The commercialization of innovation benefits society in many ways. However, most would be shocked at the number of innovations unable to be commercialized due to the lack of available capital for start-up and early stage companies.
For start-up, early stage and most later-stage companies, raising substantial amounts of seed, development or expansion capital (investment capital) from traditional venture capital firms to incubate and maintain the company’s business plan, until sufficient operating revenue can be generated to support operations, is extremely difficult if not impossible. Also, attracting the critical management talent (human capital) to put an idea into actual commercial application or taking a company to the next level in its evolution, without the proper amount of financial capital in place, can be a daunting, if not impossible task indeed. True potential management-team professionals are high in demand, have limited time and most have little to no interest in high risk ventures. These are the fundamental problems that have existed for decades within the U.S. and other democracies around the world…until now.
Although our target market is very large in the U.S., and the demand for financial and human capital from start-up and early stage companies is ever expanding, the capital-markets industry (primarily traditional venture capital, but certainly private equity and investment banking fall into this category, as well) tends to neglect it for very good reasons.
NOTE: We use the term “traditional venture capital” deliberately to describe all three primary players: 1.) private equity; 2,) venture capital; and 3.) BDs/investment banks, in this industry for simplicity of explanation from here forward.
The basic problem with traditional venture capital seeking quality investments (also known as “quality deal flow”) is that there are too few qualified portfolio company candidates that meet the typical venture capital firm’s risk profile. Venture capital firms normally seek to invest in only stable, later-stage companies that have significant profit potential. Who wouldn’t? This is known as “Quality Deal Flow” in our industry.
However, the competition for these qualified candidates is fierce because, in general, there is far more investment capital available than there are qualified candidates available to invest in.
Capital overhang is the amount of access money available for investment that will either need to be invested or returned to private equity or venture capital fund shareholders within a pre-determined period, normally 5 to 7 years, if no companies are invested in.
Although the above chart only denotes the US, through the end of 2015, the private equity industry in North America and Europe had a capital overhang of $749.4 billion hence the gap in the amount of capital available versus the amount of quality deal flow is always wide, but is widening even more.
The previous chart and data denotes professional investors. Even more revealing is M1 and M2 money supply in the US. According to FRED (Federal Reserve Economic Data) the figures for M1 and M2 when taken together, indicates that there’s approximately $17.6 Trillion US dollars in low yielding bank accounts, as of August 2018. Therefore, the public non-professional investors have a capital overhang that’s staggering in comparison, by a factor of appx. 23.5 times that of the professional investors. Even if we take the conservative route and invoke the classic 80 – 20 rule, assuming that 80% of those funds will never be invested, we can estimate that 20% or $3.52 trillion of the $17.6 trillion will, still dwarfing the professional capital overhang by a factor of 4.3 times.
M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler’s checks, demand deposits, and OCDs, each seasonally adjusted separately.
M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs)
The big issue with traditional venture capital seeking qualified candidates versus qualified candidates needing capital is that venture capital firms must limit the risk of investing in these early-stage companies. Most start-up or early stage companies fail or stagnate within the first five years of existence, hence the risk of investment loss is inherently large and therefore, as a category, start-up or early stage companies are ignored by traditional venture capital firms.
Also, when a traditional venture-capital firm conducts the proper due diligence on any company the internal costs are expensive because the process is arduous and time consuming and must be done by high paid professionals that know what they’re doing. Filtration of deal flow is easy and can be automated to save costs. But once a company is chosen, the proper due diligence must be conducted by high paid professionals that work within the venture capital firm or are hired as independent 3rd parties. Hence, in regards to conducting the proper due diligence on start-up or early stage companies, the cost is simply prohibitive.
More importantly, if a traditional venture capital firm were to invest, the continued monitoring of these start-up or early stage companies’ activities throughout the life of the investment is very much cost prohibitive, as well thereby furthering traditional venture capital’s reluctance to fund.
In addition, since the traditional venture capital investment is equity, the venture capitalists must also look to exit the investment sooner rather than later—typically within five to seven years. Most start-up and early stage companies can rarely provide a profitable enough situation so soon, to exit.
Therefore, as a rule, traditional venture capital firms rarely, if ever, invest in start-up or early stage companies. For the very few exceptions to this rule, traditional venture-capital firms must extract as much ownership interest and control as possible to maintain their fiduciary duty to the venture-capital fund’s investors. More often than not, at the exit phase of the venture-capital process, the entrepreneurial founders’ ownership equity is so diluted (minimized) that the true cost of venture capital is rarely worth it.
