We Study Billionaires - The Investor’s Podcast Network - TIP541: How Equity Crowdfunding is Changing the Game w/ Daniel Gallancy

Starting point is 00:00:00 You're listening to TIP. On today's episode, I sit down with Daniel Galancy. Daniel is the CEO of Autocoma, which is a trending cybersecurity company that has begun making waves in the space with its industry-disrupting encryption technology. Daniel has a ton of wide-ranging experience from the hedge fund world to starting a company in the Bitcoin space in 2014 and transitioning to start Autocoma in 2018. I brought Daniel on the show to do a deep, deep dive on private capital formation and its history dating all the way back to the 1930s.

Starting point is 00:00:35 In this episode, we cover how the venture capital space grew from nothing to a $750 billion industry, the difference between primary and secondary markets, how private capital markets have evolved over time with new regulations, how equity crowdfunding differs from traditional crowdfunding, what sort of role equity crowdfunding opportunities can play in a portfolio, how investors can take advantage of Autocoma's equity crowdfunding round and so much more. In terms of equity crowdfunding in particular, I personally see a lot of value in adding equity crowdfunding as a portfolio diversifier that offers the potential for asymmetric upside. For full disclosure, I personally invested in Autocoma's equity crowdfunding round myself that we're going to discuss at the end of this episode.

Starting point is 00:01:22 The cybersecurity space in particular is a massive and growing industry. And Autocoma has had exponential growth with customer contract values increasing from under $400,000 in Q3 of 2021 to over $2 million in customer contract value at the end of 2022. It was such a pleasure having Daniel on the show as he provides a wealth of knowledge and insights on private capital markets. With that, I hope you enjoy today's episode with Daniel Galancy. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast. I'm your host, Clay Fink. Today I am very excited as I'm joined by

Starting point is 00:02:22 my friend Daniel Galancy to cover private capital markets. Daniel, such a pleasure having you on the show today. Thanks for inviting me. As I mentioned at the top of the show, we're going to be chatting about the evolution of capital formation and how this gives individual investors the access to access new opportunities that traditionally haven't been available. To get this conversation kicked off, I think it would be super helpful, Daniel, to touch on your background and why this topic of private capital markets is so fascinating to you and essential to you as an entrepreneur and a business owner. Sure, absolutely. So my background is sort of half tech, half finance. So I studied physics and elective engineering, and then I was a trader for a little while,

Starting point is 00:03:08 and then I was a hedge fund analyst for quite a while in the fundamental long, short equity, hedge fund industry, and mostly covering tech. And then I discovered the Bitcoin world got excited about that, and then ultimately that got me interested in cryptography in general, right? Not the cryptography, the discipline, and started my own cybersecurity company. Along the way, I dealt a lot with, you know, of course, the public capital markets when I was a trader and when I was in the hedge fund world. And then subsequently, as I started my own company and also as I looked into other areas, in the Bitcoin world, the private capital markets, you know, markets for startups and how private capital operates. And then, of course, there were a lot of situations in the hedge fund world where entities would have an IPO and they'd be coming out of some situation. where they were, you know, potentially held by private equity or owned by venture capitalists,

Starting point is 00:04:05 among other people or among other groups prior to their IPO, right? So there are a lot of these nexus there have always been nexus to the private capital markets. You've kind of whatever I've done, and it got me just increasingly interested in how they operate. So we're going to be talking a lot about capital formation and some of these terms that are related to this. And I think a really good place to start here is venture capital, which is a term a lot of people are really familiar with. How about we just start with, you know, what venture capital is and how it came to be and how it fits into this capital formation picture? Maybe I should start by talking about capital formation and like and perhaps defining the term a little bit because I sometimes find that when I'm,

Starting point is 00:04:48 when I'm discussing this, people say, what in the world is capital formation? And it's a good place to start foundationally before we talk about the venture world. So capital formation is the process through which investors come together and provide capital to a new entity. So, you know, if you want to start a brand new company, right, if your uncle wants to start a new car wash and your uncle says, hey, you know, I want to do this thing. And maybe your uncle doesn't quite have the right amount of capital for it. Your uncle would inherently be involved in the process of capital formation And he may not go with that as most people do not. But he would initially go to friends and family and say, hey, I'm trying to put together this

Starting point is 00:05:29 color wash. I'd like it to put in some money. And that could be in the form of equity. It could be in the form of debt. It could be a hybrid instrument. There are all sorts of formats in which that could happen. But the process of that new capital air quotes for me and then the new venture getting off the ground, be it a VC like venture.

