NextSeed and Small-Business Crowdfunding with Youngro Lee

Source: GeniusDen archive transcript checked against the recording. Administrative opening and closing material is omitted; the presentation wording is otherwise preserved with light readability edits.

Presentation

What is investment crowdfunding? And people get confused by that. When you think of crowdfunding, you think of Kickstarter, Indiegogo, GoFundMe.

And it's all very, very important. That is actually the social momentum that leads to what we are today. But investment crowdfunding is actually something very different, in the sense that it is not just a real good story. It is a legal process. There were prohibitions on how to do it, what to do it. And for the first time, really, we are able to do so. So if you think about crowdfunding today, it's really just two major categories. One is the rewards-based crowdfunding. I mentioned Kickstarter stuff. And then second is the investment platform. As a concept, as an idea, it's actually very simple, right? You have an idea. Somebody has an idea.

Somebody has something that requires money, and we just happen to pull money together efficiently because now we have internet, now we have technology. Since the beginning of this, in 2015, there's over $30 billion globally. And by the end of 2025, we're expecting that to be over $90 billion. But this report estimate was actually a couple of years ago. So at this point, I think the projections are well over $100 billion. And there's really two simple reasons why crowdfunding, why you hear more about crowdfunding. One is clearly the technology part. I mean, we obviously in the last five, 10 years, have seen a lot of startups, and that's become a sexy thing to do.

So there has been a lot of technology advancements. But the more interesting part, at least from my perspective, especially before this, I was a practicing attorney. It's a change in law. Technology has been there probably for a while. But by law, you were not allowed to do some of the things that we are doing and other companies are doing. And it's not just US. There's UK, Europe, Asia. It's a momentum. It's a movement, if you want to call it that. And it's something that we, in my opinion, are very lucky to be part of. Because this is literally being one of what potentially could be, in my opinion, something that changes the world. So not to bore you guys too much, but just to set up the context.

I mean, if you think of small businesses, I am just, in this case, kind of sort of aggregating a tech startup and a coffee shop or a doggy dog, whatever the case might be, everything together. There's really just two ways to finance. One is equity and one is debt. And depending on the situation, you have different options that you can pursue. But for most of us, you basically go to your family friends, right? Like, I need money. And I'm either structured, it's like I'm going to give you a share of my company. Or I want a loan and I'll pay you back. In the traditional space, that's basically bank loans. And now you see a lot of different alternative loans popping up.

But in general, that's kind of the options we have. What happened, as you guys know, I mean, for me, this has really hit some, and I have some more colleagues here as well. But I started my legal career in 2007, like Joe mentioned, on a Wall Street firm. And that was literally when, at least in the world, that we were living in, things changed. The Lehman Brothers went down. And Texas, I think, navigated that process relatively well compared to the rest of the country. But it was a very, very scary proposition for a lot of people in the finance and legal industry. And long story short, credit dried up. Banks weren't lending. Investors were scared.

You know, people weren't giving money away easily. So what happened after that, there's obviously politics behind this, all the other things. But again, long story short, there's been an active movement by the federal government and state governments to try to make things better. And how do we get capital to small businesses? At the end of the day, even though all the media and everything's dominated by the big companies and the corporations, it's literally small businesses that drive the economy. I mean, even if you think about your daily lives, like comparing the number of big businesses you use and small businesses you use, I venture to say the vast majority is actually small businesses.

And one piece of that was this thing called JOBS Act, or this law called JOBS Act, which was the, I think, if not the only, one of the very few bipartisan laws that actually got passed during the Obama administration. And it's basically a series of laws that permit online fundraising. And crowdfunding is a word we now put to it because people think they understand that term. But it's literally as simple as you can now raise money online, which legally you were not able to do before this series of laws. So I'm going to go through that law in a little basic, and then I'll just show you our website to show you how it actually works in real life.

But there's just two pieces of it which, sorry, I do want to mention one thing. Before the national laws happened, individual states were taking matters to their own hands. And that's really why NextSeed is based in Texas. We're headquartered in Houston. We have presences in both Austin and Dallas. We want to do more in Dallas. But basically, as the national laws were coming out, individual states couldn't wait long. I mean, the way the rulemaking work process works, and that's why there's so much confusion, is that the SEC has to sort of take congressional instructions and then make very specific laws which are very complicated, which is what makes it difficult for the public to understand.

