Nathan Rose is a good friend from my University of Otago days. We met through the commerce case competitions where we competed as pretend consultants for various businesses and issues they were facing - great fun! Nathen then worked in a corporate finance job in Wellington before dropping everything and travelling the world - starting with a motorbike adventure across Vietnam! Now he has started his own business to help entrepreneurs with financial modelling and presenting their company to potential investors, partners and buyers: Value My Venture: www.valuemyventure.com. Nathan helped me value Highly Flammable Ltd, when we looked to change our ownership structure and I found his approach and experience extremely helpful. Nathan constantly inspires me through his ambition to create an extraordinary life and he recently wrote a great post on Crowdfunding which I wanted to share here. Anna Guenther, a good friend of mine from my Entrepreneurship Masters Degree, started Pledge Me at the same time as Highly Flammable Ltd; so I am a huge supporter of her business, plus crowdfunding as a concept in general. Enjoy Nathan's informative article below!
- Logan Elliott, Entrepreneurs Adventures.
EQUITY CROWDFUNDING - THE NZ EXPERIENCE
- Guest Blog by Nathan Rose, Value My Venture.
Mention the word “crowdfunding” and most people immediately think of the global online platforms Indiegogo and Kickstarter: sites that have gained a reputation mostly for funding laudable social aims and creative projects. Business ventures have also been funded using these and similar platforms using a “Rewards Model”, where the existing owners offer discounts on their products, branded merchandise, and other such perks that don’t involve giving up a share of their company.
From the perspective of the founders, the Rewards Model is attractive because it is non-dilutive, and with people putting real cash on the line, amounts pledged can act as pre-orders for their products – valuable market validation. The problem with the Rewards Model of venture finance is, of course, that it does not offer the very thing that serious investors really want: equity in the company. This does limit the universe of investors to those with a more philanthropic bent, reducing the funds a venture can realistically raise.
Equity crowdfunding, by contrast, allows investors to gain real stakes in young companies, and allows companies to raise money from the public without many of the onerous requirements of traditional securities regulation, such as a full IPO prospectus. The amount raised is capped by legislation and/or regulation with the aim of providing investor protection.
The World Bank released a report in 2013 that identified equity crowdfunding’s potential to fill a funding gap for companies needing circa $1 million in the early growth phase of their life cycle.
One country leading the way in implementing crowdfunding is New Zealand. Not only is the enabling legislation complete, New Zealand also has almost 12 months of operating history under its belt - time enough for some interesting trends and lessons to emerge.
New Zealand has four crowdfunding platforms that have launched offers: Snowball Effect, Crowdcube, Pledgeme and Equitise. New Zealand has implemented a $2 million regulatory cap on what a company can raise in any 12-month period, and recently two campaigns achieved this limit. By way of comparison, recent full prospectus IPOs of growth companies in New Zealand have been in the $15 – 50 million range, so crowdfunding has achieved the aim of making it possible for companies to reach the public at a much earlier stage.
An analysis of New Zealand’s crowdfunding offers to 30 June 2015 was recently published by Sam Stewart, and it makes for fascinating reading. Some key insights to emerge are:
- There have been 20 successful offers and 6 unsuccessful offers, raising around $12 million in total
- Around half the companies launching were pre-revenue, and around half of money successfully raised was for companies that have less than $1 million of revenue
- Individuals are contributing $3,900 to offers on average. This large of an amount for fairly risky investments suggests that crowdfunding investors are reasonably wealthy and sophisticated, although different platforms have different investor bases.
From the perspective of a company founder, should you consider equity crowdfunding? Here are a few takeaways based on the New Zealand experience.
1. Understand the alternative capital raising options. Companies looking to raise cash in the $250,000 - $2 million range could also consider alternatives such as angel investors, accelerators and even financing through personal savings / home loan equity. There are pluses and minuses to each type of fundraising. Crowdfunding’s advantages are:
- Access to a large investor base at lower cost: Due to fewer regulatory hurdles versus a traditional IPO, Crowdfunding makes publicly-sourced funding more accessible to young companies than ever before.
- Efficiency: Many meetings with individual investors, a formal due diligence process and extensive negotiation over value and terms of investment is a time-consuming, often-frustrating process which can take the founders attention away from actually running the business. Crowdfunding allows a company to set their own terms around valuation and offer period, and lets the crowd decide on whether they are acceptable.
- Extensive brand exposure: Significant publicity is generated by a crowdfunding offer, often leading to more interest from media, commercial partners and consumers. For example, one of New Zealand’s first successful crowdfunding raises (Renaissance Brewing) experienced an upsurge in sales following its initial crowdfunding offer in 2014, and has recently announced plans for a second raise.
2. Get to know the various platforms. Whichever region you are in, ask questions about the industries of the companies that have been successful and unsuccessful on each crowdfunding platform. Ask for information regarding sizes of raise, services offered in addition to the platform itself, the amount of pre-vetting and the types of investors that tend to use the platform (size, sophistication, etc.). Find the platform that best suits your company.
3. Angel investors and the general public are treated the same in equity crowdfunding. You need to ask yourself if you are ready and comfortable with the possibility of having to manage and report to a large number of investors with different levels of sophistication. This is particularly important if this is your first time raising outside capital.
4. Although a full prospectus is not required, significant work to prepare and present your company certainly is. Offers to date have featured professionally-produced videos, comprehensive business plans and forecast financial statements.
5. Momentum is critical to the success of an offer. Potential investors can see, in real-time, how much of the money has been raised and how much is still left to go. This information provides investors with total visibility over whether an offer is “hot” or “not”. The fact that around 20% of offers have failed shows that raising your minimum amount is no sure thing. Therefore, getting the valuation right and communicating your company’s story effectively is vital to getting the first few investors committed so that others will follow.
6. Engage with sophisticated/smart investors prior to the offer opening. If you can have a few sizeable investors lined up to invest early in the offer period that are comfortable with the valuation you have arrived at, this can drive early momentum and validate your offer to others.
Sam Stewart’s analysis also shows that capital being raised through crowdfunding in New Zealand is accelerating. Prior to February 2015, no month saw $1 million or more raised, while in every month since at least $1 million has been raised. Most jurisdictions have legislation either in the pipeline or enacted to allow for equity crowdfunding, and importantly the SEC in the United States approved equity crowdfunding in March. Entrepreneurs around the world have, or soon will have, a new and powerful way of accessing growth capital.
Nathan Rose is an experienced investment banker, and offers services in financial modelling, building great pitch decks, and capital raising coaching for entrepreneurs and small business. For more articles and contact information, please visit www.valuemyventure.com, or email firstname.lastname@example.org