Starting point is 00:05:48 I use air quotes there where it can scale tremendous. or a small business like a laundromat, right? All that stuff is capital formation. So with that as a prerequisite, your question was really about the venture world. So venture capital is a very specific corner of the capital formation world. And VCs really look for businesses that will scale hugely. So there's nothing wrong with car washes. And by the way, they can be great businesses, they can generate a lot of cash. And there are private equity companies that are rolling up car washes and taking them public, right? So that's happening too. But venture capitals are not really looking for car washes because it's very difficult to scale. So, you know, VCs tend to be

Starting point is 00:06:36 interesting, I would say, you know, stereotypically, and I'll use that word, in businesses like software companies, right, or a biotech company, something where you can put in, you know, a modest amount of capital up front and then get these really tremendous returns on capital because what you're getting returns on tend to be, for example, network effects or intellectual property, right, or something where, and I know you cover this a lot in your podcast, something where there's an important molt, right, sort of from the foundation from ground zero. And that's where the venture industry really cares, those sorts of businesses. In terms of its history, it's surprisingly new. So we can talk about the regulatory background, which is actually, it's not boring.

Starting point is 00:07:23 It's actually really interesting and very important. But just in terms of timing, it didn't really exist, you know, pre-World War II at all. It really emerged. There's a tiny, tiny little bit in the 60s, a little bit more in the 70s, and then really in the 80s. So in the 60s, it was so small it doesn't really matter. In the 70s, that's when you had groups like Sequoia and Kleinerberg. At the time, you know, it was maybe a $100 million industry, so pretty small. By the 80s, it was like a single digit billion. I think the number I last saw was $3 billion in 1980.

Starting point is 00:08:01 By 2000, it was more than $100 billion. Okay. So skip 20 years. Skip another 20 years to 2020-slash-21. And now we're talking about $750 billion. So much larger. Now, that seems very large. just by way of comparison, if you look at the market caps of all US equities, subtract out BTFs and mutual funds because you don't want to double count, right? That's, you know, more than 40, somewhere between 40 and 45 trillion. Right. So, you know, 15, 16, 17, 17, 18, 19 X, high teens X, the size of the venture world. Right. So even the venture world is big, it's still small on a relative basis. Traditionally, what have the returns of the venture space looks like relative to the public

Starting point is 00:08:56 markets? Is that something you're familiar with? So it's difficult to get precise data on this, but I have seen some data sets on this. So first thing is that the data is skewed. And I'll explain why that is. So when I say skewed, what do I need, certain venture capital groups will have tremendous, tremendous outperformance. And they'll be able to maintain that for quite some time, whereas others will lag. So you have this kind of odd distribution. Now, by the way, you could say that that's the case for equity fund managers, publicly traded equity fund managers, but I think that the skew here is going to be stronger.

Starting point is 00:09:40 When I say here, I mean the venture world. Why? The reason tends to be access to deal flow. So the fancier, the better the prospects of the company, the more likely they are to be attracted by the likes of the top tier venture groups. Contagarily, those venture groups, and it's very clubby, those venture groups get access to these great deals, and smaller venture groups tend to be a little bit more left out in the cold. Now, that may be changing a little bit, but if you look at historically, you know, certainly over the past 30, 40 years, it's largely been the case.

Starting point is 00:10:20 Now, if you aggregate it all together, the last data set that I saw indicated that there's actually a slight discount. So if you look at the returns on venture capital, if you go across the board, so take the high performing ones and the less spectacularly performing ones, and the aggregate performance is, you know, a couple of points below the S&P or the Russell over the same period. But I don't think that's quite the way to look at it because you really want to be cognizant of the manager here. And a big difference between managers in the, speaking of competitive advantage, managers in the publicly traded equity markets, you'll see these managers who will perform spectacularly and then it will go away, right? Not always, but often.

Starting point is 00:11:13 In the venture world, success can create more success because they get bigger and they have access to better deals and they get more connected, right? They get more entrenched in the top tier club and they get better access to better deals. So they can create for themselves over time an increasingly powerful advantage. That has been a case historically, whether that remains the case going with. forward, impossible to say, but I suspect that will continue to be a case. It reminds me of a company like Airbnb when Sequoia decided they're going to invest in Airbnb, that changed everything for them. And they got involved with Wycommodator and

Starting point is 00:11:51 Y Combinator kind of got them access to this exclusive club that you're talking about. How about we talk a little bit about primary versus secondary markets and some of the rules around capital formation and general solicitations that go around this? Yeah, absolutely. Actually, before we do, I want to add to what you said about Airbnb. Airbnb is certainly not the only example of that. There are a handful of companies that actually won't name names here. But one company in particular that's in the digital asset space, let's say,

Starting point is 00:12:22 its competitors had suffered a lot of difficulty at the hands of incumbent banks. banks didn't want to have relationships with a lot of these competitors. One company got together with the right VCs. The VCs called a particular bank and said, don't shut this company's accounts down. So these VCs can all, in a sense, drive their own returns. It's really fascinating. But, okay, to answer your question,

Starting point is 00:12:45 your question was about primary markets, secondary markets, general solicitation. Let's do the general solicitation part first. Your uncle with the fictitious uncle with the fictitious car wash. If you're fictitious uncle with the fictitious car wash, you know, if he wanted to raise money for this car wash and he would to stand on the street corner and say, I'm raising money at a sandwich board. I'm raising money for this car wash. Give me money and I will sell you shares in the car wash. Well, I will be a debt security, whatever it is.

