Last week, taxi mobile payments app Ingogo announced it was hoping to raise up to $4 million of its latest investment round using crowdfunding platform Venturecrowd.
The decision to raise up to one-third of its $12 million round through crowdfunding – a way of combining smaller parcels of investment into one larger capital pool, with the process typically enabled by a technology platform – shows how the fundraising method has become an important component of the investment environment.
The recently-concluded Financial System Inquiry, led by David Murray, listed crowdfunding as one way to assist startups and innovative businesses in Australia’s economy. The federal government is aiming to consult on draft legislation for regulation in the middle of this year.
There are two basic ways crowdfunding works. The first is rewards-based crowdfunding, which allows people to contribute money to an as-yet unbuilt product but guarantees they will be among the first to receive it if the people behind the idea raise the money they need. The best-known platforms for this are Kickstarter and Indiegogo, where two Australians with an idea for a beehive with a tap have sensationally raised $US12.1 million this year.
The other method is equity crowdfunding, where investors pay to own a slice of a company. Tim Heasley, COO of Artesian Venture Partners which runs crowdfunding site VentureCrowd, said the current law in Australia meant only wholesale investors – those who earn at least $250,000 or have $2.5 million in assets – could participate in equity crowdfunding. The potential audience is estimated in the low hundreds of thousands in Australia.
“The law is expected to liberalise or change in spring this year, that would allow most Australians to participate in this,” Heasley said.
The practice of crowdsourcing investment has become more frequent with a range of platforms being launched which connect investors with ideas.
Since VentureCrowd’s equity crowdfunding platform was launched in 2013, hundreds of investors have invested more than $2 million cumulatively into high-growth tech companies, including Ingogo, Fame & Partners, Posse/Beat the Q and CrowdMobile.
Israeli-based funding platform OurCrowd are operating similar model in Australia where pre-vetted startups and wholesale investors, also known as “sophisticated investors”, are matched.
The practice of securing backers can mean the founders are exposed to less risk. Rewards-based crowdfunding projects also provide startups with a customer base already committed to the project.
In 2014, 3.3 million people pledged more than $500 million on crowdfunding platform Kickstarter to bring more than 22,200 projects to life. Companies like Ninja Blocks and Startmate startup KoalaSafe are two Australian tech companies which have used Kickstarter to raise funds for their projects.
Another platform, Pozible, has raised more than $25 million in pledges and launched over 8,200 projects. Indiegogo is also gaining traction, most spectacularly with the $US12.1 million Flow Hive project run by Australians Cedar Anderson and his father Stuart. Their initial target was $70,000, but within two hours they’d sold $830,000 worth of beehives. Crowdfunding the project provided customers, exposure and financial backing for the startup – lowering the risk to investors.
Crowdfunding is now seeping into the property market. Startups like CrowdfundUP and BrickX are helping real estate investors buy small parts of property developments, providing a way to overcome the entry barrier that is such a common cause of complaint among younger Australians. This week VentureCrowd announced it was a running a trial in crowdfunding real estate with one of Australia’s largest developers, Mirvac Group.
Late last year, a heavyweight group of investors backed SocietyOne, which has established a peer-to-peer lending platform connecting lenders and borrowers. The investors included News Corp, investment companies controlled by Kerry Stokes and James Packer. Westpac was already invested. SocietyOne currently has at least $1.4 million available on its network, which funds loans of up to $30,000. While not strictly crowdfunding, it is another example of how the ability to raise money is being transformed by technology projects.
Clearly, this is a threat to traditional banking and capital management institutions.
But despite all the noise and some decent numbers, comprehensive and reliable data on the size or success rate of the Australian crowdfunding market is hard to come by.
Last month Atlassian co-founder Mike Cannon-Brookes put the call out on Twitter to see if anyone had some stats on crowdfunded venture capital rounds. He said the idea of crowdfunding from average punters “feels like a bad idea” and that the “man on the street would lose”.
Anyone have stats on "crowd funding" VC rounds? (Avg punters, not pros) Feels like a bad idea, that man on street would lose. Would love #s.
— Mike Cannon-Brookes (@mcannonbrookes) March 18, 2015
After failing to find some comprehensive stats, Cannon-Brookes tweeted he would maintain his “bearish position” on crowdfunding.
No crowd funding stats. I maintain my bearish position. Seems like a way for sub-par ideas to fleece everyday investors. No panacea here.
— Mike Cannon-Brookes (@mcannonbrookes) March 19, 2015
Earlier this month, StartupAUS threw its support behind establishing crowdsourced equity fundraising regulation in its Crossroads report.
“A growing list of countries have already enabled (equity crowdfunding), and StartupAUS encourages the government to move as quickly as possible to enact enabling legislation so that Australian startups are not disadvantaged,” the organisation said.
After releasing its discussion paper on potential crowdsourced equity funding models in December, the government is now considering both models presented by the Corporations and Markets Advisory Committee (CAMAC) – a federal company law panel – and the one implemented by New Zealand as options for feedback and discussion in the market.
