receive a profit.

Crowdfunding sites on the ear: we know Pebble records and loud failures of Ouya and Coolest Cooler. Crowdinvesting does not promise a tangible gadget, and perhaps, therefore, less is known as a phenomenon. In Russia, crowdinvesting began to develop only a few years ago, today there are platforms aimed at the domestic market.
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We talked to StartTrack CEO Konstantin Shabalin, one of the crowdinvesting platforms, about the development of the industry and its possible regulation by the Bank of Russia.

StartTrack platform was founded in 2013 with the support of the Internet Initiatives Development Fund. StartTrack creates a “stock exchange” on which small and medium-sized businesses (SMEs or SMEs) attract money in various formats - from the sale of shares and stocks to loans - from a wide range of private and institutional investors.

In 2014, when starting up, the company structured the first deals like in an “investment boutique” - employees personally looked for investors and companies, concluded contracts on paper. This process was complicated and expensive, yielded little profit. Having accumulated experience in StartTrack focused on transactions with small and medium businesses. The company assessed whether there is a demand for such services. As it turned out, the organization was convenient for investors, which selected good companies, prepared them, helped determine the cost and structure of the transaction.

Investors and companies were interested in not only deals in the share purchase and sale format, but also loans. Investors were willing to give money at great risk in order to receive 20-30% per annum, company owners to risk personal guarantee in order to receive it. StartTrack noticed something similar and moved from “boutique” deals to transactions through the internal trading system, which reduced the sentence from 2-3 days to five minutes. This gave a powerful impetus to the development of the site.

Now StartTrack is trying to attract as many companies as possible and increase investment. The process is gradually automated, so that it is easier for representatives of companies to submit applications without collecting a lot of documents, for investors it is easier to get acquainted with companies and assess risks. In 2017, the platform plans to make about 1.5 billion rubles in turnover.

How did the name StartTrack come?

After we decided to create a site, the name could not be chosen for about six months. There was a huge amount of options. We made matrices of words, mixed, conducted online and offline surveys among different people, built a mathematical distribution of votes and finally concluded that the majority’s attention was drawn to the most banal names that didn’t inspire us at all.

There was one day before the release of the press release about the launch of the site, but the name has not yet been. I started flipping through Ozhegov's dictionary, and somewhere on the third hour, the construction of start-ups and traction or start-up appeared in my head. Of course, these words were not in the dictionary. Colleagues liked it. But it has nothing to do with the film. I am not a fan of “Star Trek” at all, I like Star Wars much more.

In the future, this name caused some problems. Many still associate us with the film, write the title with errors: Startrack, Starttreck, and so on. But the name is still cool and well reflects the meaning that we initially invested - you need to invest not in the presentation that you did tonight, but in the traction that you watch day after day and month after month. Such an investment will indeed be of high quality, it is important for us.

In the past, you worked in the financial group "Life", before that you occupied the position of director of Internet projects in FG BCS. Other StartTrack employees have similar stories: they left large companies or banks to work in a startup and engage in crowdinvesting in Russia. Why did it happen that motivated?

Motivated several things. Firstly, most people who work in leadership positions in StartTrack have an entrepreneur’s inner light. Because you can work top in a large company, but do not feel that you play a leading role in the development of the company, and you start to be bored.

The whole core of the team is from certain people who have been developed in large companies and realized that they want to build something no less great, but at the same time want to be co-owners.


StartTrack Team

Most of us have long worked in the stock market. We had a feeling that the Russian stock market is experiencing a certain crisis and does not allow us to fully realize ourselves in work. We saw a “wild” market for financing SMEs with enormous potential, which, apart from banks, was not particularly involved. And we decided that it makes sense to leave and make a specialized platform.

When I started my career, I had my own company. I worked for several years and realized that I wanted to create a large company. I decided to find out how they work, and got a job in a large financial corporation. The knowledge gained in BCS resonated with my entrepreneurial experience, and at the same time I realized that financing SMEs was really very interesting. Therefore, we started to make a platform.

Operational Director of StartTrack Olga Nachalova - one of the founders and first director of the Consulting Center NAUFOR, worked in operational divisions, including operations director in various companies in the stock market.

