While traditional asset classes have been slowly recovering from the global financial crisis, the Australian start-up ecosystem has been enjoying remarkable growth.
The last 3 years have seen the arrival of an array of accelerators, incubators and new venture capital firms. More importantly for the maturation of the sector, there have also been successful and sizable technology listings on the ASX by OzForex and Freelancer.
But there have been limited avenues available for individual investors to gain exposure to start-ups to date.
Until the Australian launch of equity crowdfunding platforms VentureCrowd and OurCrowd last month, the two main avenues for would-be start-up investors were venture capital funds (typically requiring commitments of $100,000 to $250,000), and direct angel investing (typically requiring a great deal of time and expertise).
Both platforms, although different models, are currently limited to wholesale investors: a category defined by ASIC as individuals who either earn at least $250,000 a year or have at least $2.5 million in net assets.
There are about 207,000 wholesale investors sitting on $US625 billion ($684 billion) worth of assets in Australia at the moment, thanks to strong investment returns, climbing real estate value and healthy GDP levels.
There are good reasons for equity crowdfunding to be limited to wealthy individuals: more than half of start-ups fail, and the distribution of outcomes is asymmetrical.
Approximately 90 per cent of the returns in a diversified portfolio will come from 10 per cent of the start-ups.
Accordingly, VentureCrowd encourages investors to build diverse portfolios of smaller investments. The crowd can select start-ups from a large pipeline of start-ups pre-screened by VentureCrowd’s 25+ partners including Australia’s leading accelerators, incubators and university programs.
Communications Minister Malcolm Turnbull recently indicated the federal government would be open to enabling online equity-based crowdfunding in Australia to help encourage local tech entrepreneurs to stay in Australia rather than be lured to Silicon Valley.
The Government’s Corporations and Markets Advisory Committee is now considering submissions to change the laws that currently prevent start-ups from using websites or other means to raise equity funding from retail investors.
Submissions closed at the end of November, and presumably it will be some months until the committee issues a final report for consideration by the minister, and then of course it needs to be turned into draft legislation and go through parliament.
If this happened, a greater number of Australians would be able to invest in Australian start-ups. In the meantime, retail investors are confined to reward-based crowdfunding sites like Kickstarter, Indiegogo and Pozible, which allow individuals to pledge money in exchange for a product or the satisfaction of having brought a creative idea to life.
VentureCrowd would welcome the government liberalising the rules on equity crowdfunding, but it is imperative that, if and when that happens, we have a system that promotes both investor protection and greater access to seed stage capital for innovative startups.
This will probably mean that any loosening of wholesale investor rules will be accompanied by laws regulating the operators of crowdfunding platforms.
A key feature of the VentureCrowd model is that it encourages and educates investors to make informed and strategic investment decisions. The role of all online markets is to reduce the friction between buyers and sellers.
VentureCrowd enables investors and pre-screened startups to partner via a transparent and efficient platform with a common goal to build and support companies that will be at the vanguard of Australian disruptive innovation.
Should legislation change, we would continue to recommend an educated diversified-portfolio approach to startup investing.
Jeremy Colless is a Managing Partner with Artesian Venture Partners, the team behind VentureCrowd.
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