TradeUp Opens to Accredited Investors – So What’s in It for Investors?

I just published this blog on TradeUp site: http://www.tradeupfund.com/blog/tradeup-whats-in-it-for-investors

This week we opened TradeUp to accredited investors – angels, PE funds, VCs, banks, lenders. So what’s in it for investors to get on TradeUp? Here are 7 answers:

1. How is TradeUp different in the crowdfunding space?

TradeUp Capital Fund (tradeupfund.com) is the first equity crowdfunding platform for globalizing companies and savvy accredited investors. We enable globalizing companies and accredited investors (angels, super angels, VCs, PE funds, family offices, lenders, etc.) to connect and transact on debt and equity deals of $100,000-$20 million.

In contrast to the many crowdfunding platforms that cater to pre-revenue businesses, companies on TradeUp are proven and pre-screened, and typically have been in business successfully for several years. Most companies are U.S.-headquartered.

We are also different from other platforms in that all companies on TradeUp are already exporting – or at the very minimum have very clear pathway to go global, such as some have foreign purchase order ready to go. In short, these are companies with global growth potential with mitigated downside.

If you want to stop reading now and go and browse deals on TradeUp, please see home page tradeupfund.com; to sign up and see company documents and interact with companies, please go to http://tradeup.platform.crowdvalley.com/sign-up and select as your role “investor”.

2. Why focus on globalizing companies?

Globalizing companies are a stand-out asset offering a unique portfolio diversification strategy: they outperform the broader market in revenue, productivity, and stability.

Leading academic research across multiple rigorous studies on practically every continent has found that exporters outperform companies that do not engage in international trade. Our white papers lay all this research out. In the United States and elsewhere, exporters and importers alike pay higher wages, are more skill-intensive, and have higher sales and labor productivity than their purely domestic peers, and that they are also more stable. Companies that have made investments overseas are even more productive.

If there is one iron law of economics – and as a PhD on the topic with nine books under my belt I can say there aren’t many – it is that globalizing companies are superior to companies serving only the domestic market.

3. Why exactly do globalizing companies outperform?

One hypothesis is that engaging in international trade makes companies better. That is true. Leading academic research shows that after firms internationalize, they score a number of gains – revenue diversification across markets that reduces the volatility of sales and vulnerability to any one market’s business cycles; increased capacity utilization and scale economies; and “learning-by-exporting”, or improved managerial practices, innovations, and discovery of new global market opportunities.

These dynamics boost company revenues, productivity, and stability. Anecdotal data is illustrative: U.S. manufacturing and services small and mid-size enterprises (SMEs) outperform their domestic counterparts in revenue growth (figure 1). Exports in fact kept manufacturing SMEs afloat during the worst of the 2008-09 crisis as emerging markets drove global demand; SMEs targeting only the flailing U.S. market lost out.

Figure 1 – Globalizing Companies Outperform: Recent Revenue Growth of U.S. SMEs
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Source: U.S. International Trade Commission (2010) based on a survey of 1,176 manufacturing and,1,175 services SMEs (<500 employees).

But there is a further, deeper reason why globalizing companies outperform domestic companies: it is the high-performing companies that self-select to international markets to begin with. This is because high-productivity companies have superior managerial and organizational capabilities to seek international growth and make it to the global marketplace, and they are also better able to manage the high sunk costs associated with internationalization, such as costs incurred in locating new markets and adapting products to foreign consumer demands and regulations.

Take a recent GE study on U.S. middle market companies: the best performing companies are also ones that are most actively pursuing international opportunities (figure 2). These are not just correlations: the finding that exporters are better are echoed in numerous rigorous econometric studies around the world.

Figure 2 – Growth and Globalization Correlate: Highest-Growth U.S. Middle Market Companies Are Also Most Globalized
(click to see bigger)
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Source: Ohio State and GE (2011), based on a survey of 1,447 SMEs (companies with $10mm to $1bn in revenue).

4. So how big is this market – how many globalizing companies are there?

Right now, record numbers of small and mid-size companies around the world are seeking growth through exports. There is enormous latent capacity just in the United States: only 300,000 of America’s 30 million SMEs export. Recent surveys indicate that three-quarters of current SME exports and a near-quarter of non-exporters look to expand their exports. Trends are very similar among Canadian, Latin American, European, and Asian SMEs.

