Graduate Assistant, Peter Trujillo, MBA Haas 2015
Copyright © 2015
License is granted to any accredited academic institution to use this case study for teaching purposes. Any commercial use or reprinting without the prior permission of the author is expressly prohibited.
In many ways, Larry Gerrans looks like many other successful Silicon Valley CEOs.
After a fast-track career working for a Fortune 500 medical device firm, he launched a biotechnology company and has scaled it into a life science accelerator. Gerrans has grown the valuation of his holding company from $60 million to nearly $500 million. He has the drive, the sports car, the impressive team, and the work ethic and dedication of a former collegiate star athlete – which he was. What he has that most other Silicon Valley CEOs do not have is a large pool of private investors – whom he has essentially crowd funded.
What he does not have are institutional investors in his company, or in its way.
This Crowdfunding Case Study will review the unique methods that San Rafael, California-based Sanovas Inc. has used to attract non-institutional investment capital. We consider the opportunities and challenges from raising capital from the crowd, as well as the methods Sanovas has used to overcome entrenched barriers. We further consider possible challenges facing Sanovas as it attempts to use Regulation D of the Securities Act and Title III of the JOBS Act to continue its growth.
This case study will make it clear that Gerrans is an exceptionally talented and laser focused CEO. The question we must ask is whether this model is an artifact of his personality and network, is this an example of social capital being used to finance corporate growth, or has Larry Gerrans innovated in finance just as successfully as he has in the interventional sciences and in advancing minimally invasive surgical technology and techniques? Indeed, is it possible that Gerrans has found a new model for innovation capital?
Crowdfunding has moved from a tactic used by smaller firms who could not raise capital by any other means, to an accepted, if not required part of the funding process for many firms. Entrepreneurs have realized the value in mobilizing social and financial resources in a single, coordinated campaign. There are literally dozens of business models within the field of crowdfunding – but we must ask whether the model used by Sanovas is a novel model of crowdfunding, or if it represents a traditional capital raise with a strong social component.
Larry Gerrans’ Background
When joint replacement surgery was being pioneered, orthopedic companies hired and trained consultants to work with the surgeons and technicians in the operating room, essentially supervising and teaching them how to use the new technology and medical devices that had been created.
Larry Gerrans began his career at DePuy Orthopedics, a division of Johnson & Johnson, where on his very first day he was involved in a hip replacement surgery. He was fascinated by the technology, but also by the need for absolute accuracy, teamwork and precision – and the ability to teach surgeons and other specialists how to be innovative. He quickly learned a huge amount about surgical techniques and technologies – despite not being a Medical Doctor. He would act as the interface between the Surgeons and the engineering team – helping them understand the challenges faced by surgeons in using their devices and procedures.
At DePuy, he drove innovation and a salesforce distributing Orthopedic Implants and equipment for Total Joint Replacements and minimally invasive arthroscopic surgery, growing his division into a $40 million business. He went on to become a successful corporate executive in the life sciences and medical technology business most notably at Stryker Corporation and Smith & Nephew Corporation, Fortune 500 medical technology firms. Gerrans was so adept at identifying innovative opportunities and building markets, that he was asked to bring together teams of surgeons and engineers to create novel techniques, instruments and implant systems that have become the accepted best practice in many surgical interventions today.
Today, he is the Founder, President and CEO of Sanovas Inc. an emerging medical and biotechnology firm based out of San Rafael, California. Gerrans founded Sanovas with the initial mission of helping cure pulmonary disease and Lung Cancer. This mission was partly personal. He watched many of his friends and family members suffer from various pulmonary diseases. Gerrans noticed that while many areas of medical technology were innovating quickly, pulmonary intervention was lagging behind. Gerrans realized that there was a significant market opportunity in developing interventional technologies for the lungs, where small diameter airways posed a dramatic technological challenge to diagnosing and treating this tiny and hidden anatomy. In fact, the market for interventional pulmonary technologies was a complete white space, so Larry started Sanovas to address that market need.
