Seeking investment from the “crowd” will soon be more available and desirable to Australian small businesses. In an exclusive for Business Insider, Xero managing director Chris Ridd explains how to run a successful equity crowdfunding campaign.
When it comes to seeking funding for expansion or ongoing business activities, most businesses will borrow from a bank, or seek additional capital from existing shareholders.
Others have begun experimenting with crowdfunding, a relatively new fundraising method that allows a business to seek small amounts of capital from a large number of investors online, often for a specific purpose such as developing a new product.
The problem is that equity crowdfunding – where investors buy a small piece of your business in exchange for privately held shares in the company – has been very difficult in Australia, with onerous rules and regulations governing its use.
Those investing through equity crowdfunding platforms have, to date, needed to prove they are ‘sophisticated’, with at least $2.5 million in assets and a salary of $250,000 or more. This has locked out retail investors — mums and dads — seeking an alternative investment method than term deposits or public stock markets.
However, new laws introduced in the Federal Budget in May will likely do away with many of the restrictions and red tape associated with equity crowdfunding, allowing small businesses to access a wider pool of investors to help them grow.
But before you dive in, you should know that crowdfunding isn’t for all businesses. It’s mostly employed by high-growth tech startups who can prove that the funding will provide a significant investment return over the next three to five years.
It also means taking on shareholders. Though the company will usually only deal with one shareholder, who represents the crowd, it still comes with compliance obligations that brings the requirement to share the proceeds of any business sale. Larger shareholders might even demand a say in the running of your business.
While you have to share any profits, equity crowdfunding means you won’t have to make repayments or pay interest in the same way you do for a bank loan, but the trade-off is that fees and administration can be higher.
It’s not yet clear when the changes will come into effect, but it’s a good time to start thinking about equity crowdfunding if it still suits your requirements. If you decide to do it, here are six tips:
As with all major business decisions you should seek professional advice. Check with your accountant whether this is the best way of raising funds for your business and the tax obligations that go along with it. And if you decide to go ahead, get your lawyer to check over any documents before you make any commitments.
Build Your Crowd
Make sure you have a good “crowd” before you go to market seeking funds. Use social media like Twitter, LinkedIn and Facebook to start building a following. Make as many connections as you can and start posting updates on the progress of your business idea and other interesting relevant material. Also, connect with bloggers in the space you’re working in to see if they’ll write about you or let you write a guest post.
If you do this you’ll have a ready-made receptive audience when you launch your crowdfunding campaign.
Write a business plan
A slick video is all well and good, but no one’s going to give you money if they don’t know what you’re going to do with it. So make sure you have a comprehensive business plan that clearly sets out what you’re aiming to achieve with the business and how you’re going to do it.
The more detail you can give potential investors, the more confident they’ll be that they’ll get a return on their investment.
Choose your platform
There are already several internet-based crowdfunding platforms operating in Australia and once the government facilitates easy crowdfunding, a lot more are bound to pop up.
You’ll need to carefully weigh up with platform you go with. Have a look at their fees and charges, and also consider how many investors they can attract – the size of their crowd – and whether these investors are putting money into the same sort of businesses that you’re in.
Keep your crowd updated
Each time a new investors commits some money, build on that momentum by sending out a status update to your crowd. If potential investors see that others are putting cash into your company, they’ll become a lot more interested in your offering.
Likewise, if you sign up a major new customer or do a new distribution deal, let your crowd know.
Equity crowdfunding could be an important fundraising method for some companies, but as with all things that involve money, it does involve risk. Make sure you do your research ahead of time. But otherwise, good luck!
Chris Ridd is managing director of Xero Australia. You can find him on Twitter.
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