Localstake is a securities-based crowdfunding platform with strong financial and Midwestern roots. Launched in late 2013 by a founding team of investment banking and wealth management professionals, the Indianapolis-based company has raised $4.5 million to date for 15 issuers, mostly small businesses based in the Midwest. We talk to cofounder Ryan Flynn about the company’s progress and what’s ahead.
Amy Cortese: How does Localstake differentiate itself?
Ryan Flynn: Our goal is to provide a more comprehensive service than just a listing marketplace for companies to find investors. We’re a broker-dealer and have tools to help companies easily connect to their existing networks (and ours), identify target investors and structure their offering.
Our typical customer is raising between $100,000 – 500,000 and they’re typically non-VC growth companies. They tend to be food and beverage or other consumer-facing businesses—companies like Scotty’s Brewhouse (pictured above), a local chain of brewpubs here in Indiana. We can structure offerings to fit the specific circumstances of the business and often that takes the form of a revenue-share loan, which is flexible debt instrument.
AC: Localstake launched two years ago. Tell me about your progress.
RF: We’ve closed 15 deals so far and have another dozen or so active on our platform that have captured $2.6 million in current investment interest. The past year has been one of transition. When we started in 2013, we were engaging with our issuers in a very high-touch, service-driven model. We’re in the process of transitioning the delivery of those services through the platform. We have a two-phased subscription revenue model where companies pay us a monthly fee to access the tools we have built to help them prepare for their offering.
“A critical component of investor motivation is to have a deeper connection to the company beyond simply achieving a financial return.”
For the first phase, we charge a monthly fee of $199 to help them connect with their audience and measure demand for a potential investment offering. From that process, they’re able to surface the critical details about the offering and investor audience, like feedback on terms, accreditation status and state of residence, so they can make an informed decision about how (or whether) to proceed with structuring and closing their offering.
For the second phase, we charge a higher monthly fee of $499 for them to engage with us to structure the offering, manage regulatory requirements, and put together the offering documents. Once the offering is closed successfully we charge a 5% commission.
AC: You support multiple types of offerings, including equity, debt and revenue-share. How does that break down?
RF: Our first couple of transactions were equity, but starting mid-2014 we really honed in on revenue share. It’s a good fit for a lot of the companies we work with and is a much simpler transaction than equity—you don’t have issues around cap table management, valuation or voting. It’s also an easier step for investors who may not want to wait 5 or 10 years for a potential exit. We find it’s good for established, Main Street-type businesses. About three-fourths of our deals have been revenue-share, with most of the remainder being equity.
AC: You also work within different regulatory structures…
RF: Yes, we’ve structured offerings under Regulation D and intrastate exemptions, and we plan to do Title III deals as well. Most of our deals have been Reg D Rule 504.
AC: Interesting. Why is that?
RF: It’s important for us to help our customers find the best fit from a regulatory standpoint. It depends on the types of investors the company is interested in on-boarding, where those investors live and how much funding they can expect to raise. To date, Reg D 504 has been the best path to accommodate the interest we’ve seen in allowing non-accredited investors to participate at lower levels.
AC: What are your thoughts on Title III, which will finally go into effect this spring?
RF: We’re really excited about it. We’ll see how it plays out, but on paper it appears to be very applicable to the types of companies and the types of investors that have used our platform to this point. I don’t think it will be a good fit for the early stage, high-growth equity raises. But it’s a great option to consider for the Scotty’s Brewhouses of the world— established businesses that want to open a new location or expand and engage their customers and advocates in a new way.
AC: One of your founding principles is that investors should invest in what they know best—their community. Explain that.
RF: We think a critical component of investor motivation is to have a deeper connection to the company beyond simply achieving a financial return. The return potential needs to be there and is certainly part of the overall decision making process, but the desire to support the growth and success of the types of businesses investors want to see in their community needs to be there as well for investors to get the most value out of this transaction.
This is still very high-risk investing and we’re not suggesting this changes the physics of the risk/return profile of small privately-owned businesses. Some will fail and others will not achieve their full expected return. But if the risk is spread across a larger number of participants who believe in what they are doing, small businesses that typically have a difficult time with traditional financing options could have a more supportive foundation from which to operate and grow.
Investors can benefit in ways beyond the ultimate return by having unique access to that business and helping increase its impact in their community. In fact, in the case of the revenue share, they can actually directly impact the performance of their investment by being a customer.
AC: The JOBS Act was intended to open up new pools of capital for small businesses, especially those that haven’t had ready access to it in the past. As an Indiana-based company serving mostly Midwestern issuers, do you find that crowdfunding is fulfilling its promise?
RF: It’s still very early in this market segment. These are pretty lofty goals in terms of shifting a portion of the supply of early stage/small business private capital from lending institutions and professional/high net worth investors to more traditional retail investors. This won’t necessarily replace those incumbent sources, but it can be a conduit to supplemental funds and potentially carve out market share from some traditional sources like community banks. It will take time to really activate a meaningful portion of retail investors, but we believe the segment is on its way. Regulatory paths are in flux, platform infrastructure is still getting built and expectations are still being formed. There are several examples of progress, but there’s still a ways to go.