“Sanovas was conceived to advance diagnostic and therapeutic technologies to treat Pulmonary Diseases and Lung Cancer. We discovered the lungs to be a new frontier that had significant procedural risks and technological challenges to operate in. The lungs are the only anatomy that cannot be turned off to operate on. Consequently, these risks and challenges required us to conceive of entirely new methods of intervention and entirely new kinds of small diameter tools that function effectively at smaller dimensions and possess the sophistication and intelligence to operate on a moving target.”
(From an email to the author, October 2014)
Gerrans developed a formulaic product development approach to lung intervention to Access, Image and Measure lung anatomy and pathology, known as the A.I.M Method. He has orchestrated the miniaturization and sophistication of a wide range of A.I.M technologies that enable therapy to regions of the lungs where clinicians have never been able to get to, no less treat. These paradigm-changing technologies include: (1) a new class of minimally invasive ‘Smart’ catheters to Access small diameter anatomy; (2) the world’s smallest surgical cameras to Image it; and (3) new physiologic measurement tools and biofeedback systems to Measure it. These A.I.M. technologies are core to enabling the delivery of the company’s (4) molecular diagnostic tools; their (5) local drug delivery technologies and (6) therapeutic solutions.
As Sanovas successfully miniaturized and enabled these technologies, Gerrans quickly realized the A.I.M. tools and many of the Sanovas diagnostic and drug delivery assets could be applied to other regions of the body to improve interventional capabilities in numerous medical fields. Opportunistically, Sanovas expanded its focus from Pulmonology and diversified the company’s core technologies into other sectors, such as Cardiology, Neurosurgery, Gynecology, Urology, GI surgery, Otolaryngology and Ophthalmology to address significant unmet clinical needs in these sectors. Sanovas is now a holding company for 12 different businesses; each focusing on a specific sector with an integrated set of tools that address unmet clinical needs in the targeted field. Sanovas has over 90 patents and patents pending that encompass a broad spectrum of interventional tools and biotechnologies.
Growth Plans and Strategic Partnerships
Gerrans asset diversification and sector integration strategy is intended to expand market potentials and maximize Sanovas shareholder value. Gerrans is highly concerned with keeping tight control over the innovation and product pipeline while protecting the founders and investors from dilution. The model described below is not without execution risk, but appears to have been a sage anti-dilution model as the firm reaches scale.
Along the way, Gerrans has engaged Sanovas in Joint Ventures with Mayo Clinic and development initiatives with medical faculty from Harvard. The company is pursuing asset licensing for its drug delivery technologies with pharmaceutical and biotechnology companies and has already spun out the first six (6) companies, each focused on a specific field or technology from its first three (3) asset classes – Access, Imaging and Physiologic Measurement (A.I.M). Gerrans believes that at least 8 of these 12 business units can become multi-billion dollar companies. Part of his competitive advantage is that his minimally invasive technology has not only advanced miniaturization and improved the sophistication of the clinicians’ operative intelligence and capabilities, but it has also eliminated more than 90% of the devices required by the large-scale minimally invasive surgical systems and it has reduced acquisition and maintenance costs of these systems by 80%.
These low-cost and highly portable solutions could disrupt and displace the handful of entrenched competitors in the existing markets in the US, Canada, Europe and Japan. Sanovas’ value proposition is expected to enable the company to accelerate its growth into developing countries to expand access to minimally invasive surgery beyond the 750 million addressable patient populations in the existing markets to the nearly 3 billion middle class patient populations in the emerging global markets. Given Sanovas track record, strong patent portfolio, and deep bench of management talent, it would seem that securing venture capital would be relatively easy and also the fastest way to secure the significant capital needed for growth. However, the ‘old way’ of raising money via Venture Capital did not appeal to Gerrans.