Starting point is 00:13:14 That would be considered what's known as a general solicitation. He's asking the world for capital. General solicitations in the United States and in most other developed market countries. countries are prohibited under securities regulations. I'm going to stick with mostly the U.S. because that's where my familiarity is the greatest. But you can't do that or historically you have not been able to do that. And that history goes all the way, all the way back to the Great Depression.

Starting point is 00:13:42 So before the Great Depression, you most certainly could do that. And people did. And there were a lot of scams and lots of kind of nonsense that would go on. And then, you know, in the roaring 20s, there were a lot of, you know, there were IPOs for companies that had no prospects at all. And then you had the bust in 29, and people were angry. As people always are during a bust. And, you know, that anger sometimes gets directed properly and sometimes is misdirected.

Starting point is 00:14:07 It really depends. I will say, I'm not sufficiently adept as a historian. That's not my career. I won't say whether or not the anger was appropriately directed in that case or not. But what came out of the crash in 29 and the Social Depression were three big cases of legislation in the United States. the Securities Act of 33, the Exchange Act of 34, and the Investment Advisor Act of 40. Basically what the first two of those acts did was they said, no more of this general

Starting point is 00:14:38 solicitation stuff, no more same much for you cannot solicit generally. You must go through various different proper channels. So what ultimately is allowed and what ultimately is not allowed? So if you want to solicit capital for capital formation, and you're a private individual, you have to go to what are known as accredited investors. And we told you what the definition there is you like. You could do that, right? And those are essentially people who have a certain amount of wealth or capital or a certain amount of income.

Starting point is 00:15:13 They have to meet these thresholds for wealth or for income, which is a much tighter pool. And the assumption there, for better or worse, is that those people are more sophisticated. or perhaps that it will be less tumultuous if they lose some money. What the exact assumption is, I actually can't put it, right? But it's somewhere in there. Now, is that assumption good or is it silly? It's probably a little bit goofy because there are plenty of people who have plenty of money who don't know what they're doing.

Starting point is 00:15:39 And there are plenty of people who don't have that much money who are very smart and do know what they're sure. But, you know, this is the way the world is. This is the way the regulations were set up. By the way it's 90 years ago. The Sturdy's Act of 33 is 90 years ago. So, you know, that's a general solicitation. You can't do it anymore.

Starting point is 00:15:55 And then, you know, after that, of course, if a company wants to go public, you can do an IPO, right? And that's a registered with the SEC. But basically, there are these exemptions. You need to be following one of the exemptions. One of the exemptions is known as reg D. And reg D is what enables accredited investors to provide capital to a new entity, right? Then there's the IPO process. That's another exemption.

Starting point is 00:16:20 and there are a small handful of others. And then there are the ones that have emerged more recently. But that's where you end up with what's called primary capital. So primary capital is I'm going to put new money into a venture and the company itself is going to get that money distinct, very distinct from trading in the traditional capital markets, buying and selling shares of stock for your brokerage, that's all secondary market.

Starting point is 00:16:45 In other words, if I invest in Google by buying shares of Google, I guess Outbit, sorry, they don't get my money, right? I'm just buying from someone else to the other side of the trade. That's a secondary market to stick from the primary market. Primary market is, if you were one of the VCs who invested in Google,

Starting point is 00:17:03 and I believe that what the Sequoia was one of them, I'd have to look. Sequoia provided primary market capital. They did so under Regulation D, right? Because Sequoia is, for sure, accredit. So last but not least, I'll stop. An accredited investor could be a human being or it could be an AT, like a venture capital group. I do think you mentioned a really good point there because I think you're

Starting point is 00:17:26 common everyday person, like you say, when they're buying alphabet stock, that money isn't going to alphabet. It's going to whoever sold those shares. Whereas when they go through that IPO process, that's when they go into that secondary market. And then when they issue those new shares, then that money, you know, the bank sells the shares and it goes to the company, right? Yeah, that's right. And by the way, it's a common misconception that I hear all the time when people talk about ESG. ESG has become thematically important, right? People are talking about all the time.

Starting point is 00:18:00 And you have a lot of people who talk about ESG and say, I don't want my money going to, for example, the petrochemical industry. But if they're buying and selling shares of ExxonMobil on the, you know, stock exchange, Whatever one thinks about ESG, put that aside. I take no view on that, right? But what I think we need to avoid is the red herring that is, in this context, my money is going to the company. It's not going to the company, unless it's capital formation, unless it's primary shares. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:22:27 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right, back to the show. So how about we look a little bit more at the history of capital formation? Maybe you could discuss how some of these roles have changed over time, maybe in more recent years. So, you know, after the Depression, and you had the acts of 33, 34, and 40, you had a far more restricted landscape in terms of how capital formation could occur. And by the way, the SEC's mission, I forget the exact mission statement, but in there are the words capital formation.

