Who Are The Losers In Equity Crowdfunding

In late 2018, the equity crowdfunding legislation was extended from unlisted public companies to private companies.  With this change, in theory, equity crowdfunding became available to nearly 1 million SME’s in Australia.

Since July 2018, only 55 companies have used it and collectively they’ve raised a mere $39m in funding.

In practice, most of the “industry” thought that crowdfunding would be a great option for “getting in on the ground floor of the next Facebook”.  You could re-phrase this sentiment as Equity Crowd Funding is a way to get a 100x return on your investment.

This prevailing thought set the wrong expectation.  It focused on the “Funding” in crowdfunding and not the “Need”, “Crowd” or “Risk Mitigation” posed to the crowd.

If You’re Raising Via Crowd Funding, You’re A Loser

Naturally enough the media promoted the line that equity crowdfunding was the new way for retail investors to make small investments in businesses with large potential.

The relative early success of Xinja (a neo bank) promoted that line beautifully.

The existing funding mechanisms i.e Angel Groups, Incubators and Venture Capitalists – who traditionally provided funding to private companies in the hope of catching a unicorn went on the defensive.

On more than one occasion and from very respected Angel and VC investors I’ve heard things like this:

• You only go to crowdfunding if you can’t get Angel or VC investment
• The only ventures going for crowdfunding have been rejected by Angels / VC’s
• No self respecting VC will invest alongside 200 other investors (*1)
• Having a large shareholder register is a dis-incentive for later stage investors because they don’t want to deal with so many other shareholders
• The terms on exit for equity crowd funding are un-clear (*2) so it’s not good for investors who only make their money on exit (*3).

The statements from media played a part in setting wild expectations and the statements from the incumbents played a part in discrediting those expectations and talking down equity crowdfunding.

Now we have the situation where many founding teams would go to equity crowd funding as a fund raising method of last resort.

Intermediaries Are Losers

Crowdfunding – especially equity crowd funding where people buy shares in the actual companies – has had a slow start.

Equity Crowd Funding can only be conducted via ASIC licenses intermediaries, of which there are 15.  7 of these intermediaries listed no companies for investment, 2 listed only 1 company for investment.

Given that these intermediaries put up good money for their license conditions.

They are the first losers.

We Are All Losers

The next lot of losers would have to be the government – or all of us.

Various flavours of government invested in 4 separate industry reviews between 2012 – 2018, before then Treasurer Scott Morrison pushed through the equity crowdfunding legislation that we have today.

Granted the Australian government was in turmoil during this period with leadership spills and changes in government.  It would have cost millions and we’ve not got it right.

We would have wanted to see more than $39 million raised across the 55 businesses that tried it this year and a bit.

We would have wanted businesses to feel they had more options than current SME lenders provide.

Turning It Around

There are several ‘wins’ from the first year in crowdfunding that are worth exploring (Check out this full article on the Crowd Funding Winners) for what they can teach us about how to turn crowdfunding around.

In Crowd-Funding, it is the ‘crowd’ part, not the the ‘funding’ part that’s important to success.

The most successful raises have shown this: Food Connect raised $2.1 million in 2018 (record for that year) for an ethical food box delivery business to buy the shed they previously leased for 12-years and in doing so create an ethical food hub in Brisbane.  This offering sold a “fair food system” not unicorn returns.

Then in 2019 Shebah raised $3 million (2019 record) for an “All Female Uber”.

In order to turn around Equity Crowd Funding from losers to winners we need the focus to switch focus from “funding” unicorns to more pragmatic Zebras. 

3 Key Questions

What is the “need” the business addresses?

What co-creation will be possible with the crowd on board (this includes what genuine stakeholder engagement will the shareholders have with the day-to-day running of the business)?

How does having more people in the crowd de-risk the investment of each person making up the crowd.

In summary, focusing on Need, Crowd and Risk Mitigation is the key to turning around the game for equity crowd funding in 2020.  You can read more about this here

Want To Know More

If you want to know more about the state of Equity Crowd Funding in Australia get yourself to the Common Wealth event in Sydney at UTS Centre for Business and Social Innovation on February 27 & 28.  Tickets here

Day 1 of this Event Features 16 TEDx styled talks on creating common wealth building.  Day 2 of this event will see the Crowd Funding Institute of Australia (CFIA) host a roundtable with industry, regulators, advisors and investors.

Want to know more about Crowd Funding Winners from the first full year of roll out.

Rebutting Equity Crowdfunding Critics

(*1) VC will invest alongside other investors.  In fact, in Australia for an IPO to go ahead it requires that 400 separate shareholders are invested.

(*2) The terms on exit for equity crowd funding are clear.  In fact there is heavy emphasis requiring each investor to read the “Term Sheet” prior to investment.  The legislation and intermediaries are equally interested in this clarity.

(*3) Investors only make their money on exit.  The exit options are the same for crowdfunding investors as anyone else.  An exit comes from a trade sale (selling to a larger competitor) or on IPO (selling to the public market).  In the case of an IPO having 400+ investors is a requirement that equity crowdfunding helps facilitate.