So individual states passed their own laws. Texas happened to pass their Texas crowdfunding laws in 2013, which allowed Texas businesses to raise money to Texas investors. And that's really why we started in Houston. [unclear phrase]. So again, I'm just going to go through this quickly. If you have specific questions, I'm happy to discuss more afterwards. So there's really three, just think of the JOBS Act as three different types of laws. There's Title II, Title III, Title IV. There was a Title I, which is a whole separate issue, but doesn't involve, quote-unquote, crowdfunding. So Title II is the same rules as there always was in the U.S., which was you can raise money privately to what's from what's called accredited investors, which frankly just means rich people.

You have to be a millionaire or you have to make over $200,000. Title II allows you to conduct that type of offering online. So if you, before literally a few months ago, if you heard of national crowdfunding, investment crowdfunding, it was all Title II. And it's really been real estate companies that's been driving that. And it's that industry is probably a couple billion dollars like that. Which is, you know, phenomenal is out there. It might not sound like much, but it's incredible. Because before this law, literally that meant if I'm a private company, I have to, one, find out who is basically rich. Two, build a general relationship with them.

Like I can't just call up Joe and be like, hey Joe, I need money. I have to build a relationship with them and then I can present them with an opportunity. So that goes away. That happened in September 2013. And that sort of started getting the public interested in what was called equity crowdfunding. Because that's kind of what people were doing at the time. 2015, a different element called Title IV. Title IV is different from Title II in the sense that you can do online offerings, but now you can accept money from everyone. So you no longer have to be rich to invest in private companies. The issue with that is it's not an easy or cheap process for small businesses.

I really call it a mini-IPO. You have to still basically prepare all these complicated documents and file it with the SEC. And roughly that basically means you've got to spend at least $100,000 to $200,000 just on the legal documentation necessary to do such offerings. So there's definitely a lot of movement here as well. But when you talk about small businesses, mainstream businesses, there's probably not a practical option. Which brings us to Title III, which is what we do. And this is when Joe said we're the first crowdfunding. This is what we do. It's called regulation crowdfunding. Because it is the truest form of what people think of crowdfunding, in which small businesses or any businesses can relatively easily list their offerings online.

And anybody can come and invest without such a complicated, expensive process. So this law passed in May 2016. And actually was the first crowdfunding portal, which is a new status that was created by this law. We're also the first SEC-registered funding portal. And we closed the first-ever Regulation Crowdfunding offering in U.S. history. It was an Austin-based boutique hostel. So think of, if you guys have been to New York, Ace Hotel. These kind of new trends. Not the 1980s European scary hostel, but they're really sexy. You can pay cheap rates for your rooms, but it's a giant space for you to mingle and have fun. And we'll get to that in a little bit in terms of how the changing trends in the demographics are really affecting this industry and really why we built our business the way we did.

But long story short, this just means when you think of crowdfunding, right? You're a business. You want money. You can go to one of these portals that have the license to conduct these offerings. And then you can put it up. And anybody walking down the street can see it. You can talk about it generally, like I'm doing a crowdfunding offer. And you can come and they can invest. The one thing, I'll go through this in more detail. [unclear phrase]. Different portals have different requirements. So it's not, this process is not necessarily like Kickstarter, where you just put something up on your own. It's something where you have to go through a funding portal or a broker-dealer.

And so you are in effect applying to a third party and you have to meet the standards of that party or that company or that portal to be listed on that portal. And there's various reasons why that is the way it is. But that's something to keep in mind, depending on if you're looking for equity, depending on if you're looking for debt. If you're trying to go to an audience that's looking for tech companies, which is small businesses, or oil and gas companies, or whatever the case might be. But the way the industry is evolving, even in these first few months, is specialization into a certain type of product. So that brings me to what NextSeed is doing.

So we want to help small businesses and retail investors. And by retail investors, I just basically mean anybody who might not have a million dollars to invest. Because if you think about how you guys think of investments or savings in your future, it's really the stock. Like you literally, if you want to save or invest, you have the stock market. You have the stock market. So what we wanted to do is create a platform where you can earn solid returns investing in local businesses. It's not the stock market of some major company, but you see a coffee shop you like. You know a small business owner that you trust. And you can visit them and use their services.

