A week after new Zealand’s first foray into equity crowd funding, proponents say the signs are good this could provide a much-needed additional funding source for SMEs.
Overseas, equity crowdfunding has been able to provide an explosive revenue jump for companies seeking to raise capital, says Josh Daniell, head of platform and investor growth for equity crowdfundingplatform Snowball Effect.
He says the medium attracts “smart and powerful” money, drawing funds and momentum from companies’ own networks, industry experts, and customers to accelerate growth.
Snowball Effect is still buzzing from the success of Renaissance Brewing’s equity crowdfunding effort, the first such offer in New Zealand, which raised the $700,000 it was seeking.
The crowd provides not only capital but a groundswell of supporters who can add different dimensions to help accelerate a company’s growth, Daniell says.
“International research has found companies recording post-offer growth on average of 340 percent,” Daniell says.
Equity crowdfunding complements traditional capital raising avenues such as the stock market, venture capital funds, and angel investors. It is typically suited to companies on the cusp of growth, rather than start-up companies.
In the UK, the first equity crowdfunding started a little over three years ago, and the rate of growth has been phenomenal. US magazine Forbes tagged 2013 as the “goldrush” for crowd funding, with over US$6 billion forecast to be raised that year worldwide through its various forms (rewards, debt, and equity).
In New Zealand, changes introduced through the Financial Markets Conduct Act 2013 have set the framework for Kiwi companies to raise money from the public through licensed equity crowdfunding providers.
The rules allow a company to raise up to $2 million in any 12 months without the need to issue a detailed prospectus or investor statement.
Only two companies - Snowball Effect and Pledgeme - are listed on the FMA’s website as being licensed to provide this intermediary service.
The new regulations do not apply to rewards-based crowdfunding, where companies offer goods or rewards to pledgers.
Neville Jordan, seasoned venture capitalist, and executive chairman of Endeavour Capital Ltd, says equity crowdfunding fills a real need in the marketplace.
The equity crowdfunders complement work done by venture capitalists folks by provide additional avenues for entrepreneurs to pursue growth that will require larger amounts of funding for their next phase of growth, Jordan says.
How does a company know when it is ready to seek funding from the crowd?
Daniell says the equity crowdfunding avenue is best for companies heading into a growth phase. These are companies that are somewhat established, but need external funds to execute a growth plan inrelation to a clear market opportunity.
Investors who buy into companies through the crowd are often emotionally attracted to the particular concept, product, or market being targeted.
“Equity crowdfunding investors are generally not buying into the company to trade their shares the following month. They’re generally attracted to where the company wants to take itself over the medium to long term” Daniell says.
That crowdfunders have emotional attachment to their funding is best reflected in the case of headset maker Oculus Rift’s – which raised US$2.43 million from 9,522 investors on Kickstarter – sale to Facebook for US$2 billion.
According to research by Capital Crowdfund Advisors (CCA), in addition to the dramatic post-offer revenue growth, companies also hired on average 2.2 new people after they raised new money. This isa key driver behind the US “Jumpstart our business startups” or JOBS Act, which includes a frameworkfor introducing equity crowdfunding to the world’s largest economy.
According to CCA’s research, within three months of a successful equity crowdfunding offer, 28% of the companies in the study had completed subsequent rounds of traditional investment with angels or venture capitalists. An additional 43% were in talks with institutional investors.
Crowdfunding campaigns’ return on investment adds up to US$813 per hour invested in the campaign to raise funds.
Investors have also added their industry knowledge and experience to the company, provided introductions to new market opportunities, helped refine product offerings and gauged demand for products.
Andy Hamilton, CEO of The Icehouse, says equity crowdfunding gives public profile to an organisation and its brand, potentially building a community of raving fans providing useful sales exposure.
“Of course the challenge is that all of a sudden you are in the public domain and your promises and plans are open for competitors and investors to deride if you don’t deliver on them. These new innovations are a fantastic initiative – it is further democratizing access for funding to the masses and that is a great thing.”
Hamilton adds, however, that at the end of the day it is business strategy that reigns supreme.
“The absolute key for me is that the ‘strategy of the business’ drives everything else – not the funding requirements nor the people resources needed – so what is your strategy to take your innovation to market and grow it, from which you can define the need to access resources like funding to help you deliver on your dreams and vision.
“So do your strategy, test it, make sure you are happy with it and can communicate it – then look at what are you the funding options for you ‘now’ and into the future and then create a plan of attack to go after those.
“When considering equity crowdfunding, what you have to remember or be aware of is that people are investing their cash not only on the basis that you will deliver a product or service but that you will also build a business that will eventually provide a return for shareholders,” he says.
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