Raising capital through your crowd

Funding projects or companies through a crowd has a longer history than you might think. The Statue of Liberty was partly funded by thousands of people throwing money into donation buckets, gold mining prospects in 19th century New Zealand were often financed by offers of stock, and vast networks of railroads during the industrial revolution were built with the proceeds from bonds.

The basics of crowdfunding were covered here in Idealog 18 months ago and since then New Zealand has seen advancements in the types of crowdfunding available. This is due to changes in technology along with new legislation allowing the majority of New Zealanders to participate in a range of crowdfunding offerings.

This is incredibly powerful. The public’s ability to contribute seamlessly online is a game-changer. It stands in stark contrast to the traditional investment world which at times still requires paper forms to be signed, posted and physically stamped by a broker. Sometimes forms need to be faxed. Faxed!

Through crowdfunding platforms, contributing can be done by almost anyone. You just have to be over 18, have an internet connection and a bank account with some money in it. No longer do you have to be in a stuffy room filled with angel investors travelling to find cash: you can connect with the people who have capital in a way never before possible.

Crowdfunding is gaining tremendous momentum worldwide. Massolution, a research firm specialising in the crowdsourcing and crowdfunding industries, has forecast crowdfunding platforms to raise around US$34.2 billion this year— an amazing 112% increase over 2014.

Rewards-based project crowdfunding through an online platform dates back nearly a decade. There are now thousands of sites, from the big boys Kickstarter to smaller niche platforms that are used by individuals, groups and businesses to raise cash and awareness through the offering of rewards/products for monetary support.

Initially project crowdfunding was predominantly used for creative or artistic projects  where traditional funding sources were not aligned to wants and needs of the creators and their fans. But as platforms and technologies continue to advance, campaign creators continue to diversify. From movie stars funding feature films to inventors testing prototypes and using platforms as their pre-order channel for new business ideas — crowdfunding is disrupting traditional models.

Image: Zach Braff’s crowdfunded $5 million comedy “Wish I Was Here”.

A great New Zealand example of this is Eat My Lunch. A social enterprise startup that ran the  biggest ever campaign in New Zealand in terms of number of people who pledged. They  added 2,507 pledgers to their crowd in order to raise $130,000 to move out of their own home and into a commercial kitchen.

One of New Zealand’s earliest crowdfunding successes was Minaal which crowdfunded the first version of its high-end carry-on bag. By the end of the campaign the startup had raised $340,000, more than 10 times their original funding goal.

Project crowdfunding is attractive for companies as they can raise money without giving up any shares or incur any debt. However, the alternative of equity crowdfunding makes the relationship between company and crowd more enduring.

Anna Guenther, CEO of PledgeMe — which offers both project and equity crowdfunding — has likened the differences to dating vs. marriage. There are well-known overseas campaigns who have raised eye-popping sums through project crowdfunding, but in New Zealand it is rare for a project campaign to raise over $100,000. For companies looking to raise more, there are another two options: equity, and lending.

Equity crowdfunding allows a company’s crowd to buy shares and become a part owner of the business. What better way to ensure success and growth than bringing in a crowd of passionate advocates by giving them a real stake in the success? The business case needs to stack up, though, and there’s a lot more work involved putting together an equity campaign than a project campaign.

There are well-known overseas campaigns who have raised eye-popping sums through project crowdfunding, but in New Zealand it is rare for a project campaign to raise over $100,000. For companies looking to raise more, there are another two options: equity, and lending.

The vast majority of equity crowdfunding offers in New Zealand have been conducted by young companies seeking growth capital — those that need cash beyond personal funds, friends and family, but are too small for venture capital, private equity or an initial public offering. As the minimum contribution size for investors is often quite low, it also means ordinary Kiwis now have access to “venture capital” type opportunities that were formerly the exclusive domain of high-net-worth, sophisticated investors. Equity crowdfunding has also enabled companies like Ooooby, a tech company who connect local growers with buyers have a mission beyond profit, to have the means to raise money that traditional means of finance may not have aligned to in the past.

There is, however, no reason that equity crowdfunding must be restricted to early stage companies. Companies at later stages of their development can still use an equity crowdfunding offer to increase their shareholder spread, to substantially improve their business plan and constitution through the rigor the offer process brings, or to set a valuation anchor for future fundraising rounds.

New Zealand is a world leader in equity crowdfunding, and it’s one of the areas where we’re ahead of Australia. The first equity and debt crowdfunding licences were granted here in July 2014 and since then over $14 million has been raised across four platforms. Meanwhile the Aussies are still trying to pass legislation through parliament. The good news is though that they’re using our system as a model.

An alternative open to some small-medium enterprises is crowdlending. Banks have lent for many years, but crowdlending offers the chance to borrow from your crowd — allowing an alternative to the bank with the marketing and awareness upsides associated with the other two forms of crowdfunding.

Crowdlending allows established companies to look to their crowd instead of a bank when looking for lent capital to fund growth. One of the most famous overseas examples was Chilango’s Burrito Bonds in the UK. The company raised £2.2 million from nearly 750 investors. During the campaign they had a total of seven national TV appearances and over the lifetime of the bond they served up more than 20,000 burritos to their investors — awareness and sales that probably would not have been realised had they sought it from the bank.

Speaking of burritos, there is an appetite for growth through debt, with SMEs in New Zealand currently borrowing over $33 billion compared to the $630 million put up by angels and VCs since 2005.

In any of the three forms above, crowdfunding presents a significant opportunity far beyond the capital it brings in. Done properly, the publicity of a crowdfunding offer can lead to more interest from media, commercial partners and consumers.

It says something about the type of person that embraces crowdfunding that across project, equity and lending, New Zealand has seen a large number of campaigns with a social-good element to them — and what’s more, kiwis are embracing them.

Crowdfunding is part of a broader trend of people choosing to use their money to change the world for the better; the rise of socially responsible investment funds is another indicator that people want to do good with their savings. Crowdfunding allows people to help bring to fruition the projects the crowd cares about.

About the authors:

Will Stewart is the Equity Champion at PledgeMe — New Zealand’s first crowdfunding platform and only Kiwi company which offers both project and equity crowdfunding to help companies fund the things they care about.

Nathan Rose is the Director of Value My Venture — a crowdfunding consultancy which makes information memorandum drafting and financial modelling straightforward for company founders.