Because on the other side, the small businesses have, for the reasons I mentioned earlier, a very serious problem. It's really hard to get financing, period. If you think about the small business world and the background of the audience, there are really two problems. It's not just financing. Financing, like you get your money somewhere to open a new location or build a new building or build a new structure. But for small businesses, what we need to succeed is not just the product. You need people, no matter what. You need people to come. You need people to talk about you. You need people to support you and believe you. You can look at the successful, most successful businesses out there.

They have to do a really great job in marketing. I mean, GeniusDen is a perfect example. They have a specific business model. But the way they effectuate and they sort of deliver on that business model is by creating a community, just like this event. So what we try to do is create something that's very simple to use for you as an investor, which is you can just navigate online potential deals. And it may interest you, it may not. The whole point is it's easy. You just click and you see. You kind of research and invest on your own. So it's no longer let me trust some guy that says he's very smart or some guy that you think is smart and just saying, here's my money, please manage it or please do something with it.

We really want to give the power to you. That's at the core of this. We think we all know what we know. We know what we don't know. And we don't right now have a choice to make decisions based on that. But by creating a platform where you can actually see and research for yourself. We want to give a [unclear phrase], no-credit option. And then basically the third part is just tracking your investment. So it's not just like, you know, I put my money somewhere and then maybe, you know, five years from now something will happen and they'll send me a check. It's just, I see my, I put my money in somewhere and I'm showing, I'm seeing the returns every month.

So this is more for the business owners. Well, I guess for the investors as well. So we don't offer equity. Like I mentioned, different platforms have different specialization. So a lot of the portals that you see, whenever you see it, whenever you hear equity crowdfunding, or if you see a tech company, chances are they're selling equity, which is exactly what I said. They're selling some percentage of their company to you as an investor. And the way you get paid is that there's a liquidity event when there's an exit down the line, where they basically have a [unclear phrase]. For us, we are offering them. So businesses literally make monthly payments just like they would in any type of loan situation, any type of finance situation.

And the investors get paid what they were supposed to get paid based on the terms of the contract. So one is a term loan, which is a standard, any type like a mortgage or your car payment, whatever the interest rate is of that loan product. But in terms of the loan, you just get equal payment every single month until you get a principal loan. The other product, which has been very interesting for us and got a lot of interest from business owners, it's called the revenue sharing loan. What that basically means is a business shares a fixed percentage of its revenues until you pay back a total amount. So for example, you know, there's an outcome that we did that paid 1.5 multiple.

So for every $100 you invest, you get paid $150 back in total over a set period of time by the business sharing a fixed percentage of the revenues. So that allows, for example, the business flexibility in how they pay. So a lot of small businesses, especially if you have seasonality or cyclical cycles, that's a part of nature. Sometimes revenues are high, sometimes revenues are low. But because you're sharing a fixed percentage of that, you can kind of, you know, your business grows as you grow and your payments depend on the success of your business. On the other side, for investors, you can actually share in some ways the upside because even though the total amount is fixed, if the business does very well, you get paid quicker.

So your investment rate goes up. Therefore, you have an incentive to try to make that business successful. If I have an interest in a restaurant or a bar, if I want a beer, I want to go to the restaurant. I think a lot of us might tell our friends about it. We want to share it to the world. It's frankly, it's fun. The fun part, I don't want to downplay because it is a very serious process and very productive and it's real money. But the way that we try to make it more manageable is by also reducing the minimum investment. So on a platform, you can invest in most cases for $100. That's the power of the platform. This is the interesting part that we've seen. We've been operating, we started this two years ago.

We officially launched our Texas platform last year. We launched our national platform a few months ago. So we have about a year and a half of data points. Our fan base is growing quickly — by that I mean unique visitors and the typical startup internet metrics. But what was really interesting, which perhaps should have been obvious, but at the beginning we didn't think of that way, is that it's really millennials that are driving our growth. We nearly have, I think more than half at this point, are millennials. And they engage; they tell us based on their feedback. Because it's something different. Even if we're not technically millennials, I think we kind of are like millennials here.