Director of investor relations at StartTrack, Sergey Chetverikov, headed the network of branches and offices of BCS in about 100 cities of Russia, after that he worked at a similar position in Otkritie Bank.

StartTrack Development Director Alexandra Kotelnikova from the university came to the RTS exchange team. I started with GR projects and in 3.5 years reached the position of chapter on strategy.

What are the current sizes of your crowdinvesting platform and its growth indicators?

For 2016, we have already attracted 535 million rubles of investment in 26 companies. This involved several hundred people - investors and entrepreneurs. We expected that there would be such results. Everything turned out exactly according to the business plan, "in the eye of a needle."

The crowdfunding is a really working mechanism: a person registers on the site, passes accreditation, enters an online terminal, selects a company and transfers from 100 thousand rubles at 30% per annum. The conclusion of the contract takes place online, and when interest is charged the system sends a notification to the investor. For the user, it looks like magic.

Of course, in reality, everything is much more complicated. If you want to understand in detail the business and objectively assess the risks, then you study the statements, watch the video from the offices and warehouses of the companies, watch the interviews of the owners, meet with the entrepreneur personally. So you make an informed choice and make your personal investment portfolio.

Now the minimum investment from one investor is 100 thousand rubles. The average investment in the company in 2016 is 15 million rubles. It is important that the site was not full defaults. There were delays in payments, but not a single write-off. This is achieved by rigorous selection of companies. If we see serious flaws in the business, internal reassessment, a lack of understanding of what they are doing, or simply a desire to intercept money in a difficult situation, then we will not allow it to the site.

All risks lie on the investor. It is the investor who makes the decision and, on the one hand, makes a high profit in the form of profitability on transactions, and on the other hand, he risks his money. If he does not understand this, then he should not place money. The task of the site is to speed up transactions and focus the pipeline, screening out inadequate and crazy companies.

Which companies most often receive funding on StartTrack - only IT or representatives of other areas?

Our practice shows that this is not necessarily IT, although in modern society there is very little without IT. But at our site, a greater amount of money was attracted by companies related to children's goods and services. This makes us very happy. Also distinguished is the private medicine segment and the beauty segment - cosmetics, care products, etc.

We are interested in industrial history - production, which often have investment appeal. The problem is that few people can figure it out and see the prospects for serious growth. Another direction is the production of food products (food start-ups).

In any case, we are interested in companies that have revenues of more than 3-5 million rubles a month, have ambitions for federal or global growth. They must have experience, a proven business model in which to pour money and scale.

Companies that do not have growth ambitions are more likely to eat money and are less likely to generate income for investors. If the company grows at least 30% per year, it is very likely to provide the value of the entire loan.

Startups that have only MVP and first sales can also come to us. Investors also have a demand for them, but the format of communication with them is still in the boutique mode.

How do you see a typical investor on your site: is it a representative of the middle class trying to save savings, or a business angel?

It is well known that business angels in Russia are 5 people, or maybe 3. This is true, because all business angels who succeeded in something began to turn into VC - to create their own funds.

We work primarily with a private investor, this is how we define it. Because the experience of investing in the business of most people in Russia is very small. These are mostly men after 30 years who have already built one or several companies and sold them, or still own them and get good dividends. As a rule, they have already moved away from business management and have the time to deal with different investment options. At the same time, they tried a lot and understand what a quality company is, they often point the founders to their mistakes (this is a certain smart element). Our investors are the middle class and higher, people who earn from several millions to several tens of millions of rubles a year. And they have the opportunity and even the need to place excess money, including in such risky projects that are offered on StartTrack.

There is a separate segment of top managers of financiers who try different financial instruments and try to understand everything new. Some time ago it was the main segment of the people who worked with us.

According to our observations, we have no officials. We assumed that they could work with us, but they are not. It is difficult to determine why, perhaps, we are just differently positioned.

Like any aggressive instrument with high profitability and risk, business investments are aimed not at capital preservation, but at its increase.

How do you assess the market of crowdinvesting in Russia in its current state, what problems does it have? What is missing more: good projects or investors for them?

Let's divide. There are investments in the capital of a business - the purchase of shares or shares by a wide range of investors. This is crowdinvesting, which has certain legal and operational difficulties. Most likely, these problems will not be solved within a year. There is still no pure equity investing market in Russia, there is a series of deals in the form of syndicates with shares and stocks of companies.

