Microcosm - 2nd Seedrs crowd-funding round

We will shortly be raising another round of investment.

Our original intent was to bootstrap until revenue was enough to cover an organic growth rate and we could afford to hire and pay for additional infrastructure. We felt that the best thing to do was to have an incredibly low burn-rate (the amount we spent every month), and only to seek further investment if growth pressures demanded we do so.

Feedback to our launched product has so far been extremely positive, but it's also clear that we have a lot of work to do and have had to create a prioritised roadmap that stretches some way into the future. This is great, to have such feedback to help shape what we're doing, but what is less great is the speed at which we're progressing as it feels we can't possibly go fast enough to fulfil demand.

In addition to the work we have, we also find ourselves in the extraordinarily good place of having a number of opportunities open up to us: from local forums, to automotive forums and publishing forums.

We found ourselves presented with a very real decision to make:

1) Go slow and reject the opportunities and constrain ourselves to only grow organically over a long period of time

2) Go faster and grab the opportunities, try achieve a lot very quickly, but to do so would require hiring, which requires seeking further investment.

There are other alternatives of course; such as finding a large client willing to help front some of the development costs to meet their goals too. We have investigated these and the reality is that we are a little too early in the evolution of our product to make a compelling case for this. It would be possible in 6-12 months, but by then some of these opportunities may not still be there.

So... we are going to raise more investment.

What this means:

1) We are raising £500k, first through a £100k Seedrs round which is SEIS eligible in September 2013 that will cap out the SEIS allowance (£150k total), then after 70% of the money raised to date has been spent we are allowed to raise the subsequent £400k through angels and institutional investors, either through EIS, a convertible note (debt) or a standard party round. So that second bit is probably quite far into 2014.

2) All existing investors will have an opportunity before the £100k is available on Seedrs to assert pre-emption rights. That is: You will have a 10-day period in which to decide whether to invest to preserve your current %. After the 10-day period it will go public and anyone can invest and you will lose the ability to preserve your %.

3) Anyone who missed out on investing the last time around, this is likely the very last opportunity for you to invest, and this is the last chance to invest whilst the shares are reasonably priced... it will be your best bang-to-buck, even if you are an angel and would consider future rounds, the valuation today and the SEIS benefits mean that this Seedrs round is your best chance of getting a great deal for your investment.

4) Existing investors that do not take-up their pre-emption will see themselves diluted, but it should be pointed out that the value of the shares that you hold will have increased dramatically. You will hold less %, but they are worth more £.

We are currently preparing the Seedrs SEIS round and materials for it, including some internal re-structuring too. We hope to go live on Seedrs with the £100k round in 3-4 weeks time, with the pre-emption window for existing investors starting 10 days prior to that.

I've spoken to a few investors on Seedrs this week, and it's extremely likely that Seedrs investors who missed the boat last time will want to be in for figures of £10k - £20k each. Meaning that this round will likely close even faster than the prior one.

With that in mind, things to note:

1) You don't need to have transferred money into Seedrs before you can invest, but you do need to have fully registered and cleared the customer checks.

2) I will still have the big red button for go-live, and I really want users of LFGSS to benefit greatly from this... you guys are the reason this place is a success and we've already achieved so much, so I want you to reap any financial rewards from what you've achieved too. I will attempt to basically synchronise the public launch such that you're all online and ready, and can get in before too many other people have done so.

Seedrs has grown with publicity and now has a greater number of investors, this round will likely go very fast and you may only have an hour or two to invest should you want to... if people on here who missed out want to be involved in this last chance for you to invest (before it's out of all our leagues), then I want to do my damn best to make sure you have the opportunity not to miss out again.

I'm happy to share what the opportunities we've got are, but not in public and online. Our office door is always open ( http://studiothirtynine.com/ ), and we're there a hell of a lot (except the days we have meetings and scurry around London).

As to what the hell we expect to do with £500k, well we need to hire. Immediately we would be looking for a front-end developer, and we would like to bring Tom 6pt onboard if he wants to join us, either that or we're looking for a designer. And we need 2 community managers... 1 immediately in a more senior role focused on marketing and providing support to existing communities and helping to grow those, and then a more junior role to perform the support role to communities.

As anyone hiring knows, the cost isn't just the salary and you need to think of equipment (computer and office furniture), office space, etc. So the cost is much higher than the raw salary figure.

That would also necessitate moving office as we outgrow that space, which puts us back onto more commercial office rates, even if we still aim for the cheaper end.

We also need to invest in more infrastructure and services, from servers to cloud services (CloudFlare, MapBox, etc).