Starting point is 00:23:08 So, you know, you could no longer stand in the middle of the street with a sandwich forward and say, I want to take capital. Instead, you were, you know, if you were raising money for a new entity, you were approaching wealthy people. You were approaching other established entities that have money and say, I want to put this new entity together. I want to put together a new company. And that was the process of capital formation. and that persisted for a very, very long time. Basically, that there were exceedingly limited number of ways that you could do capital formation.

Starting point is 00:23:41 And this is all outside the public markets. This is all private markets. It exceedingly limited number of ways in which you could do that process. Now, what changed here more recently in 2012 was the Jobs Act. So the job that had lots of stuff in it. But the thing that's relevant, The piece of it that's relevant to capital formation was the establishment of two new regulations. One is called, is called reg A plus and the other is called reg C.

Starting point is 00:24:10 What do they do? They allow for within certain confines a general solicitation targeting investors who are not accredited and they enable capital formation from people who are not necessarily accredited investors. By the way, many investors turn out to be accredited and they don't realize they are, but that's another. We'll come back to that. But with the establishment of those new regulations, it was, you know, change. You're changing the landscape, you know, 80 years of history. Change, right? You know, I don't want to say overnight because it took the SEC some time to actually to actually put those regulations into action, right? So they were legislated in 2012,

Starting point is 00:24:52 but then it took until 2015 and 2015 for regulation A plus and 2016 for regulation CF for them to actually be put into force. The wheels of government do not move quickly. Once they were put into force, the rules were different. So under regulation A plus, a company can solicit from the general public. They have to file this sort of kind of mini prospectus, right? it's not quite the same as what you file in a traditional IPO, but it contains a lot of the same information. Once the company has filed that,

Starting point is 00:25:27 the company can go out and raise up to $75 million from anybody, that number, that 75 number used to be smaller, but it was increased. Regisia is a slightly lighter weight regulation. So instead of having to put together this mini prospectus, You need to put together an even more miniature one. It's less onerous, and the subsequent recording requirements are less onerous.

Starting point is 00:25:52 And that lets you raise up to $5 million, again, from the general public. That's an increase from the original approximately $1 million. So started as you could raise up to a million bucks. Now you can raise up to $5 million. And people are using it. Companies are using it. With some fairly successfully, some a lot less successfully, but it's definitely in use. And it's a huge change because now you're all.

Starting point is 00:26:15 uncle can say, I want to open that car wash. And you might not need 75 million bucks for it, but maybe he needs two million bucks for it. And he can go out on the street with a sandwich board and say, I want to raise some money. Now, he can't actually take the money and put it in his pockets. He needs to use an intermediary, the intermediary charges, please. There's a whole racket there. There's always a racket with these things. But the fact that he can do it, the fact that he can go into his own community and say, hey, I want to raise money for this car wash is really important. And here's why. Well, there are many reasons why, but I want to focus on one.

Starting point is 00:26:53 Outsiders, you know, wealthy individuals who don't live near your uncle, they may not understand the need for that car wash in that community. They may say, is there really demand for this? Do people really care? But if you live in that community, people who live in that community with your uncle, they will have a sense, perhaps, as to whether or not there's demand for that car wash. And maybe, you know, Wyneland will say to himself, you know what? There's tons of demand for this.

Starting point is 00:27:20 I really want a car wash here, right? Not just because I want to be able to watch my car, but also because I think it will generate good returns. There are no other car washes in a 50-mile radius, and there are a ton of the cars here. And I happen to know that because I'm in the community. Well, great. Now, your uncle connects directly with this, you know, this individual. The individual can put in 500 bucks. A hundred bucks.

Starting point is 00:27:43 It's not going to necessarily be the fastest process if everyone's putting in 100 bucks, but the ability to get involved in the capital formation process when you have an insight as to the value proposition of that business where others might not, that's what's so important here. That's what's so important here. That's a big change.

Starting point is 00:28:05 You mentioned these reg A plus in reg. CF that was first proposed in 2012. Why do you think this came about? Is it something with the internet making information so much more available and much more accessible? Or why do you think all of a sudden now non-accredited investors can invest in companies like this? For a very long time, there have been complaints about the inability to conduct a general solicitation. I can tell you the exact catalyst that led to the legislation in 2012. But what I can tell you is that the desire for a three-year form of capital formation has existed for a very long time.

Starting point is 00:28:45 At the time, 80 years of, you know, pent up demand, now it's 90 years later, at the time was 80 years, right? 80 years of pent up demand for people to have easier access to capital formation. And I would say that reg A plus and Reg CF have certainly not fully solved the problem. They'd solve it a little bit. But you can tell that there continues to be significant demand for capital formation through mechanisms outside of Reg D, outside of the venture world, based on a lot of things that you see around you. So if you look back to, for example, 2017-18, there was a whole ICO craze.

Starting point is 00:29:26 What is that? That's a form of capital formation. Now, does it violate regulations? So many regulators would say yes, right? But people were saying, hey, this is a way to conduct capital formation. There were tons of scams. It was tons of bad stuff going on. There were good stuff, too.

