We create the global digital capital market for small and medium-sized enterprizes (SMEs), which is reliable, accessible, and sustainable to ignite and fan the flames of business, nurturing entrepreneurship, which in turn, is the single most effective way of increasing wealth across the globe and reducing poverty.
Why would SMEs and investors need a globally accessible capital market for private companies?
SMEs have trouble accessing capital globally, especially growth capital in the form of equity or other long-term instruments. SMEs’ funding options are at best limited to bank loans, but even those are simply not available. Often the amounts SMEs need are relatively small, so investment banks are not incentivized to deal with them.
At the same time, the vast majority of the enterprises in the world are SMEs – approx. 25 million in the European Union alone and similar numbers in China and the US (not speaking about other larger markets as South America, CIS, Japan, etc.).1 SMEs are the backbone of the world economy creating most jobs and substantial wealth across the globe.
Secondly, investors, founders and employees having equity from employee option grants all need a secondary market and exit, and new investors need a way to access to the company between the capital raises.Currently retail investors have access to private company shares only when they go public and even then the access is problematic as gatekeepers (mostly banks) are not incentivised to open securities accounts for non-resident retail clients. However, the largest returns over several years are made during the time of high growth when the companies are still private and those high returns have been almost exclusively reserved for professional and institutional investors. Retail investors do not have access to those.
To conclude – SMEs lack access to the capital and investors lack access to SMEs as an asset class. We believe that everyone should have access to capital markets like people have access to basic utilities or roads. This means that the solution must be available to anyone regardless of their location and for an affordable price.
Current solutions are not working
There are solutions for capital markets for private companies, but they do not work for SMEs.2
1. Central Securities Depositories (CSD). While they enable issuing securities and create capital markets’ backbone, their problem is that they are only locally accessible and they isolate the clients from one-another – i.e. clients of CSD (although members of the same community – CSD) cannot interact with one-another and thus there is no way of creating secondary market. So effectively SMEs and investors are in a geographically limited silo (CSD) where every member is further in a separate box without windows.
1 See more about this in the Addressable Market chapter.
2 We are not addressing stock exchanges as those are not the solution for private company liquidity.
To interact, investors (and company) have to come out of the CSD – interact – and go back to transact. In addition to small and fragmented liquidity pool in itself (CSD itself is not connected to the global liquidity pool) the structure with CSD further inhibits liquidity.
- Distributed ledger (DLT) based infrastructures.3 They enable issuing digital securities, create secondary markets and are also accessible globally. However, they are very costly4 and implementation (time to start using) takes time. They are often meant for larger projects and companies, including offering a market-as-service as white-label solution to private companies. The cost structure and ease to using is suitable for SMEs.
- Captable management software providers.5 They are easy to use, often quite affordable and they provide great efficiency gains but do not create any infrastructure to enable global or any other capital market, i.e. they do not solve the main problem, which is capital markets not being there for SMEs.
Our solution to the problem: We give capital markets back to the companies
As there is a need for the capital market for private companies and there is none – we developed it from ground up taking into account the needs of SMEs.
- Seamless issuance of various digital securities to investors against payment across the world regardless of their location and residence.
- E-commerce type of secondary market, where investors and SMEs across the globe can interact and trade.
- State of the art equity and real-time updated cap-table, including issuing and managing employee options, stakeholder communication etc.
We are stronger are together. We share trading commission revenue with the companies to make it financially more beneficial to collaborate with us and with one-another than operating company’s own private marketplaces for their own clients, not speaking about saving companies from the operational and administrative hassle and cost of operating the market.
We refund to the issuer 25% of the trading commissions made on its securities and also 10% of trading commissions generated from the trades issuers investors made on other securities at Ignium. This enables the company not only to receive the benefits of Ignium (chapter below) in an affordable manner but in addition to receiving the benefits earn money at the same time.
This is how the clients benefit from Ignium and resolve the pain-points
- Frictionless connectivity between investors and companies across the globe increases access to capital and reduces cost of capital.
- Disintermediated access of investors and companies to the market increases efficiency and reduces costs (current accessibility and connectivity problem through intermediaries)
- Secondary market (and liquidity):
3 Those are challenger alternative asset markets (ATS) in the U.S. and transfer agents (in Europe this would be similar to CSD and settlement function) and relevant technology providers, which enable issuing digital assets and enable operating the secondary market for digital assets. They exploit DLT as the underlying technology. Some operate markets themselves and some offer markets as a service. Examples include Securitize, TZero, Vertalo. In Europe, e.g. Tokeny Solutions provides DLT based market as service.
4 Fees per issuance range around 10,000 Euros (somewhat lower for second issuance) plus monthly fees approximately 1,000 Euros. Listing fee in Openfinance is 49,000 Euros.
5 Carta is one of the leading captable service providers, others include Legdy, Captable, Capdesk, Vestd. They mostly offer free service for startups and from there fees range between 2,000 to 4,000 and more per month.
- opens up more avenues for raising capital in the future and reduces cost of capital.
- enables to broaden the company’s investor base.
- is an additional avenue for promoting a company’s brand, products and services and community/client management.
- makes option grants a tangible benefit and motivation tool.
- Real-time updated cap-table available at any time saves management time (plus T+2(3) through incumbent settlement systems induces risks).
- Seamless, fully digital and automated employee option program management saves management time.