Sanovas was started in 2010, during the great recession and at a time when capital markets essentially dried up. As a result, Sanovas was bootstrapped through its initial growth phases – which is nearly unheard of for biotechnology firms. Nevertheless, Gerrans could not escape the inevitable day when Sanovas had burned through available cash. So Gerrans approached his family, friends, and former colleagues and found that despite being connected to a fairly successful network of high net worth individuals, nearly none of their friends had the capital to make investments. Many had their funds in 401k programs, and had no liquidity.
Gerrans could relate: he had watched the tech boom of the 1990s and considered moving into IT. He saw the allure of early access to equity in fast growing firms. However, he did not want to change the focus of his career. Unfortunately, his 401k manager had made substantial bets on the IT sector and when the market crashed in the late 90’s Gerrans found himself down 40% in his 401k, with essentially no control over those investments. Gerrans moved his money out of his Traditional 401k into a Self-Directed IRA program and bought 120,000 shares of stock in a life science company where he knew the founders and their technology well. That firm went public at $13 a share and has traded as high as $27 a share. This experience taught Gerrans that wealth comes from early access to private companies and that Traditional 401k programs do not allow investors the opportunity to invest in companies they happen to know well.
Based on this personal experience, Gerrans shared his example with potential investors, and has so far raised over $30 million from his personal network. He and his team have singlehandedly helped hundreds of his friends and family extract over $20 million from their Traditional 401k accounts and redirect them to Self Directed IRA Trusts to invest in Sanovas and to take control their retirement futures. He has developed systems and processes to help potential investors through the laborious and often intentionally opaque processes of transitioning a Traditional 401k and creating a self-directed IRA.
A Broken VC System?
Gerrans did not immediately start with the Self-Directed IRA model. He approached and met with some VCs, but also conducted fairly extensive research into the prevailing business model of most VC firms. Gerrans believes that even in Silicon Valley, the VC system is broken.
Thought not explicitly designed as an impact investment, part of the pitch of Sanovas is that investors can realize significant financial returns while also helping promote the development of interventional technology that has the potential to significantly affect numerous classes of procedures and treatment for multiple difficult to treat diseases. There is some risk in positioning an early stage company as providing social impact at the same time it is raising early stage capital – as most investors, especially institutional investors, do not base investment decisions on double bottom-line factors.
Gerrans strategy was based on his need to build a complex inter-connected series of technologies and companies without being forced to spinout promising technologies before their full potential across interventions could be realized. He needed “patient” risk capital willing to allow Sanovas to develop a multipronged strategy and technology suite – a strategy usually reserved for profitable divisions of large multinational biotechnology firms. The section below highlights the logic Gerrans presents to investors and strategic partners.
Gerrans’ Views of the VC System
First, by some estimates, as few as .01% of firms seeking venture capital will ever receive it. Gerrans was shocked at the requisite effort and the distraction to growing the business caused by raising VC funds. Second, Gerrans was very concerned about the issue of control and exit horizons. Third, Gerrans learned very quickly that the capital markets do not invest in ‘Start Up’ only in ‘Scale’. He is very concerned about the lack of access to “Innovation Capital” in America and the impact this is having on innovation and entrepreneurship in the U.S.
Gerrans has maintained close control over Sanovas and has built a very strong foundation for future growth. He has surrounded the company with the ‘very best minds and best talents from across the clinical, business and legal communities’: securing a joint venture with Mayo Clinic, a development relationship with Physicians from Harvard and numerous advisory relationships from esteemed institutions of higher learning and medical investigation. Sanovas has grown into new technology sectors and markets and amassed a large portfolio of products and patents.
Equally important, Gerrans has amassed a passionate investor base that believes in the company and its humanitarian cause ‘to do well by doing good’, and he is passionate about delivering on his promise to maximize their shareholder value and return on investment. On the other hand, Gerrans is concerned about the traditional modus operandi of VCs who fully expect to generate high value very quickly and who seek expedited exits with disproportionate liquidation preferences to other investors. He is concerned about their lack of interest in growing large complex enterprises that can maximize shareholder value.