Starting point is 00:29:41 But people were doing it outside of the framework of Reg A and REC-CF. Some people actually tried to embrace Reg A and kind of mel the two together. I don't know how well that went. I think some of those were okay. But the point is, it occurred in this sort of big rush. And people were like, you know, well, here's a very way to raise money. And it worked. And you continue to see situations in which,

Starting point is 00:30:03 Individuals and companies will have interesting ideas and they have trouble forming capital to create a new entity, to create a new venture to affect those ideas. I think Reg A and Reg. CF are a great starting point. Clearly more needs to be done. It's still too onerous overall. And if you look at, for example, just some of the fees that exist if you're involved in Reg CF, those fees can hit, you know, tenets. which is a gargantrantrant amount of money. Imagine you're raising $5 million, half a million dollars going to intermediate areas. It's a lot of money. I would say that the reform process remains incomplete here. And you see a lot of areas in which there is innovation based upon these reforms, based upon those new regulations. So, for example, if you see a real estate venture, a real estate opportunity advertised to you on social media, or fractional ownership in a car or a

Starting point is 00:31:06 collectible, or fractional ownership in artwork. All of these things are being done via Regia and Reg C. So you've had a lot of innovation as a consequence of these regulations emerging. You couldn't have done that. Forget the social media part. You couldn't have done that before the jobs act. Now you can. And, you know, it goes to show that innovation will persist and you end up the caps on that are often, not always, but are often a regulatory framework. And if you loosen those caps, you'll probably see more innovation emerge. I think this brings to question things like equity crowdfunding and maybe some of the other crowdfunding opportunities you might see on something like Kickstarter. How about you talk about equity crowdfunding, what it is, and how this sort of fits into the picture as well. So Reg A Plus and Reg CFR, the equity crowdfunding regulations.

Starting point is 00:32:08 And I think it's really important to talk about equity crowdfunding versus traditional crowdfunding. You look at the type of crowdfunding you get on the likes of Kickstarter. You're not getting any equity ownership in the entity that's raising capital. What you're doing is you're effectively providing that company with working capital or potentially some R&D money. to develop a new product, then you're kind of pre-buying the product. You don't own the company. That's, by the way, that does not, as far as I know, does not run afoul of the general solicitation rules because you're not getting any securities, right? You're just pre-buying a product. Equity crowdfunding is different. You're doing the same thing in terms of asking the crowd

Starting point is 00:32:45 for money, but the crowd in return for its capital gets an ownership interest in the company conducting the offering. So equity crowdfunding is very, very different from old school crowdfunding. So for the traditional crowdfunding, you said they're providing capital for, you know, for the working capital needs of the company. So what are they actually purchasing then if they're not getting equity? In regular crowdfunding, you're generally getting access to a product, perhaps before it's released to the general public. That's generally what you're getting. Versus in equity crowdfunding, you are getting other shows of stock or some other security interest in the target company. So with the regular crowdfunding, you're getting a one-time thing.

Starting point is 00:33:28 You're getting the widget that they make. With equity crowdfunding, you get shares of stock of the company, which you could own into perpetuity. And to the extent that, you know, ultimately those shares pay a dividend or ultimately there's an acquisition, you have the opportunity to to make money, not just receive a product. Now, when I look at your background and your experience, you know, working at a hedge fund, you have a finance background, you started your own Bitcoin. coin company in the 2010s, how do you see equity crowdfunding playing a part in an individual's portfolio then? I think this is an interesting topic. There are at this point an abundance of equity crowdfunding opportunities. You can go on websites like WeFunder or Republic or Start Engine. There are a bunch of these

Starting point is 00:34:11 things out there. And you can see these companies that are raising capital. Now, question, should you put capital into one of these companies? I'm not here to answer that. What I can talk to you about is So I think this is your question, some of the frameworks for analysis here. So certainly, you know, one approach is to take a portfolio approach and say, okay, I don't know which ones to pay. But I'm going to pick A and B and C and D and E and F and 10 of them, right, and put, you know, an equal amount of capital age, sort of had your risk that way. Second way to do it is if you have some specific familiarity, this goes back to the car wash

Starting point is 00:34:48 example. If you lived, you know, in the town where your uncle is raising money for the car wash and you know that there is a need for a car wash there and you think that there will be demand and you think that that car wash will make money, then you have some information on which you can make potentially a reasonable decision, right? And, you know, an outsider wouldn't know one way or the other necessarily, right? So maybe you have information as a community inside. that would enable you to put capital into an entity because you have a sense for upcoming demand. And that doesn't have to be a call law, right? Maybe you're a physician and what's being proposed is a medical device.

Starting point is 00:35:31 And you understand that area particularly well. Or you're not a position. Maybe you're just like a biologist. Who knows? You understand some particular area. That can be interesting. Those are interesting opportunities. So that's the second way.

