A tale of two platforms: Equity crowdfunding in Australia & New Zealand

By Kat Jenkins
from Multitude

The last 12 months has seen a steady stream of equity crowdfunding laws and platforms released globally. The UK and Europe are already home to CrowdCube and Seedrs. And the JOBS Act in America is opening the floodgates there as well. In New Zealand, equity crowdfunding will become possible due to a law change coming into effect on April 1, 2014. Australia has also recently begun work on their crowdfunding legislation.

both-logos

With all this activity going on, I sent through some questions to two new players: Fundakiwi, from New Zealand, and Squareknot, from Australia to see what they were up to, and what they thought the future looked like.

UPDATE: Since this article was written, Fundakiwi has decided that it will not be proceeding to become a crowdfunding licensed intermediary under NZ law.

What is your platform’s approach to equity crowdfunding?

Squareknot: Squareknot matches entrepreneurs and businesses with investors looking for compelling opportunities. Our approach is to provide transparency, liquidity, resources, and to build relationships.

In the process, we are creating an enriching environment capable of delivering significantly more than just capital for growing companies. Wherever possible, we proactively leverage the resources and experience of the Squareknot community of investors, entrepreneurs, mentors and experts to help businesses get to where they want to go.

We encourage investors to become active participants when suitable. Engaged shareholders bring capital, but they and also create commercial opportunities, facilitate strategic partnerships, add credibility, and act as a quasi-marketing and sales force.

Fundakiwi: Our aim is to create one of NZ’s first equity crowdfunding platforms. However, rather than just being an introduction service between entrepreneurs and investors, we are focussed on providing a “full life service”.

For companies, that means supporting them over a longer period of time than just their initial campaign. To begin with, we provide support with campaign creation and promotion. Once the company has completed a successful raise, we will offer the option of placing them with our incubator partner, increasing the chances of their startup being a success. Finally, we will help in the next round of funding via a network of Angel Investors and VCs.

For investors, we plan to educate them on what equity crowdfunding is, and how they should approach it. On successful investment, we will be keeping an eye on their investments via a nominee company to give it the best chance of success. Ideally, we will also help the investors exit on the next round of funding.

Given New Zealand’s laws don’t come into effect until April, and Australia doesn’t have draft legislation yet, how are you launching now?

Squareknot: Regulation around equity crowd funding in Australia is still a grey area. But this isn’t because it’s inherently higher risk. Instead, it reflects the challenges on regulators to keep apace with the opening up of capital markets through technology.

In response, Squareknot was delighted to prepare a comprehensive submission to CAMAC (Corporations and Markets Advisory Committee) to advise the Australian Government on how to regulate crowd sourced equity funding.

Squareknot values being regarded as a trusted source and destination for both investors and investees In the process. We seek to comply with, and exceed all the relevant legislation, legal frameworks, and industry practices around investment and fundraising. This extends through to the application of an AFSL (Australian Financial Services Licence).

Fundakiwi: Our answer to that is a virtual equity crowdfunding platform. Fundakiwi is holding a New Zealand-wide competition where entrepreneurs can win $10,000 worth of services. These will help them build and promote their real equity crowdfunding campaign once the laws allow it, potentially allowing them to raise up to NZ$2 million for their startup.

We want to give an opportunity for entrepreneurs and would be investors to try out the platform and understand it. Our virtual equity crowdfunding platform will feature real ideas and real investors, giving entrepreneurs and investors the opportunity to connect. This way when the law does come into place, the groundwork will have already been laid for a successful raise.

For the Kiwi investor, this is a chance to educate themselves about equity crowdfunding by getting a chance to experience it live, without the risk of investing real money.

Everyday kiwis will get a chance to be ‘investors’ in Fundakiwi by signing up for free. Every investor who signs up will be given $10,000 worth of virtual currency they can ‘invest’ in the companies and ideas they believe in. Investors also have a chance to win invites to a launch party VIP dinner with the entrepreneurs who win the Fundakiwi virtual equity crowdfunding competition.

What do you think an investor needs to know before investing in an equity campaign?

Squareknot: Equity crowdfunding opens investors to deal flow previously confined to the realms of banks, venture capitalists and angels. Unlike listed equities, there are fewer degrees of separation, giving investors a greater sense of being able to contribute to the success of a company they have funded.

Hope however, is not an investment strategy. While the returns may be great, like any investment, it involves risks. Earlier stage companies bring additional risks such as a lack of track record and liquidity. Hence, any investments in equity crowdfunding campaigns should be seen as long-term and illiquid.

