Elio Motors is the poster boy for Reg A+ Crowdfunding in America and Reg A+ could fundamentally change how capital formation takes place.
The Elio story shines a light on crowdfunding, but it also shows that Crowdfunding wins when it focusses on real world innovation. Traditional FinServ does a good enough job financing the old. Fintech scores best when it finances the new.
Old fashioned story?
At first sight, Elio Motors looks incredibly old-fashioned – a car built in America and it is not even electric and unlike a Tesla you won’t find pictures of celebrities driving them. This is a car for poor people in America that will cost $6,800 and deliver 84MPG.
It is close in spirit to the Tata Nano in India, the first car for a family that is upgrading from a motorbike that costs about $1,500 new. Who knew there was a market for a car like this in America? Yes, there are poor people in America who need a cheap car. For a funny/sad take on this watch John Oliver’s takedown of subprime auto lending
Personal story: a few years ago I gave a hitchhiker a lift in America. Having been a hitchhiker in my youth it felt like the right thing to do. But this was no young student having fun. It was a middle aged woman trying to get to work after her car had been repossessed.
A cheap car is very much needed in America.
Elio reality checks
- #1: it is more like a trike than a car (but if you need something to drive to work in the rain who cares about the label?) If you can afford a more expensive car, you may not be in the market for an Elio.
- #2: it is still a prototype. The 50,000 people who placed pre-orders will have to wait until 2017. But read that again – 50,000 pre-orders – yes there is a market for this.
The crowdfunding story
Hey, this is a Fintech site, not an Auto site, get to the point. The Elio story is about how innovation is funded and how capital is formed and how retail investors can make money in the stock market. In short, even if you are rich enough to afford an ordinary car, this is a big deal.
The Elio Motors Reg+ CrowdFund campaign was managed by a Los Angeles company called CrowdFundX. In this 30 minute video, their CEO Darren Marble explains how they did it. In short, it is like any online marketing campaign.
What is extraordinary about Reg+ is that you can market the stock of your company like any online marketing campaign. Actually what is extraordinary is that prior to Reg+, you could not market the stock of your company like any online marketing campaign. You had to go through a high touch (read, expensive) campaign of selling to accredited investors. There will come a time when that will seem as out of date as a fax or telex machine.
For more on the stock market side of things, the Press Conference for Elio Motors stock market launch at OTC Markets has it all (but beware this is an hour long)
92% and 14.8%
RegA+ allows entrepreneurs to market their stock to non accredited investors. That is 92% of the American population.
To put that another way, before RegA+ you could only market to 8% of the population. 92% and 8% does not have the sound bite of 99% and 1% but may reflect reality better.
Elio Motors may sell stock to the 92%, but they will mainly sell their car to the 14.8%. This is the 14.8% living in poverty in America.
Of course, you don’t have to be officially poor to buy an Elio. You could be a Millennial loaded up with student debt in a weak job market just wanting to be frugal enough to get out of Mom & Dad’s house.
Who knows, it might even get chic status in LA. So we might see celebrities pulling up the red carpet in an Elio?
Needed – financing for a new cheap car
The poverty trap means that even $6,800 looks like the price of a private jet to somebody living in poverty. Paying $6,800 for a new Elio is better than paying double Blue Book value plus high interest rates (watch the John Oliver takedown on subprime auto lending).
So, some Fintech entrepreneur needs to come up with loan financing for a $6,800 new Elio. Let’s run some numbers. Assume 4 year amortization, payments will be $142 per month. Add 10% interest (not so bad in a ZIRP/NIRP environment) on the declining balance and the borrower ends up paying $16,622 in interest over 4 years. 4 years to own a car outright is a dream for many people. Poor people may need some philanthropic or government assistance to make the numbers work, but it must better than the world of subprime auto lending.
Audited Financials and Reg A+
A few months ago I wrote a skeptical post about crowdfunding. My concern is that soliciting money for stock without audited financials is breeding ground for scams. It turns out there is devil in the details in this regard for Reg A+. As per the SEC site, there is Tier 1 and Tier 2:
- Tier 1, which would consist of securities offerings of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.
- Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.
Tier 2 have to file audited financial statements on an annual or semiannual basis as well as “current event reports”. Tier 1 companies may choose to do this, but don’t have to. As an investor my rule is simple – I won’t invest unless I get audited financial statements. Reg A+ companies are public. They are just smaller public companies.
Better than buying hot stocks at IPO or in private markets?
Buying a RegA+ public company has risk (even with audited financials). Everything has risk. But compare that to buying a hot stock at a high valuation at IPO for a mega venture like Uber (so that the people who bought earlier can sell) or buying that hot stock at a high valuation in private markets where you might not get all the disclosure and financials that you get in public markets.
Fintech is great, but math is merciless
Old FinServ finances old stuff well enough. Fintech scores when it finances innovation. When we look at big markets such as Health Insurance and Education Loans, we can see the limits of Fintech. You cannot change the underlying math with a new UX or even a marketplace model. To change HealthInsurance or Education Loans you need to fundamentally change how they are delivered and priced.
The same is true of Auto Loans. When the average price of a new car is over $33k, a few % points less on interest, while useful, does not fundamentally change the game.
Supplier networks and the return of local manufacturing
When Elio Motors launched the P5 at the LA Motor Show, what really comes across is that this is a car built by a network of suppliers. This is not a vertically integrated GM from the 1950s. This is closer the network of companies that build motorbikes or electronics equipment in China (described in this 2005 article in McKinsey Quarterly).
The other Chasm
There is a well-known chasm between Minimum Viable Product and Product Market Fit.
The other chasm is less well known. This the chasm between high quality company and IPO. Uber has a valuation in private markets of $66 billion and yet “it is too early to go public”. Huh?
An IPO is a branding event as much as a financing event. If you have a product that people want they will pre order it. Kickstarter has proved that. Then you can go to Equity Crowdfunding platorms. Then you fall into Chasm between viable company and being big enough to get to the massive valuation that Wall Street bulge brack investment bankers require before they will take you to IPO. RegA+ can change that game, so that fewer entrepreneurs fall into that chasm.