EVERYTHING YOU NEED TO KNOW ABOUT EQUITY CROWD FUNDING
Written on the 24 November 2017 by David Simmons
CROWD funding has long been a darling of entrepreneurs, inventors, and creatives.
Platforms like Kickstarter, Indiegogo, and even Patreon have launched the successful careers of a number of Australian change makers. By allowing interested patrons to donate money, sometimes in exchange for tokens of appreciation, these crowdfunding platforms allow emerging and growing brands, products, and businesses to raise early stage capital.However, these types of platforms are not always appropriate for every company. In some situations, entrepreneurs with brilliant ideas might want to look to crowd funding as a capital raising tool, but require a more sustainable and reliable flow of income for their initial states of capital raising.
This is where the relatively new concept of equity crowd funding steps in to revolutionise the accessibility of capital raising.Like traditional crowd funding, equity crowd funding involves tapping an huge number of interested parties who want to see an entrepreneur's idea leave the ground. However, instead of a t-shirt, patrons receive equity in the crowd funded company.
Recently, Australian laws were changed to legitimise equity crowd funding meaning platforms like Equitise can legally facilitate transactions allowing companies to give shares in exchange for capital.
Business News Australia spoke to managing director and co-founder of equity crowd funding platform Equitise, Chris Gilbert, to figure out the do's and don'ts of equity crowd funding, how Equitise works, and the future of the capital raising platform.
If you're familiar with platforms like Kickstarter, you'd know how open access these platforms can be. A cursory glance on the site reveals fundraisers for projects varying from comic books to video games to print magazines. On Equitise, there's an initial screening process that Gilbert says knocks out most applicants.
"First, there's an initial screening process, because not every small business is the right fit for equity crowd funding," says Gilbert.
"Maybe eight or nine out of 10 businesses won't get through this process."
If you're one of the suitable companies to make it past the screening process the business is taken through to an investment committee.
"The investment committee then discusses the company, and we discuss the pros and cons, and ask further questions to the founders over a phone call to get a bit more information about the business," says Gilbert.
The final step is onboarding, where the business plan is reviewed, information memorandums are created, and a short video profiling the company and its founder(s) is made.
"Short videos are a really powerfully way of communicating what the business does, who the founders are, and what problem they're trying to solve," says Gilbert.
"Because all the investors in the platform have never met the founders of the business before its really get to get the founders on camera so they can see they're real people and humanise with what these businesses are doing."
What businesses does equity crowd funding suit?
"Not every small business is the right fit for equity crowd funding," says Gilbert.
The types of businesses that generally suit equity crowd funding, according to Gilbert, are hard to pin down, but he says there are a few ingredients that Equitise looks for.
"They're B2C type businesses as opposed to B2B, because you've got consumers buying into the brand," says Gilbert.
The size of the business pre-crowdfunding is irrelevant according to Gilbert, and the Equitise platform suits all types of businesses from pre-revenue and prelaunch companies all the way up to big global companies.
"Equity crowdfunding has been used for big beer companies globally like Brewdogs which now has 60,000 investors," says Gilbert.
"That's now been valued at 1.2 billion dollars and they're still using crowdfunding as a way to expand to new geography and they started out as a humble boutique beer business in Scottland about six years ago."
Gilbert's biggest tip is to do some research to see if any businesses like yours have been successful with crowdfunding in the past to see how a close competitor in a different market is running their campaign successfully.
"If you can't find any people who had marketed a business like yours before there's perhaps a reason why that's happened," says Gilbert.
"If you're a small corner shop mechanic for example and you're trying to do a crowdfund through equity, I would probably suggest not to do it because it's just not the right type of business. But if you're a drone delivery company or a virtual reality business, which has got more blue sky and is a bit more interesting, then that would be fascinating."
Currently, for example, Equitise is running the equity crowdfunding round of capital raising for a peer-to-peer car sharing network called Car Next Door to give access to at least $500,000 of its equity.
Car Next Door CEO and co-founder Will Davies says equity crowdfunding is a no brainer for the platform.
"There are over 50,000 people signed up on Car Next Door now, and we've had numerous requests from our members may of which are sophisticated investors who are excited and want to invest," says Davies.
"It's not just about investment, it's about getting our broad user base even more interested in us and our success. Crowdfunding is the logical way for us to unlock some of our equity for our members."
Gilbert says Car Next Door is the perfect fit for a platform like Equitise.
"Peer-to-peer sharing is the way of the future, with consumers embracing companies like Uber, AirBnB and Airtasker, Will and the team have taken the best parts of the sharing economy to drive growth for Car Next Door," says Gilbert.
What are the advantages of equity crowdfunding?
The first advantage of equity crowdfunding as opposted to seeking out institutional investors, traditional crowdfunding, or running an IPO, is the sheer number of investors wanting to be a part of your vision.
"One of the advantages is you've got a lot of smaller investors coming in to capital raise as opposed to one bigger investor," says Gilbert.
"The reason that's a benefit is that you won't have one big investor taking up a charge in equity and trying to talk you down a valuation or take a board seat and negotiate preference shares and liquidation preferences."
Simply, lots of smaller investors mean typically individually the investor doesn't have a whole lot or right. As a whole they have a lot of rights, but the investors all vote individually.
"You don't really lose control of your business, which is a big positive," says Gilbert.
Additionally, having investors interested in your B2C company creates a big sense of brand loyalty, creating effectively a free army of salespersons.
"Equity crowd funding enables you to get your customers to buy into your business," says Gilbert.
"You're getting your loyal supporters and your fans to actually become shareholders which builds up brand loyalty. It means you've got a on foot sales people because they've bought into what you're doing and they want you to succeed even more."
What obligations do you owe after equity crowd funding?
Once the process is over and the equity crowdfunding component of your capital raising is a resounding success, there are some legal obligations you owe to your new shareholders.
At the moment in Australia, investors must be reported to at least twice a year, but Gilbert recommends communication should be more frequent than that.
"We try and make sure that communications are more frequent than twice a year, although with high-risk startups and busy founders it can quite often be a difficult thing to do," says Gilbert.
There's also a requirement for companies funded by equity crowdfunding to hold an AGM, but this can be done through digital means.
"It's not face to face like with the traditional ASX companies, it's a whole lot more efficient," says Gilbert.
Chris Gilberts top tips for raising capital through equity crowdfunding
Have a strong pre-launch strategy:
"A big mistake that some companies make is launching too quickly and not having investors lined up to put money into the offer. You need to have a crowd built around the offer before you launch this is why we do a lot of press and marketing before an offer goes live."
Socialise your business:
"Socialisation basically means working on your database size, working on your number of Facebook followers and Instagram followers so that when you launch your campaign publically you can tell all those followers that you've launched. Crowdfunding has always been successful because it's a social way of raising money, so you need to make sure you have a strong social footprint."
Develop a clear Information Memorandum/business plan:
"Having a really powerful and easily expressed and articulated information memorandum is a huge tick. If it's a very word heavy and boring document you probably won't receive much investment. But if it's a polished, image centric, well laid our document, it makes a big difference."
Business News Australia
Author: David Simmons