This is not due to the fact that crowdinvesting is prohibited (trying to create and maintain it, on the contrary), but we have a rather complicated operational part and legislation related to the securities market and the issue of securities in the form of shares. For a company with a small capitalization is expensive and for a long time to issue shares.

There are certain difficulties, but they are solved. The law is already changing, the Central Bank has noticed the probability of creating such a market and is monitoring its development. StartTrack is a member of the Central Bank working group, where we discuss possible crowdinvesting laws. There is no crowdinvesting market yet, but all the prerequisites for its emergence and development already exist.

Crowdling is the financing of a business under a loan agreement through a specialized platform. As for the crowdlending market, we see no difficult obstacles to its development. Crowdling is growing, and is actively developing both in our country and in Alfa-Potok. Here, the site just needs to be able to work properly with investors and companies. Everything is good, you just need to continue.

Regarding the lack of investors or companies - any marketplace is a two-way system. As soon as you solve the problem with money and investors, the problem appears on the other hand - there are not enough companies. You need to be in constant balance. At the moment, of course, there are more problems with quality companies. This is a key product that is easier to sell to investors. For quality companies, investors will come independently, without extra expenses for communication from the site. Because we already have accumulated background, traction, a positive investment history, people really get 20-30% per annum.

How much volume can equity investing grow in Russia? How will he change the financial landscape: press down venture funds or occupy some kind of uncovered niche?

According to our calculations, the potential volume of the market for private financing of small and medium-sized businesses (including crowdfunding and crowdinvesting) is more than 1 trillion rubles a year. This applies to companies that can grow multiply over several years. If we talk in general about the needs of Russian companies in financing, it is about 10 trillion rubles a year (of which 5.5 trillion rubles is the amount of loans to SMEs issued by banks in 2015). That is, crowdinvesting and crowding can provide a market growth of 20-100%. If there are mechanisms and tools that allow money to reach companies.

It is important to understand that crowdinvesting and crowding is not a replacement for existing financial institutions, it is an additional tool that is built into the system of existing and already well-understood products. It definitely will not kill the banks and is unlikely to press the venture funds. Rather, they are the same market participants who can also work through the StartTrack platform. Some functions for which they now spend a lot of time and effort, can pick up sites, making the work of banks and funds faster and cheaper. What we are already seeing.

Of course, funds will have to be quick, because the best deals will close faster (more participants will compete for the best deals). This is also not bad - the market will become much more cheerful and more interesting.

Those familiar with crowdfunding sites may have negative experiences from campaigns that raised money but did not release a product. They can transfer this experience to crowd-investing, although they differ from raising money for some smart gadget on Kickstarter. What guarantees do modern crowd-investment sites offer? How do they help investors and companies avoid risks?

You can transfer the negative to anything. You can put money on a deposit in a bank that has burst and then painfully receive it from the DIA . Or buy stocks and bonds in the stock market, and then say that all investments do not lead to anything good. Any negative experience can discourage moving on and trying, if you did not initially understand what you are getting involved in.

This is a question of financial literacy of a wide range of people. If they understand what an investment strategy is and their own investment portfolio, then a negative attitude should not arise. If this happens, it is only from a misunderstanding of how to handle money:

1. Sites introduce standards for the selection of projects while they do not guarantee that the project is perfect and cannot accept the risks, because the site commission cannot override and hedge the risk of the investor. They can only help - cut off investment unattractive, crazy and inadequate projects.
2. Projects must not only attract money, but also continue to unfold across the site. In order for investors to have an understanding of how the project is developing, the money went in favor or they were “squandered”.
3. In case of problems, the site can help the parties to the transaction find a common language, represent the interests of investors or companies in court. The platform should work with documents that are legitimate and understandable to all, follow market and judicial practice in order to always be able to protect the interests of the weak side. For this on board, you need quality lawyers.

Do you consider it necessary to develop laws and clear regulation of public funding: crowdfunding and crowdinvesting?

Of course yes. Clear and understandable laws will help build the normal rules of the game. The question is how and what these laws will be written about, whether they will develop the market or become a severe restriction.

The CBR and other regulators are going to develop norms for the crowdinvesting industry. How is crowdinvesting currently regulated? What positive and negative consequences do you expect from the actions of the regulatory authorities in Russia?