To his point, VCs have increasingly focused their efforts on deconstructing a company into its most promising application or technology – eliminating everything else, and positioning the firm for a quick exit. Conversely, Gerrans has built his model on a challenge to the core tenet of the VC funding system – arguing that firms can achieve growth, provide excellent returns to investors and maintain control without needing to strip their business down to one core technology or market opportunity.
Gerrans respects the need to accelerate the velocity of capital, but not to the dilution of shareholder value in the process, especially seed capital. VC’s follow an ideology that ‘new money trumps old money’. Essentially, VC’s and Private Equity wait for a company to reach a level of maturity, typically revenue generation and market adoption, then they move in with their investment to scale the business’ growth. Their deal tenets dilute prior investors by using liquidation preferences to reserve the terms and conditions of their return on investment to the exclusion of seed investors.
The Internal Rate of Return for all Venture Capital during the last decade, 2000 to 2010, was 4% – the worst Internal Rate of Return the Venture Capital industry has recorded. Gerrans believes that the current VC systems provides too many rights and preferences to later venture investors – which he described as based on greed, not the best interests of the company and all investors. Gerrans points out that the VC system is essentially broken, with terrible returns across the industry, many smaller firms collapsing, and an over-representation of a handful of very powerful VC firms in Silicon Valley controlling the majority of all investment capital in the United States. Gerrans describes this as a ‘dearth of innovation capital’.
Gerrans also discusses the fact that the ecosystem in Silicon Valley was based on a cooperative set of institutional actors that was conceived in the 1960’s and 1970’s and grew in scale in the 1980’s to create the tech boom of the 1990’s. He relates the aspirational influence Hewlett and Packard and other garage start-ups had on entrepreneurship in Silicon Valley and the synergistic model of innovation, intellect and investment that built it – the Service Corp of Retired Executives, early Angel investors, the Small Business Administration, the venture firms and institutional banks. He describes a tightly integrated ecosystem that diversified both risk and rewards across seed and venture stage financing. Gerrans believes that the power of the large VC firms has distorted market dynamics such that the interests of different parts of the risk capital community are no longer aligned. He points to the ‘accidental Millionaires’ the tech boom created, the vogue trend that led to the explosion in VC firms in the late 1990’s, their hunger for instant gratification, the ‘greed metrics’ that permeate institutional investing and have clouded rationale thinking and expectations in the capital markets.
Gerrans believes that the key to building a multi-billion dollar company is the ability to focus on exploration of new technologies, the integration of existing technologies and their applications across interventions, industries and disease classes to address the challenges and unmet needs of a growing global healthcare marketplace. Gerrans sees the growth in emerging markets and the global middle class as a renaissance opportunity for the Life Sciences. He sees a 400% increase in the global patient population from 750 Million addressable patients (largely comprised of Americans, Europeans, Canadians and Japanese) to more than 3 Billion addressable patients by 2020, that include new populations from China, India, the Baltic States, South America and southeast Asia.
The Gerrans vision believes in ‘Patient Capital’ as a critical component of building significant shareholder value, and he is creating the model at Sanovas to achieve it. He wanted to build an autonomous accelerator, where he and his staff of engineers could experiment with new applications of technology from his patent pool and spin out companies as their technology was ready for a broad market. To do this, Gerrans needed to maintain control and looked for alternative sources of funding.
Self-Directed IRA – Process and Syndication Model
United States law allows private citizens to create a Self-Directed Investment Retirement Account (IRA) and to control the assets held in that account. This little utilized provision is now receiving significant attention within crowdfunding as a potential source of investment capital.
Traditional IRA companies generally try to prevent their investors from doing private placements with their IRA accounts. They employ procedural tactics that makes the process very difficult, since their business relies on the management of the IRA funds through their own vehicles. There are a few ‘Retirement Trust’ companies who specifically focus on serving as ‘Custodians’ to private investors. These Self-Directed IRA companies enable private investors to ‘Roll Over’ their individual retirement accounts from the Traditional IRA companies and are generally more accommodating to their clients wishing to make private placement investments.