And finally we need to start thinking of marketing costs from T-shirts through to communications, etc.

All of that is our immediate requirements to attack those opportunities that we have, and we've left some headroom so that we will not be caught on the back foot the next time a large set of opportunities comes up. We're leaving room in our funding to either go longer without taking further funding, or to able to hire to grab opportunities when we need to.

We still hold a firm belief that to build a sustainable business our costs need to be much lower than our revenues, so this is not a spending spree... it's fast growth to grab opportunities whilst they are within reach. You'll still see us being aggressive with our costs, but the thought of being too aggressive to the point of missing opportunities is plain crazy... our job is make this business grow, not just to give investors a great return, or to change the lives of people using forums, but for us personally too.

So that's where we are, that's what we're doing. And now, when we're not writing code it's because we're working on the pitch deck and speaking to investors.

That would be me. The one who missed the first round.
How do I go about it? The first time round I gave up on the Seeders registration and then I went through some personal shit, and then it was too late.

subscribed

That would be me. The one who missed the first round.
How do I go about it? The first time round I gave up on the Seeders registration and then I went through some personal shit, and then it was too late.

You should head over to http://www.seedrs.com/ and complete the registration.

There are some verification steps, and you need to be through that before we open the round. You have at least 3 weeks from today to do this, we won't be opening it sooner than that.

Great stuff, David. It's pleasing to see that your initial idea is generating such strong interest outside of lfgss, most of us believed in it, so this is brilliant.

And, yes, I know there's still lots to be done.

Yep, good luck.

What would be the additional investment required per, say, £ 100 to remain undiluted? (I assume you or seedrs have done the maths so we don't need to)

What would be the additional investment required per, say, £ 100 to remain undiluted? (I assume you or seedrs have done the maths so we don't need to)

This does depend on the exact valuation, so I can't give you a promise on that number today but in a week's time I will be able to do so.

We do have a pretty good idea, but we're having it validated before we settle on it.

It is substantially (several times) higher than the initial valuation given that we now have IP assets, some traction, opportunities and some value in the brand (btw, I may have neglected to say that Microcosm is being trademarked in relation to forums, chat and discussion software and services).

David, I might have a job for you - a heritage / archive site that allows lots of user input (files, media etc.) if you're interested? Still chasing the funding for it, and development wouldn't happen until the start of the next calender year.

snowy, I've stopped doing any outside consulting.

I had stopped totally, but did a a few days at Hailo recently to see if it was still tenable at 1-2 days per month. But even an occasional day is just too disruptive and I need to be 100% focused on Microcosm.

^^ Bca?

Branch Chain Amino

Aciiiiiiiiiiiiiiiiid

Ah no I was thinking of using microsm for the project...

Just been through seedrs sign up, straight forward enough. Gonna have a good old ponder on this one.

Everyone should have a slow-burner.

Ah no I was thinking of using microsm for the project...

Ah, in that case let us know the details.

We're still thinking free for anything public, and to charge some standard and very reasonable usage fee (based on API calls and total file storage) for private forums. It will be extremely affordable thanks to how efficient the software is.

so under present share class, to preserve percentage up to the SEIS threshold one would be looking at investing 2 X existing holding.

when SEIS maxed and rollover to EIS, will this be a new class of share issue?

There's a lot of possible scenarios in what you've just described. I'll lay out some likely numbers that are not final, and some likely scenarios that also are not final.

Bear in mind I am not a financial advisor or accountant, and whilst I'll have someone check this tomorrow I'd rather attempt to answer sooner... but run the numbers yourself to double-check my workings.

If the valuation is £2m, and to max out the SEIS allowance the round is capped at £100k, then the Seedrs round of £100k = 5% at the new value. Which means that the dilution to your existing position is just below 5% (10% of the company held by Seedrs would be worth 9.5002065% after shares worth 5% have been added to the company).

In effect, this means that to maintain your position, you would need to invest the equivalent of fractionally below 5% of your current position, at approx' 4-times the value originally invested.

Or in plain English: If you invested £100, to maintain the same % you would need to invest a further ~£20 to cover the ~5% dilution at 4 times value.

If you chose not to, then that's cool (but you only have a 10-day window before it goes public on Seedrs and you cannot exercise your rights after the issued shares are fully subscribed), your £100 investment would now be worth a smaller % (95% of whatever it is worth today) at 4 times the value... that is, your original £100 investment would now on paper represent something like ~£380.

Dilution is going to happen, not just when we raise money but when we employ people (though an option pool has already been factored in to the first round to prevent early dilution, that option pool will be topped up on subsequent rounds).