So we want to enjoy the process of living, right? We don't necessarily want to do something now for the next 30 years and see what happens. We want every day to come. We want what we do, what we spend our money on, what we invest in, [unclear phrase]. So people love the idea of investing in something tangible. That's the other part of the early adopters, as well as the business side. When people come and they see what it's about, they get it. So it might take some time, just like it might take you guys or anybody, to understand what crowdfunding is and what equity is. Once you see it, we think, people will like what they do. Even if they see, they'll come back.

So this is just a case study that we did. One of our early deals was in Houston. If you guys have been to Houston, you should check out this restaurant called Peli Peli. It's a South African restaurant in a couple of locations. One in the Galleria. The top five rated in TripAdvisor and Yelp. So they raised $358,000 for 127 individuals over 42 days. So during the campaign, they had 13,000 views for over a minute and a half. They were covered in different locations, different press, different blogs. We generally use standard marketing analytics for metrics to over $10,000 worth of that. So if you think about a restaurant, you spend so much money on marketing.

Google, Google, whatever. Everybody's trying to hit you up for marketing, PR. So for them to have 13,000 people in the Houston area to look at their offering page and look at it and review it. So they're thinking about it from the investment side for a minute and a half. They love that engagement. Some people invested. Some people didn't, obviously. But at the same time, people were sort of [unclear phrase] by even going to the restaurant [unclear phrase], telling their friends about it. So that interaction is what I mean about crowdfunding. That's what makes this unique. It's not just about the money. It's the process of engaging with their community.

To an audience that you may or may not want, but you're testing that out. You're sure to share your story to find [unclear phrase]. I'll go to the website now, but just some additional examples so you've got to get a sense of what our platform does. This was a new [unclear phrase] started by a few established entrepreneurs in Houston. They raised over $440,000 from 134 different people over 70 days. It's literally, if you guys know Houston, it's across the Highway 59 in the George R. Brown Center in the East Downtown, which is an up-and-coming area of Houston, similar to this area in Dallas. They allowed the team to sort of start building a business before the Super Bowl.

And for a lot of investors, again, it was a chance to get in on a small business concept, which obviously they otherwise wouldn't have been able to do, because even if you're legally allowed to business owners, they can't take a $100 investment. You need a lot of money for it to make it worth a while to build people and things like that. But through this platform, a lot of people got engaged. And really, this business was the one that, in some sense, helped us connect with the community. Wow. This is called the Brewer Stable. It's a new concept coming in Austin, started by a very popular theater professional or celebrity in Austin. They raised $300,000 from 190 investors.

And this was the hostel deal that I mentioned. This was the first-ever regulation crowdfunding offering in the U.S. They raised close to $400,000 from 227 investors. So you'll notice, it's not small amounts. We're not doing $25,000 food trucks, although we definitely consider those on a case-by-case basis. There's a few reasons. One is, we're trying to educate the public as much as we're trying to actually be dealing with them. This is not just for us. My team, my colleague here is here. Our team didn't do this because we thought this was just a cool idea that we wanted to experiment. We think there's something fundamental happening in our generation, the way the financial systems work, the way we think about money and investments.

And we really want to build a good foundation. So we are trying to work with established business owners so that you, the public, know that it's not just a, you know, established real entrepreneurs to do real things. And frankly, we want investors to make money much more often than not. We don't want this to be like an [unclear phrase] where, by definition, you're going to lose money 90% of the time. We want this to be a true alternative product where you can potentially and hopefully rely on to consider as a different investment option. So I'll just go over real quick. This is our website. And I think [unclear phrase].

So we're using this super high tech with the mouse. This is our website. Now we'll be at NextSeed.co. Now please check it out when you have time. So we funded over $2.1 million of debt financings since we started our businesses last day. And so we just lost a second group today. So if you look at this, this is our track record. So we've got to test out by seeing what it was. This was the first ever deal we did, which was a hair salon in Houston. They raised $25,000 in the first loan. They paid everything back, sorry, the revenue sharing. But they did it back in less than a year. That return was, I think, about 7.5%. We've done, we have done a snoring center, which is sleep and snoring problems.

You can check them out. They'll do a 15 minute procedure and you're sleeping.

Interview with Jason Croft

So, you've got another question. One more question. So, why do you pick debt instead of equity? The question is, why do you pick debt instead of equity? So, when I mentioned the difference between credit investing and equity investing, not to say that it's because you have more money, you're sophisticated, but it is the concept that is actually very complex. How do you, if you own 2% of a restaurant, so the basic idea was we didn't want to offer something that was a product manager's name.