Gerrans created a customer service process to help his investors manage the administrative and compliance issues involved with rolling into a Self-Directed IRA and then making the investment into Sanovas. Through the process of syndicating investors through their personal IRAs, Sanovas has raised $20 million out of a total of $30 million raised.
This syndication process is administratively intensive and expensive, which also makes this method unique. Sanovas estimates that 2% of the money raised goes into the administrative and legal processes of their investment offering. They have full time staff members dedicated to managing investor relations for over 300 investors who made 589 investments in Sanovas as of August 1, 2014.
Gerrans and his team have built a meticulous system that helps investors through the entire process. First, they have built an SEC compliant online system that allows potential investors access to their investor portal where investors have to cede their personal information and referral source before they are given access to the sensitive information within the portal. There is an authentication process that happens internally and once a potential investor is verified by Gerrans, they are given a 96-hour access window into the data room, which provides investors with a full and highly transparent analysis of the company. This data room is built with many security redundancies to protect the company’s private information.
Once an investor has committed to invest through an IRA, he is contacted by Sanovas to begin the investment process. Gerrans has built an administrative process that helps these investors navigate the IRA process including the necessary diligence and paperwork. This process can take anywhere from 3 weeks to several months depending on the responsiveness and compliance of the investor and IRA company.
This unique model, conceived by Gerrans, is essentially a peripheral enterprise that had developed deep expertise in the process of converting Traditional 401k investment funds into Self-Directed IRAs. Gerrans had particular expertise in the cumbersome process and has learned what models to pursue with which 401k custodians.
It is not clear if Gerrans should provide this service to other firms. One possible business model would be to bring other life science firms into the state of the art biotech facility that Gerrans has created. In addition to the typical administrative offices, it has its own tissue bank, microbiology laboratories, molecular science laboratories, manufacturing clean rooms, engineering and design studios and could become a world class life science accelerator – especially if it adapts its expertise in this novel form of finance to assist their client companies in the accelerator to use this business unit for finance.
Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (“Reg D”) contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC.
Sanovas uses the exemptions under Rule 506 in Regulation D (non-JOBS Act exemption). Under this exemption, the issuer can raise an unlimited amount of capital from issuing restricted shares to mostly accredited investors, with restrictions on the amount of non-accredited investors. The issuer also cannot use general solicitation to recruit investors. While companies using the Rule 506 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company. Issuing companies are required to issue periodic audited financial statements.
The JOBS Act was passed in 2012 and is a substantial modification to existing security regulations. Through funding portals, companies are able to solicit their private offering to a broader universe of investors. Title II allows firms to raise money from accredited investors, and in a remarkable break with securities regulations, allow general solicitation.
As of this writing the Securities and Exchange Commission has not released rules to enact Title III, which will allow firms to raise equity investments from non-accredited investors. Sanovas intends to take advantage of Title III when passed, but the proposed regulations only allow companies to raise a maximum of $1 million per year through Title III, and the cost of capital is estimated to be between 12 and 25% (this variation is due to a lack of clarity about ongoing compliance costs and the level of accounting scrutiny that will be required).
Sanovas Capital Structure
Sanovas first started raising capital in 2010 with an $8.5 million convertible loan. As of June 2012, Sanovas converted that note into 10 million shares of equity at a $60 million valuation. This valuation was based on one subsidiary company and 25 patents.
Today the valuation of the whole portfolio of 12 companies and 90 multi-national patents/patents pending is expected to be more than $500 million, largely based on the value of the first six (6) business units, with a total of $30 million of equity invested. Sanovas has a cost of capital of 12% that includes 5% of equity, 2% of overhead, and 5% in warrants.
Spinning Out and Keeping Control
Through this model Sanovas has been able to maximize shareholder’s return on equity in the near term and maximize their return on investment by creating enduring and recurring value in the long term. Gerrans strategy of asset diversification and sector integration has already served to mitigate the dilution his shareholders would have, otherwise, endured at the hands of venture capitalists if Sanovas had followed the traditional path to finance.