Starting point is 00:35:43 So first way, portfolio. Second way is you have some sense for what's going on within that particular land. Third way is you can certainly follow along with others. There are newsletters and all sorts of publications that will talk about these things and compare though. And I think that's a good way to do it. There are websites also where you can kind of compare and contrast, you know, conceptually similar to a screening tool for stocks, right, where, you know, you can screen

Starting point is 00:36:10 based on earnings growth or revenue, some particular that. So there are a bunch of ways for a person to get informed about this stuff. certainly do your homework. What's nice here is the fact that these opportunities are no longer limited to venture capitalists. It's not that VCs can't invest in these things, and often they do, by the way. Some of these opportunities are led by venture capitalists, and they're taking money from the crowd anyway, right, because they want a community building exercise. They have a product, and they want their users to get even more excited about the product, so they're taking money and hoping that the users get more excited to be able to be able to.

Starting point is 00:36:48 already are. There's that as well. It's not limiting to the venture capitalists, but what it does is it enables investors who happen not to be accredited to participate in these sorts of days. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC two or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35

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Starting point is 00:40:23 Earlier, you mentioned the venture space being around a $750 billion market, I believe. So how does the crowdfunding piece kind of play into this? I'm curious if it's sort of disrupted venture capital in a way, you know, now that, you know, there's more access for investors or how big is this crowdfunding piece of the puzzle? I have to get back to you with the exact numbers. There is data out there. It's not even close to the 750B. It's not even close to disrupting venture. It was one of the reason why it's so interesting. We're at the earliest stages, it's not even close. And there are many reasons why it's not even close. You still have a lot of hot deals that know they can go straight to VCs and get the money, you know, get it done fairly quickly, whereas the equity crowdfunding

Starting point is 00:41:08 route is sometimes viewed as more of a lot, you know, more of a slot, a longer process. It depends. It isn't always. You know, when we did it, we, you know, filled around very, very quickly. But I think there's certainly a perception that it can take a long time. And I think in many instances, it does. So it has not yet disrupted the venture capital world. And I don't know when it will. It may never disrupt it per se.

Starting point is 00:41:32 It may exist alongside it. I would be surprised if equity crowdfunding were to destroy venture capital. I do not expect that. What could be interesting is the coexistence of the two, and they continue growth of equity crowdfunding, and the ability for people who are not venture capitalists to get involved in opportunities where they otherwise would not have the chance. And I think that coexistence can actually be not just healthy, but beyond that, I would say symbiotic. And a good example of that is a situation in which there's a consumer-facing product and the users are excited about the product. And they want to put in capital. And that can sit right alongside the VCs.

Starting point is 00:42:13 Now, this whole topic really hits close to home for you because your team at Otacama is actually doing an equity crowdfunding around yourselves, which is quite unique for all the reasons we've discussed here. How about you talk more specifically about Autocama, your company, and the equity crowdfunding opportunity that your team has? So Autocomacom is a cybersecurity company based in New York City. And we started an equity crowdfunding round late last year under reg CF and also Reg D. So we did these two things simultaneously.

Starting point is 00:42:49 And then also another red called Reg. S, which I can explain in a moment as well. The reg CF portion sold very quickly. So between Reg CF and then silver credit is we hit the $5 million in like five days. I said earlier that many companies find this to be a slog. We found it to be a very efficient and effective way. of raising capital. We're thrilled we did it. We think it was great. And now I give these investor updates and it's great. I'll do a webinar and I'll have all these folks who are investors in the

Starting point is 00:43:20 company and I'll be able to tell them directly what they, you know, what's going on, which I enjoy. And I hope they enjoy it too. I think they do. We've continued along with the equity crowdfunding route here. So right now we have for the time being exhausted our $5 million cap. It's $5 million dollars every 12 months. So now, right now, we're still raising under what's known as reg D, so we can take money from accredited investors, but also under what's known as reg S. Reg S enables us to raise capital from anyone overseas, accredited or not accredited. So overseas relative to the United States. So anyone, SEC says, under reg S, you can raise capital from folks who are outside of the United States, regardless of their accreditation status. We look forward

Starting point is 00:44:05 in the future to, if at all possible, we'll say it's reopening the reg CF piece and being able to deal with even more investors in the United States who are not accredited. I think that's great. But for now, it's accredited U.S. and not accredited slash accredited overseas. I'd love for you to jump in on the product side as well, because I find that aspect just so interesting because you're able to recognize this opportunity in the cybersecurity space and move along and work for a hedge fund, work in tech, and then start a Bitcoin company and kind of understand the technology and the cybersecurity aspects. So I'd love for you to talk a little bit

Starting point is 00:44:43 more about the product side of Autocoma. Absolutely. I'll give you the 22nd Genesis story, which will explain how we've got the product piece. So when I spent some time in the Bitcoin world, one of the most interesting aspects of that space in my mind had been various different mechanisms of storing cryptographic keys. So without getting too mired in the underlying details, cryptographic key is what enables you to send Bitcoin crypto from party A to party B. You have that key. You can send it to another person.