The only thing that is really important whenever dilutions happen are: Did the value of your investment go up? Are you in a better position regarding the security of the investment (strength of the company) and a step further along the path to a healthy exit (when either we IPO or are acquired)?

As for the share class, the next Seedrs round which completes the SEIS allowance will still be ordinary shares, which is the only class of share currently issued.

As for what happens when we raise the £400k... I cannot say. For example if we issue debt in the form of a convertible note then no shares will have been created and so we won't have this question. If we go for an angel round based on a syndicate/party form then the terms will come about by mutual agreement amongst those angels and structured by the lead investor with agreement from ourselves (our accountant and lawyer). If we lead a party round then we'll obviously shoot for ordinary shares. If we have institutional investors then not all institutions are EIS eligible as some use funds provided under existing and conflicting structures and the whole round may not even be EIS eligible. If the round is dominated by institutional investors then they may wish to dictate a preferred share class be created guaranteeing they get their money out first (which is standard when you invest at that level... they do not have the comfort of SEIS and the taxpayer underwriting a sizeable chunk of their investment).

The £400k round has far too many questions open for me to give any meaningful clue as to what may happen. I can only say that the £100k Seedrs round will be ordinary shares, at a valuation likely to be in the region of £2m, and therefore for a % likely to be in the region of 5%. Then, if it looks like the £400k round will require EIS eligibility we will have to stagger the rounds such that we have spent 70% of the money raised to date before being permitted to raise investment under EIS.

A long post, but I hope it makes sense and helps clarify somewhat. I'll have the numbers checked tomorrow to make sure I'm not misleading you.

Oh, and the second question that comes up is: What if you want to improve your position and go for a higher % and you are an existing investor?

My understanding is that you should exercise your pre-emption rights when those are available, but you cannot at that point improve your position.

Then, when the round opens to the public you have the opportunity to improve your position by participating with everyone else in the public part of the round.

I know already of one existing investor who wants to dramatically improve their position, and of another who wasn't in the first round but wants to invest heavily in the public round... this is basically why I'm attempting to keep you all in the loop and to hopefully synchronise opening that public part of the round when I know anyone who wants to invest from LFGSS is already registered and ready to... you really aren't going to get that chance if I did not, and it is extremely unlikely that future investment rounds will be open to non-institutional investors or very high net worth individuals. We have interest for over £30k in the SEIS round already, and we've literally only spoken to 2 or 3 people outside of this thread, existing investors and a few forumengers I've bumped into.

so each time the shares get diluted will existing investors get a chance to increase their investment to keep the percentage the same? Or is it a one off?

Great to hear things we going so well Dave, OOI how many individuals came forward in the last round?

registers on seedrs

so each time the shares get diluted will existing investors get a chance to increase their investment to keep the percentage the same? Or is it a one off?

Yes.

But... whilst you have participation rights in future rounds, provided you participated in prior rounds, you only have the right to preserve your position as it was at the time the round was announced.

And... the valuation should increase each round (as a result of the sum of company assets, opportunities and revenue increasing)... so even though you have that right you will find the investment required to maintain your position will be substantially greater each time.

Given that the value is lower today than we all hope it would be in the future, you'll get far more bang for buck defending this time round than you would in a year's time. That is, the number of shares £50 buys today is greater than the number of shares £50 will buy in 6 months time, which is greater than the number of shares £50 will buy in 1 year's time. Hopefully that trend continues (i.e. we don't screw it all up) until such time that either we exit and you all get a big piece of cash, or a secondary market emerges (perhaps within Seedrs) that allows you to sell sooner than the exit event and you cash out sooner.

Great to hear things we going so well Dave, OOI how many individuals came forward in the last round?

registers on seedrs

61 people invested in the initial seed round.

The lowest amount invested was £10 (which we didn't actually realise was possible) by 1 person.

The greatest amount invested was £2,500 by 5 people.

We believed at the time that all of the investors were LFGSS users, but it's become apparent (by talking to people) that something like 10-15 investors were from Seedrs and just happened to be online on the morning that it was happening and all jumped in before it closed.

A few angels contacted us afterwards asking to be kept informed about future rounds as they felt a little miffed they'd missed out.

I am far more concerned how LFGSS users had missed out and felt that we could have perhaps done it better... maybe held back a few more days, maybe synchronised people better and launched when everyone was ready. I want to try and get that right this time, for people who haven't invested this is likely to be their last chance as future rounds are likely to be closed rounds for seasoned investors only.

Signed up to Seedrs and verified so ready to get involved :)