Today crowdinvesting and crowdlending are not regulated. The law is really being discussed, we regularly meet with representatives of the regulator and other market participants in the framework of the working group of the Central Bank. At the moment there are subgroups related to the discussion of taxation, reporting for the regulator, with the development of the law and relationships with large market participants. We are actively participating in these groups. They want to create a law in the horizon of several years, but so far the Central Bank consults with each platform. They offered everyone (not obliged!) To submit reports on all transactions of the Central Bank, which we conducted.

And this is important, since there is a serious risk, because it is easy to devalue the attitude of a large number of investors if pyramid platforms appear that deceive investors. It needs to be cut off and regulation here can really help.

The clear status prescribed by law removes the border risks that may arise. For example, if the state has a misunderstanding, and the sites will fall into an unpleasant situation.

On the other hand, the negative point associated with the emergence of a possible regulation is also present. It is connected with the fact that all financial organizations are rather strictly regulated. We can get into a familiar situation for banks when a business wants to provide additional services, but at the same time is limited by the regulator. Another possibility is the mandatory identification of all participants in transactions according to certain standards. We are already doing this, but the regulator may require new, more complex procedures.

The regulation may also introduce limits on the size of transactions for both companies and investors. This can frankly knock down the market. May impose bans on reporting information on the possibility of financing specific companies to a wide range of people. What can also reduce the amount of investment, because people simply will not be able to learn in time about raising money.

There may be requirements for infrastructure, for IT and employees of sites in terms of knowledge, experience, etc. This is not bad, but can result in additional costs and, as a consequence, increase of commission for sites.

Are you ready to offer regulators your options for regulating crowdinvesting?

We are ready and we are already offering our options in the framework of the working group of the Central Bank.It is important to formulate everything correctly and in a balanced way, and to prepare them taking into account the interests of already existing financial institutions. One sentence to express it is hardly possible.

In short, this proposal does not kill the market, but develop it. To give the opportunity to the money that they want to get into a quality business. So that quality business gets bigger and bigger. Therefore, there are sites.

The main thing that I would like to offer within the framework of the law on the regulation of crowdinvesting is the online issue of securities, which will not require much time, documents and money. So that SME companies can issue shares quickly and inexpensively.

Cloud investment is criticized for its risks. Do you consider crowdinvesting in Russia a high-risk investment at this stage?

In this case, it is necessary to criticize not only crowdinvesting, but any high-risk investments. Business investment is often associated with 100% risk. This must be understood immediately, and this must be spoken honestly, warned all about the risks before the transaction. We say this at the beginning of any meeting and recall at any opportunity. In fact, any investment is risky. In the case of investments, losses are an integral part of earnings. So you need to think about it. If you are not ready for this, then you need to learn more, attend courses, talk to experts, and only after that, act or abandon the idea altogether. Because investment is work, not entertainment. Otherwise, you will get into an unpleasant situation and, most likely, you will lose your money. It is connected not only with crowdinvesting, but with any investments.

In addition, crowdinvesting is only the development of the existing financial line, the improvement of existing instruments. People already invest money, for example, in business to their friends and acquaintances. The risks are the same there, and the percentage is often higher. Because it is more difficult for an individual to verify a business - he has no access to databases, no professional analysts, no lawyer, he does not know how to build a financial model. As a rule, such “wild” investments are more risky, and the sites reduce risks seriously.

Over time, statistics will appear - tens of thousands of transactions with different outcomes. It will be clear that defaulting on debt transactions is one, on share transactions the percentage of write-offs is different, etc. We will see the first results in the horizon of two to three years. When companies that have received money go through the next cycle of their development, it will become clear if private investment has increased their survival rate or lowered it. It will be possible to judge more on the market of crowdfunding and scammers or vice versa.

The difference between crowdinvesting (investment in capital) and crawling (investment under a loan agreement) in terms of risk is that in crowdfunding risks are covered by a personal guarantee of the business owner. But theoretically it may turn out that the owner has no money left and no sources of income to cover the debts. The investor must be prepared for the fact that he will lose his money. In crowdinvesting, you fully share the business risk with the founder, while not forgetting about the risk of fraud by the founder, who can take and spend money.