Because even before, like, just company has to sell itself. So, for us on the investment side, we don't want it to be disputed about what the company is worth, what the rights of the shareholders should be, what, you know, what happens if something goes wrong, etc. When we do that, it's a very simple question. Literally, contractually, businesses are required to pay the investor a percentage or a dollar amount, and there are no other issues. So, it was really just to make it simple for people to understand what this could be. And perhaps, if there is a [unclear phrase], [unclear phrase], you can get some of them to pay for them.

That's awesome. Yeah. So, we do, when we work with a startup business, we require basically, not require, but we would like to see the entrepreneur having done something very similar and successful. So, again, not just because, we're not making a judgment on what is a successful business now, but because we're sort of looking out on the investor's goal and basically, it's based off historical experience. So, if you have experience, then, we'll basically use that as a reference point, kind of see what a typical business plan, how much time it takes, basically the business owner itself or self-putting in business. Really, at the end of the day, probably we advise and recommend.

Pricing is basically a question of revenue. Okay. How much money are you generating? How much money? What? What? Whatever the terms that you offer, can you negotiate them very significantly. We're not trying to, okay, we're not talking to Facebook where we're [unclear phrase]. If you think you're going to make that percent, [unclear phrase]. We'll take some more here. We'll take some more questions here towards the end, just a little bit. So, great presentation. I appreciate all the information. Something you said at the very beginning, when it came to Spartans, two, three years ago, right? It was, I just kind of knew this, like, it was just, everything else went away, this was it.

Why? Yeah. I think we all are conflicted about, [unclear phrase]? I mean, I've had that for a while. Not that I didn't, but I learned so much doing what I was doing in the long run, but [unclear phrase]. I don't, yeah, I'm not trying to put value just based on what something would happen for me personally. I wanted to do something where I know, like, this is literally resulting in, you know, some other action, some other reaction. Well, from my perspective, it was also something where, as a platform, I can't actually help you much out. It was, you know, [unclear phrase]. So. When the JOBS Act came out, it was something where I felt because of my legal background, I had the opportunity to share.

Share. That might not really help. I was talking about it. Yeah. We'll just swap the mic back. So, because of my, we talked about it from a startup perspective, everything about my startup, so I completely agree with you. We need a competitive advantage, right? [unclear phrase]. So, it was a chance where I felt like I could use my knowledge and experience to [unclear phrase]. And long story short, it felt like if I didn't do this now, [unclear phrase] A lot literally changed for the first time in history. So, if it wasn't me, or if it wasn't NextSeed, somebody else would do it.

There's a lot of people that are there. So, I think it was that sort of perfect form of where I was personally, where I was thinking about my life, and [unclear phrase], where I felt like it just, I don't know, it comes up to me again. You know, Abe, what has first mover advantage brought? Have you seen that difference? Does it, do you think it matter? I think there's various. Depending on the startup, how you're thinking about your business, I think [unclear phrase]. It definitely matters for us in the sense that we were able to prove that what we do works. It might not be elegantly, it might not be super efficient, but it works. Especially from our perspective of doing small business debt.

I mean, if you Google or look at different kind of crowdfunding, I think we're still the only platform that focuses on only doing small business debt. Everybody else kind of focuses on startup tech equity crowdfunding, because that's the sexy part. And so, like, [unclear phrase], but two years ago, when I started, honestly, like, even, at least I thought I had a background, and my team had a really good background. And we're willing to just put our own money for our own business, [unclear phrase]. And yet, a lot of people just didn't believe it. So, in that sense, we are setting precedent. That gives us some credibility in the market to say, yes, like, we know this works, because this is what we thought about two years ago when we developed it.

At the same time, and this is more strategic from a startup perspective, we talk about the first movers, like, that's not the game-changer in itself. Because what you're really doing is making it easier for the second guy to do it faster than you. So, in some sense, we set the playbook, and now I'm sure there's other companies that are, other platforms that are tracking the world, too. But in our sense, that's a good thing. I mean, this is such a big industry. Like, small business financing. You look at it as an industry. It's literally a trillion dollar industry. So, no one company is going to dominate the whole space.