The Sanovas business has created 12 companies and already spun off six (6), realizing parts of their shareholder’s equity, and more importantly reserving another six (6) opportunities for further capital appreciation. These subsidiaries better align with the goals of the private equity and venture capital investor, and thus those types of investors have committed to back some of these ventures. Since these institutional investors have not been given access to the parent corporation, Sanovas has been able to shield itself and its investors from any potential intervention or interference by these outside investors.
Clearly Sanovas views institutional investors are primarily sources of capital – they do not believe that the ancillary benefits – access to investors’ networks, board input from investors, possible strategic introductions, etc., justify the liquidation preferences and push for early exits. Gerrans believes “investor’s compensation should be commensurate to their contribution” and that the ancillary benefits of institutional capital rarely measures up to its promise and has not been respectful to the risk capital that preceded it.
Given the dearth of innovation capital in recent years, Gerrans model has as much to do with necessity being the mother of all invention as it does with saving innovation in America and turning around the downward trends in the US savings rate in time for the last baby Boomers to cross the IRA savings threshold in 2023. He has also worked to harmonize his investors’ interests by preaching the need to make a socially responsible investment in the humanitarian cause to treat and cure pulmonary diseases and Lung Cancer. This passionate plea falls deaf on the ears of institutional investors who rarely look past the financial metrics to the people who make up these disease markets. So for that, Gerrans model gives double meaning to social finance.
Risks and Benefits
Sanovas’ process for raising capital is cumbersome. There are many administrative and legal costs, but these costs do come with some benefits. Their process provides much better control as these investors are not strategic investors who want to take control of the business. No single investor owns enough equity to exercise power over management, and thus management can retain full control of the operation and maintain the flexibility they require. This capital is also much more patient, because the Self-Directed IRA investors are not looking for a quick exit or quick profits, as they are in retirement accounts and looking for the very long term benefits.
It is unlikely that this “patient” capital is “quiet” capital, however. The company still has 30% of its investor commitments in cash, and those investors interests may be short term. Managing this investor base is clearly laborious. Gerrans maintains active dialogue with investors and has transmitted over 36 investor communications in 2014, alone. The Gerrans model has allowed him to insulate and protect his early and core friends and family investors from the predation of new money investors, effectively preventing new money from trumping the old money. This process also provides an alternative to VC funding that is extremely difficult money to raise and comes with its own set of problems as previously discussed. In considering all aspects of this model, has Gerrans developed an efficient model for innovation capital that allows firms to scale without venture finance?
Discussion Point: If Gerrans model can return an average 5x return in 5 years to just 10% of the retirement savings in 401k and IRA accounts in the U.S. what impact could this model have on savings rates and retirement planning? Could this be a formula to reduce the 30 year decline in the US Savings Rate and stimulate job growth in the process? How could his model impact innovation, entrepreneurialism and job creation in the US? What could its impact on US GDP be?
The Economics of Retirement Savings
In discussions with potential investors, Gerrans argues that his model could be adapted by other firms to make a significant impact on both the capital markets and the retirement prospects of Americans. His argument is based on:
- Baby Boomers need higher than average returns over the next 10 years.
- The Life Sciences are best suited for this kind of investing as it requires patient capital and can most responsibly manage investor risk/reward threshold while delivering on the increased ROI needs required by Baby Boomers.
- The fact that the Baby Boomers will be the biggest consumers and beneficiaries of Life Science innovations.
- The observation that as the baby boomer generation is now exiting the capital markets, there will be a drain on holdings in IRA and 401k accounts.
- The emerging global healthcare marketplace is growing in excess of 400% by 2020 and it cannot afford the current technology to meet the standards of care its patient populations require.
- The fact that the US has had a 30-year decline in savings rates.
- The Great Recession and impact of Quantitative Easing and the Fed’s Zero Interest Rate Policy has displaced over $9 Trillion in possible Savings to retirement accounts.