CAMAC’s model included caps on the amounts retail investors could invest in crowd sourced equity funding (CSEF) of $2,500 per issuer a year, and $10,000 aggregate investment over a year, allowing small investments into 4 ventures annually.
The approach in New Zealand includes voluntary investor caps, with the level of disclosure to investors dependent upon the level of any voluntary caps and the amount of funds the CSEF issuer is seeking to raise.
Both the CAMAC and New Zealand models limit the amount companies can raise via crowdfunding to $2 million in any 12-month period, excluding any funds raised under certain existing disclosure exemptions.
‘People need to be aware of the risks that they’re taking. You don’t put the rent money into a startup’
Business Insider spoke to Yasser El-Ansary, CEO of the Australian Private Equity and Venture Capital Association (AVCAL) who said data around crowdfunded equity raises in Australia was limited at best.
“It’s hard to get an entire overall read of the numbers, crowdfunding isn’t [always] being exchanged for equity but in exchange for reward,” he said.
Heasley said it was “too soon” to tell if the financing method would produce significant returns for investors. VentureCrowd has closed about seven deals using the platform but Heasley said as for whether they would prove good investments, only time would tell.
“It’s too soon obviously, to tell because they’re very early stage deals,” he said. “It’s more a marathon than a sprint.”
Opening crowdfunding to retail investors is something that needs to be handled with care, a point Heasley says he “undoubtedly” agrees with, saying the risks and time frames involved with investing in startups needed to be grasped.
“Our model is very much around education and encouraging people to diversify their investments,” he said about VentureCrowd. “There needs to be a lot of education and people need to be aware of the risks that they’re taking. You don’t put the rent money into a startup.”
Nonetheless, Heasley says the law needs to be changed which has already happened in New Zealand, the UK and the US.
He’s expecting the legislation to be passed during the spring session and while the draft hasn’t been released, he’s hoping it takes its inspiration from the laissez faire style New Zealand has adopted rather than what was detailed in the CAMAC report last year.
“I’m hoping that it falls much closer to the New Zealand approach,” he said, adding: “CAMAC was quite restrictive…It was generally very thoughtful but there were four or five provisions in there that looked like it had come from academic rather then someone with a commercial background.”
He said ideas like limiting the amount investors can chip in to $10,000 a year across four companies is “pretty nanny state” and suggesting startups must become exempt public companies to participate in crowdfunding creates an “administrative nightmare”. (Although Heasley added he would be “pretty surprised” if the latter survived.)
The other idea CAMAC raised was flat fees for fundraising platforms, rather than on a commission basis.
“That’s ridiculous,” he said, adding VCs should be “paid relative to the value that they’re adding”.
The federal government’s competitiveness agenda last year outlined a number of changes to enable equity crowdfunding in Australia.
“At the end of the day, we are very supportive of changes that would improve the landscape for startups here in Australia,” El-Ansary said.
“Anything that has the effect of slowing that trend [of startups moving overseas] and encouraging more of our best and brightest entrepreneurs to stay in Australia is a good thing.”
He says the regulatory framework needs to strike a balance between opening up a marketplace for broad-based equity crowdfunding in Australia while minimising the risk of fraud, and ensuring retail investors are equipped with information about the risk of investing in a nascent market.
“The last thing you want to do in this context is put in place a very rigid, complex, compliance heavy regulatory framework,” El-Ansary said. He points out that startups don’t have the resources to spend bucketloads of money on lawyers and accountants to work through regulations. Too much regulation will simply strangle many of them.
“Ultimately, I think there is a very compelling case for us to adopt a more open equity crowdfunding policy framework here. I think we are lagging behind other jurisdictions around the world but this won’t be a silver bullet,” El-Ansary said.
“Very early-stage seed funding rounds are improving year-by-year and what we’re seeing, in parallel to that, is a drop off of the slightly later stage funding rounds of between $2 million and $20 million.
“That’s where we need to be focusing most of our effort in addressing that challenge, because the so-called valley of death, that’s the single biggest challenge of startups. That’s when they develop their concept, they turn it into a commercial reality and they are at that critical infliction point where they need to start thinking about scale and global reach, bringing on more resources and starting to feel and operate like a sophisticated business, it’s at that point that they start struggling here in Australia to attract enough interest from potential investment.”
Paul Niederer, CEO of the Australian Small Scale Offerings Board, estimates about 90% of the transactions are done on the rewards side, rather than equity.
“On the equity side, it’s very early days, we’ve been doing it since 2005, it wouldn’t be over $20 million a year on the equity side of it,” he said. adding, “We’re really waiting for treasury to set some rules.”
As for where crowdfunding sits, Niederer said was an important mechanism which sits between founders using credit cards or sourcing family money and when the company is ready for Angel investment.
Federal treasurer Joe Hockey said last week that there would be “more to say” about incentives for startups in the budget, which will be handed down on May 12th. Regardless of whether specific crowdfunding methods are announced that night, the coming months are likely to be a critical period in shaping the future of this emerging investment trend that many believe holds so much promise for unlocking the potential of innovative Australians with ideas they want to export to the world.
Just ask the Andersons.