One reason for the explosive growth in the number companies engaged in trade is that the cost of doing global business are lower than ever. For example, digitization of products, 3D printing, and cross-border e-commerce enable even small businesses to attain global scale and expand their visibility in international markets. And of course, many tech companies are “born global”, practically inherently global out of the gates. Come to think of it – TradeUp too is such as mini-multinational as we serve companies and investors globally.

Another reason for why companies are going global is of course policy. The fact that tariffs and other trade barriers have been coming down over the past 20 years has diminished the hurdles form companies to roam on the global stage and set up global supply chains.

Still another reason for the boom in globalizing companies especially in the U.S. and Europe is the growing purchasing power in emerging markets. This wallet space is starting to grow again on the back of the expansion of middle classes and infrastructure spending across the emerging world, and rapid growth in the frontier economies in Africa, Latin America, and Asia. U.S.-based companies are also eyeing at Japan and Europe, collectively a 630 million consumer market. America’s own recovery and macroeconomic fundamentals – lowering energy costs and high-productivity, competitively-priced labor – are also fueling optimism and real investments.

The timing is right. World economy is back, and world trade is bound to grow at 8 percent annually through 2030, doubling by 2022 from 2013 levels – and while growth is strong now, it will start peaking in 2016. This is the time to get in, for companies and investors.

5. Why are globalizing companies raising – and not going to banks?

What’s really interesting to us is a market inefficiency: even though globalizing companies outperform, they also see obtaining financing as the main hurdle to doing trade. In a U.S. International Trade Commission survey of over 2,351 companies, U.S. SME manufacturers rated access to financing as the number one steepest hurdle to trade, out of 19 hurdles, while SMEs in service sectors rated access to capital as the third hurdle to trade, well above such challenges as high tariffs, locating foreign sales prospects, identifying foreign partners, and establishing affiliates in foreign markets.

This finding too is echoed around the world. In an OECD survey of 230 SMEs across advanced economies, access to working capital was ranked as the greatest hurdle to trade, out of 47 hurdles. In a European Commission survey of nearly 9,500 European SMEs, 54 percent of SMEs viewed lack of capital as an “important barrier” to doing business in the EU market and 44 percent to doing business in extra-EU markets. No other barrier (paperwork, laws and regulations, lack of information on overseas markets, etc.) was considered as important.

So there you have it: globalizing companies outperform yet are also constrained for capital.

Why is this so? One reason is that the traditional source of funding for exporters, banks are not interested in the smaller end of the market and have tightened the meaning of “credit-worthiness”. We see this reluctance by banks every day, even in the market for export working capital to small businesses that have foreign purchase orders ready to go. Many local and regional banks also lack awareness of government loans guarantees that could be utilized.

Another reason why globalizing companies often feel constrained for capital is that globalizing companies need substantially more money than the domestic companies, to cover the many up-front costs associated with going global, such as creating overseas distributor networks and meeting foreign product standards. The costs of each transaction also grow in the international context: there are higher shipping, logistics, and trade compliance costs. Perhaps toughest but most necessary for companies is to secure adequate growth capital to expand production capacity to serve the global customer base and fulfill large international orders. This is especially the case if the business is a born global company.

The third reason is time. Few small business owners after all have ample time to pound the fundraising trail: they are already stretched in working to bring in new clients. We see this constraint amplify in the case of globalizing companies, as the CEO is often flying around the world to meet prospective clients. For anyone having done frequent transcontinental business travel, you are getting the picture.

6. Why do crowdfunding for globalizing companies?

At TradeUp, our purpose is to bridge the financing gap facing globalizing companies by leveraging the power of equity crowdfunding, We simply put 2 and 2 together: since crowdfunding enables companies to gain visibility across multiple types of investors globally, why not use it to capitalize high-growth companies constrained for credit: globalizing companies?

Everyone wins: companies can access critical gap capital to export and expand in international markets; savvy lenders and investors around the world access pre-screened, proven companies with superior growth prospects and pent-up demand for capital; and national economies gain through export-led economic recovery, growth and competitiveness.

7. How do I see and contact companies on TradeUp?

To browse deals on TradeUp, please see home page tradeupfund.com; to sign up and see company documents and interact with companies, please go to http://tradeup.platform.crowdvalley.com/sign-up and select as your role “investor”. Please remember, you are on an equity crowdfudning platform and need to be an accredited investor.

We accelerate investments in globalizing companies, and look to work with companies and investors around the world to together leverage one of the oldest and greatest engines of growth and prosperity, international trade.

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