- Seamless making of dividend and coupon payments saves cost and time.
- Can be exposed to private company asset classes usually not available to them.
- Access to private company investments across borders.
- Possibility to exit reduces opportunity cost and liquidity discounts.
- Founders and employees can exit (fully or partially) in case they need liquidity as opposed to selling the company or doing an IPO (often neither is a suitable option).
- Real-time settlement against payment in the secondary market through Ignium reduces counterparty risk and increases efficiency.
3. Employees who hold option grants
a. Digital receiving and tracking of options, automatic reminders enable avoid missing the deadlines, effortless exercising of options and receiving equity saves time.
The market for private company secondary market does not exist today in a scalable manner. Therefore, we have tackled that by a number of potential participants – SMEs and investors.
We first tackle SMEs, who would issue digital securities through Ignium and whose securities would be traded on the market. Ignium would receive subscription revenue from issuers for its services.
We have focused on selected markets which are our first level interest and we have defined the size of the market by the number of SMEs.
Number of non-financial SMEs:
- – European Union6: more than 25 million7, of whom more than 23 million are micro SMEs (0-9 employees), 1.5 million small SMEs (10-49 employees), 230,000 medium size SMEs (50-250 employees).8
- – China: more than 22 million, of whom 19 million are micro SMEs.9
- – The United States of America: more than 30 million.10 6 Pre/Brexit numbers which include the UK. 7 As of 2018, see Annual report on European SMEs 2018/2019, Research & development and innovation by SMEs, European Commission, Published in Nov 2019.https://ec.europa.eu/growth/smes/sme-strategy/performance-review_en 8 Number of SMEs is growing faster in EU than in the U.S. or Japan. 9 As of 2019 registered enterprises, see: https://wenhui.whb.cn/third/baidu/202007/17/361371.html . Growth rate of Chineses SMEs is higher than those in EU. 10 https://ustr.gov/trade-agreements/free-trade-agreements/transatlantic-trade-and-investment-partnership-t-tip/t-ti p-12
Largest number of SMEs in Europe is in the UK with 6.0 million SMEs.11 However, not all of them are relevant customers for Ignium. Desirable customers are those who are employers. Out of 6.0 million 1.1 million are micro businesses with 1-9 employees and 212,000 are small businesses with 10-49 employees. Hence the ratio in the UK between total SMEs and micro and small businesses who are employers is approx 5 (6/1.312).
If we apply the same ratio for the EU and China, then the EU relevant addressable market is approximately 5 million SMEs (25/5) and China 4.4 million (22/5). The U.S. has already provided statistics by employer SMEs, which is 5 million.
Investors. Retail investors are acting extensively in financial markets, above all in equity markets, FX market, crowdfunding etc. Retail investors attend more those segments which are made easily accessible and have liquidity, e.g. FX and crowdfunding.
The addressable market is very large and SME, as a segment, is unattended. At the same time they generate the majority of the jobs and GDP across the globe. In our opinion there is a huge opportunity.
Go to market strategy
We have two main channels how we go to market:
- Distributors who are: (1) advisors – legal, financial, corporate services, and (2) primary distribution services providers – corporate finance advisors and primary distribution platforms (crowdfunding). We will enable distributors to offer more complete and valuable solutions to their clients. For our purposes, distributors who have trusted relationships with their clients, will transfer credibility to Ignium. Therefore, distributor success and relationship management are material part of our strategy.
- Affiliate marketing. Leverage on online investment communities and our affiliate commission.
- Digital marketing to generate inbound leads and sales.
Our strategy involves onboarding SMEs (often in an early stage) for the captable and employee option plan management services as every company needs those. Once the companies grow beyond first funding rounds and employee options start to vest there will be a need for liquidity of shares and the secondary market. In this case Ignium would be the natural choice as not only are we comfortable to use but also financially the most sensible as it is free of for the issuer companies plus we have revenue sharing arrangement (please see section “Our solution to the problem”).
In addition, we would tackle separately companies with large user bases, to whom it would be alternative to run their own market, and bring them straight to Ignium secondary market.
We can be a very affordable solution compared to service providers who offer mainly cap-table as our main revenue source is expected to come from the secondary market and trading fees (as opposed to cap-table subscription fees).
Inclusive and accessible market means also affordable. Therefore, our goal is to build not only the best but also the most affordable capital market in the world for digital securities.
Our fee model is the following:
11 Business Statistics, by Matthew Ward, published in House of Common Library, Jan 2021. https://commonslibrary.parliament.uk/research-briefings/sn06152/
12 Rounded conservatively.
- Issuers subscription fees:
- Startups (companies having less than 25 investors and having raised less than 1m euros): Free.
- Green (companies whose operational model tackles climate change): Free
- Regular companies: 99 Euros
- Commision on trades made on secondary market:
- Sellers: 1% of the transaction value, capped at 299 Euros.
- Buyers: Free.
Trade commission fees make the model very scalable.
Our goal is to be the leading digital securities market for SMEs and the number one market for Green companies.
For going forward we envision that Ignium could be the solution, in addition to capital markets, for any corporate finance needs for SMEs – such as loans and mezzanine products by alternative and non-bank financiers. We would have the data about SMEs past performance which makes the funding decisions faster (faster due diligence, less documents needed to be resubmitted), less risky thus resulting in lower cost of capital.