And for us, the more people do this, the more people learn about it, it's better for everybody in the industry. Not just for the portals, but at the end of the day, for us. Because it basically means that, for small businesses, they'll have more options. The cost of financing will go lower, theoretically. And for investors, you just have more options to choose. Yeah, I think that's great. And to that point, with the portal, you know, you're really, you've got different audiences that choose the seat in your marketplace, right? So, you've got two distinct areas that you have to go to the market yourself from the investor side, you know, who's looking for investment.

How are you planning that right now? And I'm really interested to find out what's, what's that next level of step for you to get to build this? So, if any of you guys are trying to work on a platform or marketplace, that's literally the hardest question ever. If I knew how hard that was, I might not have started this. Because you have two clienteles. You're in effect building two separate businesses at the same time, and [unclear phrase]. The way that we look at it is, right now, you might not trust NextSeed. Because for all you know, this is some thing that doesn't work. But what people do know, and which is why we also focus on this local piece, is the businesses.

If you live in Houston, you know every one of these business owners. Because [unclear phrase], and we're working on some deals in Dallas that [unclear phrase]. So, that's kind of what we're trying to get. The second question, I think, was, there was only before how do we meet money? Yeah, how do we meet targets? Because that is so common. So, the question is, how do we target other companies? I mean, there's no way to do that for certain, right? I mean, at the end of the day, we're still betting on people as much as, any equity investors and tech startups. Small businesses, as you might be a business owner, it's really hard.

I mean, I've never appreciated how difficult it was to run a small business. I mean, even though there's no, like, I don't know, [unclear phrase]. The ability to manage your books, manage people, manage customers, it's not easy. So, we do our best in our diligence process to, I mean, that's the question on the track record. Like, have they done it before? Do they have relevant experiences? If it's an existing business, we read their books. So, businesses have to apply, give us their financials, give us tax forms, give us their expense structure, and the cap table. So, we can at least take a reasonable estimate on how they will perform.

And again, we focus on debt. So, it is a more simple question. Because it comes down to, can you pay this off in the next two, three years or not? But we do our best. And part of it is, as we have more events like this, we want to track the right people to our product as well. On our side, the fee structure charges up to 10% of the total amount raised. So, if we raise X dollars on the platform, whatever our fees take out, we proceed to move back to the business. And on the maintenance side, everything is free up to the investors to sign on whatever, until they start getting the payments, which are 1% of the proceeds and services. That's to basically maintain the financial accounts.

So, we have not only the, it's not just like we just put one, we have the backing infrastructure with the partner bank, where we create a NextSeed account, just like E-Trade or Fidelity. So, yes, it's your bank account, really. And using that, once you fund your account, then you invest in deals on our platform. And then at the end, we give you a 1099, one for NextSeed. So, the partner setup is efficient. So, you mentioned earlier that there is some high-level credit analysis, employee, brand recognition, previous success, you know, various financials. Is all of that done annually? And if so, do you see that as being an issue that tracks us terribly, going forward?

Right now, we feel a lot of it, man. The question is basically, how do we evaluate businesses in different ways, and is it manual or not? So, it's kind of really simple. We have developed a system to be able to evaluate efficiently. So, we have basically, depending on what numbers or what categories they are, we'll have an understanding of what's good or bad, things like that. But we do have individuals improving them. And our goal, of course, is to make them more efficient over time. But at this point, it's really important for us together that, like I said, trust is everything. So, we could still be wrong, but we do everything we can right now, too.

Then, uh... So, what percent of retail businesses that use the platform now, would you say, are spread between traditional service-based businesses or product-based businesses? It's basically all service right now. Do you have a question? So, one percentage of our businesses are service versus product. Everything that you see, almost everything is service, even if it's in product, it's really service. Again, that's kind of what the strategic move on our part, because service is where you need them from. Where you need people to really come in here, like literally walk your business, get that sort of stuff. We have, and we are actively looking into product companies, like CPG companies especially, where, again, the crowd matters, because you're trying to advertise, basically, in a new way.

They have very different cost structures. If you guys are in the CPG process, it is a very, very thin margin business, breweries, craft products. Like, they're literally counting pennies to try to make more profitable or volume. So, there might need to be a different product that works for those businesses, but we're actively trying to figure out how to serve them. So, what's the actual cost? What do you make, and then typically what percentage of that is the percentage of the entire debt step? For example, they might go to a bank for a 50% loan, and then some percentage is their money, and some percentage is NextSeed money. So, the question is, I guess to summarize, what's the overall cost structure or cost basis of the business?