Most broker-dealers (investment banks), especially the smaller firms that would entertain issuing small blocks of securities ($1,000,000-$50,000,000 range) owe their fiduciary duty to the investor side of the equation, not the issuer, by federal law. Federal and state(s) securities laws, rules and regulations are designed to protect the investor, not the issuer.
Unlike most traditional venture capital funds or broker-dealers (investment banks), we do not utilize outside investor capital which places our fiduciary duty solely with the entrepreneur by engagement and contract. Unlike other venture capital firms, we do not demand board seats or common equity ownership and voting control.
Because no professional entity would ever invest cash at these early stages, we trade capitalization service methods, education and coaching (hands on or through our automated platform known as the Corporate Engineering Conservatory™) for preferred equity in selected start-up and early stage companies, as well as cash. Once selected these companies become portfolio companies of our venture capital fund, Commonwealth Capital Income Fund-I.
The beauty about all this is there’s an insatiable demand for quality deal flow from the venture capital and investment banking firms coupled with an even greater demand for capital from start-up and early stage companies. Traditional venture capital firms need established companies to invest in. Start-up and early stage companies need the financial and human capital to become established. The problem is obvious. There is a huge gap between the two. It’s a Catch-22. Commonwealth Capital has closed that gap and is prospering accordingly by becoming the source of quality deal flow for the venture capital and investment banking firms and the source of financial and human capital for start-up and early stage companies. We’ve been doing it as a practice since 1998, but now we’re geared to do it en-masse’ with our Corporate Engineering Conservatory™. We have invited a select few professionals, like yourself, to help commercialize innovation…and prosper in the process.
Introducing Commonwealth Capital’s unique solution to resolve the financial and human capital problem for start-up and early stage companies and prosper by providing the solution in the process.
As former Wall Street Investment Bankers and experts in matters related to selling securities, Commonwealth Capital’s management (“Management”) is intimately familiar with the criteria employed by institutional sources of capital looking to fund “quality deal flow.” From the institutional perspective, quality deal flow typically refers to a company with increasing, revenue streams & profitability, positive cash flow, an experienced management team, and a unique, high-demand product or service in a growing market. Unfortunately, identifying quality deal flow is often an overly simplified, quantitative assessment that does not fully recognize the distinctive benefit and potential value of investing in start-up or early stage companies that can be properly engineered to minimize operational, financial and regulatory/litigation risk, while maximizing revenue and profit potential. Our unique venture capital model is designed to prepare these underserved companies to become that quality deal flow and then supply it to either Wall Street or Corporate America, as an exit, but only if and when they’re ready.
As we ultimately incubate quality deal flow for Wall Street or Corporate America we inherently incubate for traditional venture capital and private equity firms, broker-dealers, law firms, accounting firms, insurance companies, angel groups, accredited investors, university incubators and accelerators, commercial banks, FINRA crowdfunding portals, independent directors and a host of other service providers to small business. These are known as Alliances. We service their internal incubation needs with no cost to them, and no cost to us. They feed us their prospective companies that need capital, and we run them through the Corporate Engineering Conservatory™ to see whether they qualify for our Block and Tackle service or should be run through our automated Friction Free service.
Our automated online Corporate Engineering Conservatory™ is designed to take a start-up or early stage company from “Idea to IPO.” We’ve taken the capitalization processes used on Wall Street coupled with the product and service marketing and brand management of Fortune 500 companies and transferred them into an easily understandable mapping through the use of our online Corporate Engineering Conservatory.™ Within the Corporate Engineering Conservatory™ we employ modified Critical Path Methods “CPM” and Program Evaluation Review Techniques, “PERT” specific to securities offerings compliant with state(s) and federal securities laws. Through our Corporate Engineering Conservatory,™ all the elements from “Idea to IPO” have been encapsulated into one easily understandable and interactive service for start-up or early stage companies. This is a significant development in our goal of capturing, developing through proper corp. engineering and ultimately owning the market of “Quality Deal Flow” in the US. You will be going through the 1st part of that process, for further educational training after this initial orientation.
Agents of Managing Enterprises are paid directly by their sponsoring Managing Enterprise. We may provide a full online accounting of Agent commission activity to the Managing Enterprise at some point in the future. However, it will always be up to them to take our accounting and account for and pay their Managing Enterprise Agents directly.
Below, you’ll find the Industry Analysis & Opportunity quiz. To progress to the next lesson you must correctly answer all of the questions that follow. If you make any mistakes, you can retake the quiz once complete.