A new stock exchange focused on startups went live yesterday, to help small companies go public and sell shares to investors from around the globe.
Startup Stock Exchange, which is based in Curacao and operates via the Dutch Caribbean Securities Exchange (DCSX), hopes to become one of the world's first major stock exchanges dedicated to startups.
It won’t be the first stock market to focus on small companies.
In 1995, the London Stock Exchange launched the
Alternative Investment Market (AIM), as a sub-market; since
then, over 3,000 companies have joined. In the U.S., the California Stock Exchange,
which offers equity crowdfunding and a startup accelerator,
hopes to launch a U.S. stock exchange for startups this
Yet SSX, which will focus on rounds ranging from $100,000 to $2.5 million, will be the first designed for companies at even earlier phases than AIM allows.
In practice, it won’t be far from angel investment platforms, like U.K. based Seedrs and U.S. platforms SeedInvest, AngelList, and Golden Seeds; the only difference is that on SSX, investors will open brokerage accounts to purchase and exchange stocks.
An Arab startup goes public
It’s an idea that could suit the Arab world; after all, the idea
for an exchange for small and medium-sized enterprises (SMEs) was
floated at the Dubai Financial Market, and it’s no secret that
early stage capital is difficult to secure in this region.
Now, an Arab company has become one of the first two startups to debut on SSX: VIP-only.ma, a Moroccan fashion flash sales site that hopes to dominate North Africa. (The other guinea pig is Compliance Aid, a advisory company registered in the British Virgin Islands).
To fuel growth in Morocco and expansion into Tunisia and Egypt, VIP-only is looking to raise $500,000. After failing to secure investment from regional venture capital firms and falling short of AIM’s criteria for size, founder Mohamed Amar decided to apply to SSX. After passing its due diligence rounds, the flash sales site went public yesterday, listing 250,000 shares at an IPO price of $2, for a total of 25% of its equity.
It’s now part of a global experiment; whether VIP-only.ma can secure more funding on SSX than it would via equity crowdinvestment on Eureeca, or via crowdfunding on a platform like Zoomaal, will depend mostly upon three things:
- whether investors trust SSX
- whether SSX can generate liquidity
- whether a local startup on SSX can effectively market itself to global investors
Trusting a global IPO
Investors looking to invest in companies on SSX will likely first want to know about the due diligence performed on listed startups.
It’s rigorous, insists Ian Haet, who co-founded the exchange
along with Brian Niessen, who also has a background in managing
tech companies. SSX also relies on a large team of
advisors to assess companies in their contexts.
Here are the steps:
- Startups must submit an executive summary, for a $25 fee.
(The first 50 Wamda readers interested in having their
companies reviewed can use the promocode WAMDA1 to
waive this initial fee).
- If accepted into the next round, startups submit a business
plan for $500. At that point, SSX begins working to help
startups hone their business plans; even those who don’t make it to
the next round will still leave with actionable advice, says
- If the startup's business plan is solid, SSX begins a corporate
due diligence process which costs $2,500.
- After completing an extensive due diligence process, SSX
submits a prospectus to the DCSX for approval.
- If the company is approved, it can pay another $2,500 and proceed to go public.
This makes the total cost of IPO $5,525. Of the original applicants, very few are likely to make it to this stage. "We envision around a 2 to 3 % acceptance rate overall,” says Haet.
Once a company then goes public and is listed, a monthly charge of $1,250 is levied for custodian fees and review fees so that SSX can continue to oversee listed companies. Yet the total cost of going public on the platform is a fraction of the millions that large companies pay to prepare for listing on major exchanges.
What makes the platform trustworthy is the rigor of its process,
the fact that its subject to Dutch law, but also its consistency,
says Haet; listed startups have to report on a biweekly basis.
Investors are also carefully vetted, he notes, to ensure that they
are financially sound and understand the risk.
Stirring up demand
For investors, SSX’s biggest advantage over crowdinvestment platforms or angel investment is the platform’s promise of liquidity, says Haet. “If you invest and want to sell in six months, you’ll have greater liquidity than you would with equity.”
It also offers specific rights. "When you invest via a crowdfunding platform, you have no rights and no reporting. You're basically waiting to see if it gets acquired or fails," he points out.
From a startup perspective, Amar agrees that using the platform has its benefits. "If we want to raise additional funds, we have very transparent criteria, and we'll be able to raise funds with a proper valuation, while not losing a lot of equity."
Yet, generating that liquidity is crucial for its success. That will depend upon rustling up demand across the globe. If investors cannot turn around and sell stocks whenever they prefer, the platform will essentially come to function as a private placement vehicle.
Stirring up that demand could be difficult in the Arab world. It’s known that investors who buy stocks on regional exchanges often prefer to invest in companies that they know and see often in everyday life; many of the most heavily traded stocks in the region are financial institutions, industrial companies, or telecom companies.
Any IPO requires heavy marketing, but this means that Arab companies looking to entice investment from their own region will likely have to market their brands even harder to receive the same kind of attention.
Marketing a startup IPO
When it comes to the marketing phase, SSX is focusing on wooing
international investors. Once the vetting process is over, “SSX is
not an investment advisor,” Haet points out. “It’s your decision
whether you’d like to invest.”
To reach investors, VIP-only has launched a three-pronged marketing campaign: re-contacting investors that it has already approached, drumming up some press, and asking its own base of 200,000 members if they are interested in buying shares. It's betting that its new legal structure, under which a holding company bridges its British and Moroccan assets, will entice previous skeptics.
Again, it's an experiment. It's not a method that other flash sales sites like MarkaVIP or Wysada have pursued; the former raised a total of $18 million from European and U.S. investors, and the latter just announced an undisclosed round of funding from early stage vehicle MENA Venture Investments today.
But flash sales is a cash intensive business. And today, young
startups in the Middle aren’t waiting for venture capital firms to
get on board; they’re launching successful
crowdfunding campaigns, and using any means possible to
Dealing with angels from around the globe could be risky, as they can be notoriously difficult to vet or educate about startup-friendly policies. But perhaps distributing risk across several will even out the effects of any one.
What do you think- is a global IPO platform part of the solution to funding early stage startups? Or would startups be better off with more local or regional solutions?