How much does NextSeed make, and then how does that blend out? So, it really depends is the answer, because we've done it so many different ways. Some businesses, they only took on NextSeed debt, basically, NextSeed loan. Some businesses have NextSeed as literally a mezzanine piece. By that, I mean they have traditional debt, NextSeed piece, and equity contributions. Some businesses just have, well, I guess it has a difference, right? So, NextSeed piece is between 5% to 10% of the total amount raised. But that entire amount is the obligation of business, so it does lower their financials. I think the way it works best for NextSeed is really if you want the marketing aspect, if you want the crowd.

And I'm very frank about this, and I believe this, if you just need the cheapest money possible, like if you don't want the crowd involved, try to get a bank loan. Like seriously, there's no cheaper solution than bank loan, it's just really hard to get. But if you can get it, you should definitely get it. If you can't get it, that's actually the area where NextSeed, or fintech financing makes sense. So, a lot of the businesses we talk to, the problem is if you can't get a bank loan, you're not going to get, there's really nowhere else to turn. Besides, one, selling equity, or two, there's a process called merchant cash advance that's been really up and coming in the last five years because of the gap in funding that has taken place.

And if you, I don't want to go into detail on that, but it's very expensive capital. So, in those situations, we work best. And depending on the needs of the business, we'll work with them to try to figure out something else. The question is, is there? Yes. Which is, eventually, we want to be a solution for all types of financing depending on the needs because we can customize it. So, that's the value proposition of crowdfunding. It's literally a financial security that you sell to the public. So, it can be structured to meet your needs. We just happen to customize it in two ways so that, as an investor, you know exactly what you're getting.

But, I think as an industry, as an industry evolves, I think businesses will be able to structure what works for them. And hopefully, by then, they have enough credibility with the public that the public also understands that customization and be able to meet their needs more efficiently. I think so. I think so. Yeah. I mean, just right now, like, crowdfunding is so... What impressed me sometimes is that I read articles from whatever so-called experts have been buying and saying crowdfunding sucks. It's not going anywhere. I'm like, it's been two months. So, I'm sorry it's not a billion dollars right now, but I think it will be soon. So, it's just going to be an education process.

And it's just a matter of, like, who's interested in it. I think the one thing that does perturb me, and this is not just [unclear phrase], but the startup cycle generally, like, best advice that I got when I started was don't measure progress by our metrics. Because it's so hard. No matter what business we do, it's so hard to start a business and run a business. But try to find different ways, and if you do have to measure progress, try to measure in different ways whether you're making progress or being successful. The way that I've internally tried to measure progress, in addition to obviously metrics now, is who believes? Because when I started, very few people believe.

But now, the fact of this, I really appreciate you guys making the time. I don't know if you believe me or not, but at least you have more context to consider whether you believe me or not. And we have, like I said, we have really amazing people that want to work with us, partner with us, collaborate. And you see that happening more and more. The fact that more people in the media are talking about it, more politicians are talking about it. And that's a sign that whatever I'm doing isn't, like, [unclear phrase]. No, it's not. It's already happening in the world. I'm just channeling it or presenting it in a way so that more people understand it.

Two more questions. Why did you say you weren't doing B2B? And what kind of dialogue for investors? What's the same question? The business or business? Yeah. You say you were a coordinator or you were not doing it, you were the next thing. Yeah. What was the second question? The second question, what kind of dialogue for your investors? What do you have? Investments, yeah. So the first question is, why don't we do B2B? So to be clear, it's not that we intentionally don't do B2B. It's just that our product right now might not make sense for that. But we're happy to — we actually consider every single business. By that I mean, for B2B businesses, typically, you just want capital as cheaply as possible.

We're not the cheapest capital when you compare us to, okay? Or even a hard money asset lender, which is, if you have a lot of equipment, then we'll have a mortgage, whatever. There's non-bank lenders who will give you money cheaper. Again, so if your business is very asset heavy, like you know you have an expensive piece of equipment, equipment financing can be a very good deal. If you know you have receivables coming in. There's so much innovation in this space. There's a lot, and as long as you are definitely making money, there's a lot of cheap money out there. So I would recommend B2B businesses try to get that, because they don't really care about this stuff.

