Collaboration Capital and NextSeed were Houston investment companies on opposite ends of the spectrum.
Collaboration advised people with between $2 million and $25 million to invest in stocks, bonds and other traditional investments. NextSeed.com was a crowdfunding website where individuals placed an average of $1,000 to $1,500 into private companies.
But both organizations shared an underlying desire to provide more investment opportunities (and unique opportunities) to a broader swath of people. And so they merged their businesses and plan to develop a full-service investment firm that uses NextSeed.com’s technology and Collaboration Capital’s socially and environmentally conscious investing.
“We’re really spreading the net so people who don’t have a million dollars, people who have relatively small portfolios, can have access to this as well,” said Christopher Knapp, CEO of Collaboration Capital.
Knapp is overseeing strategies for the combined company’s investment advisory business and remains chief executive of Collaboration Capital, which will continue operating as a wealth management firm for wealthier clients. Youngro Lee, NextSeed.com’s chief executive, is chief executive of NextSeed Inc., the parent company under which Collaboration Capital and NextSeed.com operate.
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Together, the companies are seeking to help investors fund a loan or take equity in local, private businesses – via NextSeed.com – and buy stock in publicly traded companies that provide fair wages, promote women and minorities or protect the environment – via Collaboration Capital. Ultimately, they plan to make the latter available to more people through NextSeed.com.
Both approaches represent increasingly popular investment strategies. Technavio, a technology research and advisory based in London, expects global crowdfunding as a whole, not just limited to investment crowdfunding, will grow 42 percent to $163 billion between 2019 and 2022.
And according to US SIF: The Forum for Sustainable and Responsible Investment, investors in 2018 considered environmental, social and governance (ESG) factors across $12 trillion of professionally managed assets, up 38 percent since 2016.
“What you see is a massive shift in appetite,” Knapp said, “to say, ‘You know what, I want to know what my money is doing.’”
Knapp has focused on ESG investing since 2007, when he was co-founder and CEO of Chilton Capital Management, a traditional wealth advisory firm. He started Collaboration Capital in 2016 to focus entirely on ESG.
He began working with Lee in 2017, when clients of Collaboration Capital invested in NextSeed, which enables investors, even those without substantial assets, to invest in privately held businesses through a crowdfunding website similar to Kickstarter or Indiegogo. Rather than pledge money for a company’s product, people using NextSeed are seeking to make a return.
Through the partnership with Collaboration Capital, Lee sought advice on getting wealthier individuals to invest in more private, local businesses. And Knapp, whose father and grandfather were community bankers, saw a possibility for reaching more investors and smaller businesses.
Debt and equity crowdfunding are relatively new phenomena, spurred by changes to U.S. Securities and Exchange Commission regulations that previously limited most of these opportunities to accredited investors, such as banks or individuals with more than $1 million net worth, excluding their primary residence. Texas passed intrastate crowdfunding rules that permitted equity and debt crowdfunding for Texas businesses and residents in 2014. Similar federal rules went into effect in 2016.
The first was the worry that everyday people, those not familiar with the risks associated with investing, might put their money in bad deals or invest money they couldn’t afford to lose.
Lee was in the second school of thought: Just because someone is wealthy, he reasoned, it does not make him or her a savvier investor. What’s more, crowdfunding rules have extensive disclosure requirements for providing information on the investment opportunity, which can help people make informed decisions.
NextSeed, which started under the Texas rules and then expanded nationally, has helped more than 60 businesses across seven states to raise $15 million.
“NextSeed enables everyday investors to invest in private companies that they care about,” Lee said. “We are providing capital to businesses with very interesting ideas and products that might not get the support from the traditional financial system.”
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Knapp’s staff of eight to 10, who typically meet face-to-face with clients, cannot effectively manage these types of smaller transactions. Wealth advisory firms typically charge a 1 percent annual fee on the assets they manage. The firm could not afford to operate its face-to-face meeting structure while catering to customers who invested, say, $500 a year.
The internet, on the other hand, doesn’t require one-on-one meetings and so can reach more small investors.
“If you think about the NextSeed platform, what drew me into it was that it allows someone with as little as $100 to invest back into their neighborhood,” Knapp said. “That’s a huge shift in terms of availability of resources.”
Several trends have laid the groundwork for the merger. Technology has become intertwined with banking. Social media has connected the world and informed people on the plights of those in their communities and abroad. The United Nations Sustainable Development Goals has raised awareness to issues like poverty and hunger, and the Paris Agreement has highlighted climate change, said Kunal Sachdeva, an assistant professor of finance at Rice University.
Such factors are steering millennials toward ESG investments and local, private investments, he said. The latter were particularly difficult to find before platforms such as NextSeed.
“Previously, you’d have to know someone or have a personal connection,” Sachdeva said.
NextSeed vets businesses before listing them on its website, which Sachdeva said can help first-time investors who don’t know how to conduct due diligence. But investors should also be aware of the risks that could come with delegating this vetting opportunity.
“All of the monitoring and due diligence and everything now relies on these platforms,” he said.
Though Utpal Dholakia, a marketing professor at Rice University who taught one of the NextSeed co-founders, believes artificial intelligence and better quality data has helped improve the vetting process for platforms like NextSeed. He said the chances of getting defrauded are lower than they were five or 10 years ago, when peer-to-peer lending was newer.
And like Sachdeva, he said technology is widening the opportunities for investors and entrepreneurs alike.
“It’s making it easier to actually carry out the motivation you have to do good through your investment,” Dholakia said.
Investing in local startups
As part of NextSeed’s efforts to help small businesses, the company has two permanent locations that companies can use for pop-up shops. Businesses can test their concepts for one to three months without renting or buying space, instead sharing roughly 20 percent of their revenues with NextSeed.
The pop-up shops can also be a way for out-of-town businesses to try out Houston, Lee said. The Chicken and Rice Guys restaurant from Boston is currently a tenant at one of the spaces and is considering a more permanent location in Houston, Lee said.
Another company, Buffalo Bayou Brewing, in Houston used NextSeed to raise $1 million from 583 investors who funded its revenue-sharing loan, in which investors receive a percentage of the businesses’ revenues until they get paid back their agreed upon terms. In this case, that’s 1.9 times the original investment.
Lee, previously a corporate lawyer specializing in private fund formation and investments in the U.S., Europe and Asia, is a member of the SEC Small Business Capital Formation Advisory Committee that’s seeking to advise the SEC on how to improve security laws so every day people can invest in more ways and capital can better reach the middle of the country.
And while many in Houston’s nascent startup community are trying to attract venture capitalists to the Bayou City, Lee argues that venture capital is just a sliver of the money available. And that NextSeed, his own Houston-based tech startup, is pursuing another avenue to help its peers.
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“What we’re really doing is creating community capital,” Lee said. “We are allowing a community to invest in businesses they believe in, which we think is much, much more powerful than trying to get out of state or out of town venture capitalists to come to town.”
The combined company also plans to develop city-specific private funds that will invest in local businesses and real estate in Houston and other cities, enabling investors to diversify their money across a variety of local private businesses through this one fund.
“The future of finance in so many ways, and I don’t mean this recklessly, is in technology-based applications,” Knapp said. “So if you can create a company that combines the technological aptitude with the rigor that goes with how I was trained in terms of fundamental securities analysis and understanding of macroeconomic patterns and shifts, you actually have a really powerful company.”