- Most institutional investment capital is directed as consumer debt finance – the proportion of investment that seeks to invest in businesses is decreasing dramatically across banking and institutional investors.
Gerrans argues that if Sanovas’ 5x average return to investors over a 5 year period could be extended to only 10% of the retirement savings in the United States, this model of investing in technology startups though Self-Directed IRAs could have significant impacts on retirement prospects. Given the body of research showing that most job creation in the US comes from early stage companies, he also argues that his model can have dramatic impact on job creation.
What objections would the consumer protection lobby offer to Sanovas’ claims?
What is the appropriate balance between consumer protection and providing access to investments with significant upsides?
Are capital markets working for middle class American Investors – does Gerrans have a point?
What would the impact on GDP be if 5-10% of all retirement money was directed to business investment?
Sanovas has essentially created an “IRA crowd finance model” using a private syndication under the old Regulation D Rule 506. With the passing of the JOBS Act under the new Rule 506 provisions, Sanovas can easily begin crowdfunding investors using general solicitation while maintaining its current system of controls and processes. With a company that is mature but still in a growth stage this can be a very attractive offering to the general public. With a generally solicited offering Sanovas has the potential to raise a significant round of capital which will allow the company to reach the next level of research, development and expansion.
Is Sanovas Crowdfunding?
Crowdfunding is traditionally viewed as the utilization of websites or platforms to raise funds from a broad pool of potential backers, who are engaged through integrated marketing and social media promotion. Since the Title II provisions of the JOBS Act were legalized in late 2013, there have been dozens of new platforms launched to attract investments by accredited investors.
Large corporations such as Sony, Coca-Cola, Dodge and Lenovo have been using crowdfunding as a marketing and product innovation model. 100 Billion dollar real estate development companies and investment groups have been posting deals on their own equity crowdfunding platforms.
Is crowdfunding becoming a marketing and deal promotion model divorced from its original social media origins? Is the novel application of a series of regulatory reforms by public companies an extension of the crowdfunding model, or does the entrance of Fortune 100 firms represent a threat to existing crowdfunding platforms?
Sanovas is mobilizing capital through its social network, directing potential investors to its self-hosted deal room, and using existing security regulations to secure an exemption from a full security offering. Many investors come from recommendations from existing investors. But, where most of the process of creating the transfer of funds is done offline through specialized staff, is Sanovas’ model crowdfunding, innovative finance or both?
What impact will the passage of Title III of the JOBS Act have on Sanovas’ business model and cost of capital?Key Questions:
- Has Sanovas hampered its growth by focusing on the Self-Directed IRA investor acquisition rather than seek institutional investors?
- What impact does this model have on the governance of Sanovas?
- What impact has this model had on shareholder ROI? Dilution? In comparison to Angel, VC investor funded companies?
- What threatens Sanovas’s ability to scale this model across the 12 intended spinouts?
- Should Gerrans spin out his Self-Directed IRA services group into a separate company and offer services to other firms?
- Given the tightly networked nature of the early investors in Sanovas, has the founder exposed his firm to additional risks? Do these investors help or hinder the Founder?
- Is Sanovas efficiently focusing on deriving value from its portfolio of patents and technologies? Is crowdfunding an efficient mechanism to fund market expansion and growth capital?
- Should Sanovas consider Title II general solicitation rather than pursue Title III – what are the benefits of one model over the other?
- How should Sanovas fund its remaining capital formation requirements? At the Holding company? At the Subsidiaries? What are its best sources of capital?
- What are the most profitable exit opportunities for this enterprise?
- Is Sanovas crowdfunding? If not, how would you describe the financing model
- How should a VC firm approach a technology firm whose core value proposition is the development of multiple technologies across disciplines?
- Is the Sanovas model replicable?
Copyright © 2015
License is granted to any accredited academic institution to use this case study for teaching purposes. Any commercial use or reprinting without the prior permission of the author is expressly prohibited.