Starting point is 00:45:15 You better keep that key very well protected. And one of the really neat ways to do that is to split the key into pieces. And the, I would say, most well-known mechanism for doing that cryptographically, the assuming there is Shamir's secret sharing scheme. So, so Shamir's secret sharing scheme is what's known as an example of threshold photography. It's a mechanism of splitting a piece of data,

Starting point is 00:45:42 be it a cryptographic key or otherwise, into multiple components. We saw this within the Bitcoin and crypto world, and we should wait a second. This is great security. Why isn't anybody doing this for enterprise cyber security? And I really was shocked at how little of this

Starting point is 00:45:58 sort of thing was actually going on in the enterprise cybersecurity world. So, of course, we said, this is great, the great opportunity. Everyone is running towards the white, hot Bitcoin and crypto world. And we said, wait a second, wait a second. There's something great here tech wise. We could take that and apply it someplace else and people are not running into that area. They're not all trying to do that same thing. So we built out an encryption platform that enables the splitting of keys and the reassembly of those keys at the point of decryching. So you'll have a piece on your laptop, a piece on your phone, a piece on your iPad. A piece could be on a server.

Starting point is 00:46:36 And then when you want to decryct that piece of data, you can on the fly, let the shards of the key be reassembled. And, you know, sort of tap a prunes. It's got sort of the UI, U.S. user interface, user experience of what looks like 2FA, you just tap a button on your phone. and then shroom. Your cryptographic key is reassembled. The file is decrypted. You're ready to rock and roll.

Starting point is 00:47:00 Meanwhile, if somebody manages to get access to the underlying encrypted data, all they have is a bunch of encrypted nonsense. They need to have the keys. So in order to steal your data, it's no longer just breaking into your Google Drive, breaking into the file server, breaking into Dropbox, whatever is.

Starting point is 00:47:19 Yes, they have to do that, But they also have to get the piece of the key that's on your phone, the piece of the key that's on the server, the piece of the key that's on a laptop. It's much, much harder. So you've increased the difficulty of accessing data here in a gargiatrine matter. So if stealing one piece of a key is difficulty X, stealing two pieces is not two X. It's like X to the sum power, right? It's very difficult to calculate, but it's much much more difficult. So you end up with incredibly powerful protection, again, what's known as data expultration,

Starting point is 00:47:53 exultration meaning the theft and potential exposure of that data, right, elsewhere. And it's been great. And, you know, we have more than 60 enterprise customers. 60 would be very, you know, 60 doesn't necessarily sound impressive if you're talking about, you know, mom and poppy. We're talking about, you know, big companies, right? So you're getting big companies to buy this stuff with success and they like it and they're buying it. If you look at just, you know, Q1 is not quite over as we're recording this.

Starting point is 00:48:22 It's approaching over. By the end of Q1, we will probably have grown, you know, revenue on a year-over-year basis. I think we're recurring revenues, the amount of like new customers that we get in, where we're at the current revenue by somewhere between 30 and 40 percent. So we love it. We're thrilled. And it's super cool technology. It serves a really important purpose.

Starting point is 00:48:43 Customers love it. And we're thrilled to be doing it. Since we're talking about Autocoma, I just wanted to give a full disclosure that I have personally invested in your team's crowdfunding round just a few months ago, actually. And that was after researching and getting to know yourself and getting to know the great people on your team, just to make the audience fully aware. And regarding the cybersecurity space in particular, one of the things that amazed me with Autocama in the industry is just how massive it is. McKenzie released a study that showed that in 2021, organization,

Starting point is 00:49:17 spend around $150 billion on cybersecurity. And they estimate that this is really just beginning in that there's only 10% penetration into this total opportunity for cybersecurity. And the current growth rate I saw in that McKenzie study in spend was around 12.4% in 2021. So you mentioned the growth in Autocoma in your business. You're growing very rapidly and adding new customers. I'm curious if you could talk a little bit about the value.

Starting point is 00:49:47 and how that works with the crowdfunding ground, and then maybe what sort of opportunity you see in the future for your company? I think the study that you referenced captures it quite well. The need for cybersecurity is only increasing. And it's increasing for a lot of different reasons. It's increasing because the complexity of the Internet is only increasing. The places in which we keep our data, that number of places that's only increasing. the opportunities for attackers.

Starting point is 00:50:19 That opportunity space, unfortunately, is increasing. And, you know, cybercrime is the new way of conducting criminal activity where you can hide behind something. Physical crime, it certainly still happens today, right? But there are cameras everywhere, sure. I don't think it's as appealing to be a mugger on the street when you might get picked up by a camera as it is to be

Starting point is 00:50:48 an attacker behind a keyboard or of course there are ways you can be caught but it's much easier to cover your tracks besides your webcam which you've probably put a piece of tape over if you're an attacker there's no camera to watch you do it so lots of attacks going on

Starting point is 00:51:03 and you know businesses are the primary targets of these attacks because they have you know the opportunities to steal money or steal data or unfortunately extort businesses And then, of course, the underlying data is like your data and my data to data about us. So the attackers know that. The attackers know that they can really do a lot of damage and they take advantage of that.