But if, even if it's B2B, it doesn't matter to you for whatever reason, like that you want people to know about your service, maybe because you're strategically considering going to the retail market, or you just need individuals to know about it, for a business to consider using your products or services, then it probably makes sense. You're going to have to pay a little more than what you typically could get, but if you're willing to do that, then yeah, you definitely want to do that. The second point was basically the investment guidelines. So on our platform, in order to use our process, you have to create a NextSeed account. So we have a different process than I think every other platform out there, which is you have to create a NextSeed account.

Because basically, it does mean you have to give us, by us, it's not me, it's a very secure system, your personal information, including your ID and your social security number, just like you're opening a bank account or a securities account. Because we, by law, have to perform KYC checks, make sure there's no terrorist stuff, and things like that. So that's just something you have to do. On the amount of investment size, by law, you're limited by an income-based test. So it's a little complicated, but the basic thing is if you make under $100,000, you can invest up to 5% of your income across different types of crowdfunding offerings per year.

If you make over $100,000, you can invest up to 10% of your annual income, or net worth, whatever's less, across this type of offerings. So that is a compromise that the regulators and the lawmakers made in passing this law and getting rid of this accredited investor test. Yeah, we're going to open it up to everybody, but in some sense, they're saying they're trying to save you for yourself, which I don't necessarily agree with, but that's the law. You've mentioned how you've been pretty successful in Houston, where you were headquartered. You've also mentioned how, you know, you have some deals maybe in the works in Dallas. Can you expand a little bit more on, you know, what NextSeed means to the Dallas community?

Maybe even more, you know, hyper-local, what could it mean to, like, the community here, GeniusDen and in Deep Ellum in South Dallas? Yeah, so the question is basically, what are you looking for here? Let's help you meet them. What is NextSeed looking for, and what does the local aspect mean to us? So to us, it means everything. Not just Dallas, but by definition, we talk about small business. Local is what people are interested in. So it happens that we start in Houston, but we want to create local communities that can support each other. So by that I mean, you probably have literally, you know, 10 businesses you go to pretty frequently, right? If you do the math, and you're just not going to care as much about something that's not one of those 10 businesses.

I think that's the overall trend. I think the way, especially, I hate to tie it to the political election, but you're seeing not just us, but the international scene. There's a lot of, I don't want to say fear, but hesitation about globalization, and just how big guys are kind of taking over our lives. And I think people find a lot of comfort in knowing, or doing business, or living in a world that we know, right? And people take that in different ways, but on our day-to-day basis, I think that just means we care more about our local communities. So if, imagine, I don't know what, how the community banks were in the 1960s or 70s, my understanding would be they were very local focused.

Like literally people could deposit to their local banks, and those local banks make local loans to local businesses. And that system just doesn't exist. The top six banks in the country control, I think 67% of the entire industry. So it's all balance sheets, money moving in and out, and there's no specific focus on local communities. But if you have a chance to basically lend to local businesses and get customers and borrow from local people, I think a lot of us find that it may be attractive. So our business model is creating a really awesome infrastructure system that can handle the tech, compliance, marketing, whatever the complicated, you know, the tech-style stuff is.

But really creating an opportunity for individuals and businesses to create their own communities and using us to affect their own interests.

Startup Q&A — surviving excerpt

We'll, like, help push those things to you so we can get a win. Just, so, uh, question is: how can we work together — us and GeniusDen Dallas? Really, and I hope you got, if you see that, well, one, please check that website. There's a lot more there that I couldn't cover. But you'll see the kind of business that we work in. It's basically forward-thinking, transparent business owners. Small business. We love tech startups, but it's not a good fit for us, personally. But if you know an amazing small business, whether it's a coffee shop, a pizza shop, whatever, you know what it is. But they're not the kind of people that's going to screw you over.

You trust it. People love them. They love people. I think that's basically it. And I think for us, we want to find, I mean, if you, if you look at our website, there's an event that we did in Houston, a couple of events. It's basically showcased businesses. Like, we bring different types of businesses and individuals to interact and then go out and showcase to each other. That's kind of what we look at. Even though we're a startup ourselves, obviously at some point we need to sustain ourselves. What we really believe is [unclear phrase].