Togetherness: Can A Collective Investment Fund Help Founders Solve Their Liquidity Problems?

As a general rule, founders don’t get a lot of sympathy from the public at large. We live in an era where entrepreneurs are celebrated and even lionized while their success stories are widely covered in the media. Nothing wrong with that, but the focus on founders who have exited their businesses and pocketed life-changing sums of money in the process can obscure the fact that running a company prior to a liquidity event is not something that will necessarily make you rich, or even particularly comfortable.”

“Entrepreneurs are often well off on paper,” says Tristan Schnegg, co-founder and partner at Collective Equity. “But they might not see any liquidity until they sell their companies.”

And in the meantime, as Schnegg points out, founders live with a lot of pressure. “There is continuous risk,” he adds. “You have to meet milestones. Double your workforce. Change your business model. Find ways to monetise your operation.”

So is there a way to make that risk feel a little less acute? I’m talking to Schnegg and Mike Royston, also a co-founder at Collective enquiry. The two men come from very different backgrounds. Schnegg is an academic who has studied entrepreneurship and related wealth management issues. For his part, Royston spent many years at the sharp end of corporate finance, working for pioneering enquiry crowdfunding platform Crowdcube.

Different perspectives perhaps, but their experience led them to the same conclusion. Founders would benefit from some means to hedge their financial risk.

Pooling Resources

The solution they came up with was Collective Equity. Essentially, it’s a funding platform that enables founders to invest up to 10 per cent of the equity they hold in their own companies into a collective fund with other founders. The idea is that it operates something like a VC fund. When a portfolio company undertakes a liquidity event, the other founders take a share of the proceeds.

So what problem does this actually solve? Well as Mike Royston puts it, founders tend to have all their eggs in what basket. Collective Equity, he says, enables them to essentially become investors in multiple companies, mirroring the modus operandi of professional investors such as VCs or angels. “Professional investors wouldn’t invest in a single company,” he says. “They would have a portfolio of companies.”

Bad Decisions

In addition to enabling founders to spread their risk, the fund also sets out to solve a related problem – namely that founders are often short of hard cash. “Founders can make bad decisions because they are short of money,” says Royston.

In addition to the financial motivation, Royston says businesses also benefit from networking opportunities. There are, of course, more networking opportunities than the average founder can shake a stick at but Royston says Collective Equity offers something a little different. Because they have a mutual interest in the success of each other’s companies, they are incentivised to provide mutual help, he argues.

“Founders like the idea of investing equity to share in the journey of others,” says Royston.

Collective Equity is at the start of its own journey. Its first fund has just closed, with 11 companies and 19 partners – comprised of founders, investors, husbands and wives – on board. The equity is valued at “3.76 million.

This initial fund is populated by companies that have previously raised capital through equity crowdfunding on Crowdcube. The second will be focused on businesses operating in the climate arena. The third will be a cash fund.

Becoming an equity investor does involve a selection process. First and foremost, a business has to fit the fund thesis. Applicants must also have raised finance from VCs or institutions. Collective Equity carries out due diligence. There’s also scrutiny on the part of founders. Schnegg says the fund is transparent. Applicants can look at the other companies and make judgements accordingly.

The first fund – and this is likely to continue – has been deliberately engineered to include businesses at different stages of development. The intention is to ensure a flow of liquidity events over time.

Will there be demand for this kind of fund? Schnegg and Royston say they have spoken to over 100 founders and the response was overwhelmingly positive. And it’s certainly true that the first fund has closed with a suitable quorum of businesses on board. As with any investment platform, longer-term uptake is likely to be determined by the success of the earlier funds in delivering the fruits of collective investment to participating founders.