Starting point is 00:51:25 In terms of valuation, so our current equity crowd funding round is at a $29, $29 million valuation. How did we come up with that? We wanted something that wasn't too high, wasn't too low. You'll see in the equity crowdfunding space that there are all sorts of ranges of valuations. And I would, by the way, you know, listener beware, right? You will see valuations that are egregious and, you know, just be aware of the fact that when you see a $1 billion valuation on a company that doesn't have any revenue, think carefully about what you want to do there. The thing about that great crop funding is you sort of get to pick your own valuation and then people either invest or don't invest. So we wanted to pick something that was reasonable, right?

Starting point is 00:52:09 You know, that's based on, you know, the fact that, you know, we have totally. contract value of about $2.3 million right now. So we felt like it was in a reasonable number. And then if you look north towards some of the big exits, there are plenty of cybersecurity companies where the exits have been well north of a B. So obviously, and some that have been well with a 10B,

Starting point is 00:52:35 we would love to be able to provide our investors with these 30x, 300 X, like these, you know, this gargantrican return. He said, you know, our job right now is to continue to, you know, bust our behinds to make that happen. My team, you know, credit to my team, I think my team is terrific. They're doing an incredible job pushing us forward. But we wanted to pick a reasonable valuation where investors can participate.

Starting point is 00:53:02 The founding team doesn't get excessively diluted, but investors can participate and still make a really great return. And I think we've done that. Now, you really understand this equity crowdfunding venture capital. Why did Otacama decide to go the equity crowdfunding route and not some of these other routes that are available to you? Biggest reason is that I have a personal proclivity towards enabling everybody to invest. I don't think it should just be in the hands of venture capitalists.

Starting point is 00:53:32 I'm not saying that they should be excluded. I'm not saying you should prohibit them for participating. They have their place. but there's no reason why that guy and that woman and that person over there and that person over there shouldn't be able to participate as well. Let them read about the company, right, you know, get to know us, do their own work a little bit and you know, if they want to participate, there shouldn't be any barriers to that. So, you know, once I, I think once I discovered the I already crowdfunding space and I realized what's possible, you know, the fact that anyone can

Starting point is 00:54:03 invest and there's no longer these goofy restrictions just because you, you know, You don't have some threshold amount of income or some threshold amount of assets. I think once I discovered that, I shouldn't discover that it's quite liberating. I really love the idea. And it's worked out nicely for us. I'm also curious. You mentioned some of these cybersecurity companies have had very successful exits. So someone invests today, if they decide to invest today, their money gets locked up, they own equity in autacoma.

Starting point is 00:54:34 And then what does the exit process look like? and maybe what sort of timeline or general timeline investors can expect for when they can or when they do exit? Eggers can come in a variety in different sorts. You know, exit can be an acquisition by another cybersecurity company or another company in general. Oftentimes, cybersecurity companies will acquire other security companies. And exit can be in the form of an IPO.

Starting point is 00:54:57 And egg can be in the form of an I position not by a cybersecurity company or other company, but rather by a financial sponsor, you know, by private equity. So there's a three examples. And of course, we are not opposed to any of those three. All three of those would be interesting ways, good ways of affecting an exit. Right now, the way we're thinking about it is build the most powerful business we can build, grow revenue as powerfully as we can, create a bunch of really happy customers who want to continue to spend, grow the product line.

Starting point is 00:55:32 We do those things and we do them well. and I'm confident that an appropriate exit will appear. So I think it's important to mention the ways in which exits can occur, but I think simultaneously it's important to mention that the team at Otacama is focused on building the business. And we have confidence that building a good business will ultimately result in a good exit in one of those forms or some other form. Well, Daniel, I really, really appreciate you coming on the show. I know I learned so much from this one hour, you know, capital formation, venture capital, equity crowdfunding and autocoma. There's just so much in this episode and I got so much value from it. And I know that

Starting point is 00:56:16 the audience will as well. So if anyone's interested in investing in autacama like I have or learn more about your company, how can they get in touch with you and invest and check it out? Yeah. So first of all, Clay, we're thrilled to have you as an invest. And for folks who are interested in investing, you can go to invest. otocama.coma.com slash WSB. And otacama is spelled A-T-A-K-A-M-A. We're named after the Otacama Desert in Chile, which is spelled with the C, but we spell our name of the K.

Starting point is 00:56:49 And at invest. Onautacama.coma.com slash W-S-B, you'll find tons of information about the company. You'll find information about milestones that we've hit, our success to date. you'll find our investor presentation, the ability to talk to investor relations, and a whole lot more, and we'd love to have you as investors. Awesome. Well, Daniel, we'll be sure to get that link to the show notes for anyone that's interested. Thank you again for coming on the We Study Billionaires podcast and providing so much value to our audience.

Starting point is 00:57:17 We really do appreciate it. Thank you so much for having me. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network. and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network.

Starting point is 00:57:46 Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP541: How Equity Crowdfunding is Changing the Game w/ Daniel Gallancy

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