Investors are now better armed than ever before. The internet is a powerful ally to undertake detailed due diligence. However investors should always seek out professional advice before any investment decision.

Fundakiwi: Equity crowdfunding gives the average Kiwi a chance to invest in companies they believe in. Every investor needs to make sure that they believe in the vision of the entrepreneur, the team behind it, and the execution plan.

The next step is taking a look at the financial numbers of the company to determine what the payout is, and how the entrepreneurs aim to achieve it.

All companies listed on Fundakiwi must provide a standard minimum amount of information for potential investors. This includes a business plan, and a set of financial forecast numbers.

Investing in a crowdfunded company is very similar to other avenues of investing. The investor needs to do their due diligence, decide for themselves if the plans and forecast make sense, and then make the decision to invest their hard earned money.

What do you think a company needs to know before seeking investment?

Squareknot: It’s not all about the money. For businesses, crowdfunding provides an opportunity to validate their business model and strategy. It’s also a chance to seek out investors that bring skill sets under-represented in the current management. For example commercial networks, marketing expertise, globalisation track record, or an industry reputation.

Simply appearing on a crowdfunding website is no guarantee of success. There is much work to be done and things to consider. How much should be raised? In how many stages? On what valuation? Is the right team in place? Even the best ideas will go wanting if the right management is not in place. Investors often invest in management as much as they do in the product or service of the company.

Take a long-term view of the business’ capital requirements. Calculating the amount to raise involves a fine balance of avoiding the need to come back to the market too quickly, and being diluted too aggressively too soon. Business owners must also be aware of the reporting obligations to an enlarged shareholder base, and to communicate effectively to manage expectations.

Fundakiwi: Along with having a great idea and a team, companies need to keep in mind that transparency and communication are the key to a successful equity crowdfunding raise. My top three tips for successful raises would be:

  1. Craft a compelling pitch with special attention given to the campaign video. The video is what will lure in potential investors to read the rest of your pitch, so that they can make an informed decision to invest in your company.
  2.  Start working on promotion before you launch your campaign. For a raise to be successful, you need the initial push from a core set of your own supporters. These could be friends and family, your current customers, partners, or social media fans. Once you have that, it will motivate other investors to get on board.
  3. Keep communicating with investors during the raise. It is this communication which will answer questions for all the other potential investors considering investment in your business.

On the legal side, the proposed rules in New Zealand allow for a company to raise up to NZ$2 million in a rolling 12 month period. All companies are also only allowed to raise equity crowdfunding via a registered and licensed intermediary, (the crowdfunding platform). Fundakiwi will be one of the first platforms to be licensed once the laws come into effect on April 1st.

What do you believe the future of crowdfunding looks like a year from now? How will your platform change the landscape?

Squareknot: The post-Global Financial Crisis decade is centred on alternative funding. Equity crowdfunding will continue to try and fill the funding gap left by banks. The better crowdfunding platforms will offer companies much more than just capital.

These additional (sometimes intangible) benefits will be very difficult for banks to replicate effectively. Coupled with the need to fund the hundreds of companies graduating out of incubators, as well as established businesses looking for growth capital, will see strong demand for the likes of Squareknot.

The Government’s response to CAMAC will be critical. There is the risk of over-regulation, and we’ll be watching closely as well as advising where possible.

Fundakiwi: I would say we will see a lot of consolidation in the equity crowdfunding market in the near future. There are currently 400+ portals waiting to be launched in the US, and other than the very niched ones, most of them will either shut down or merge into a few big players. I think this will be a positive development, as the major platforms will theoretically have better policies and procedures for businesses, reducing the chances of fraud.

In New Zealand, the Equity Crowdfunding market does not exist right now, so the next year will be one of growth, and platforms figuring out the best way to serve the local market.

We at FundaKiwi believe that equity crowdfunding has the potential to revolutionize the New Zealand economy and will be working towards that goal. We are looking to change the landscape for Kiwi entrepreneurs and investors through equity crowdfunding, rather than change crowdfunding itself.

If you’re interested in checking out either of these platforms, you can take a look at Squareknot here, and Fundakiwi here.

squareknotfundakiwi

UPDATE: Since this article was written, Fundakiwi has decided that it will not be proceeding to become a crowdfunding licensed intermediary under NZ law.

 

3 comments

  1. Dwight says:

    Australian and New Zealand governments are getting in the way of a good idea. And even private companies interested in putting up crowd-funding platforms are missing the point. What we have here is a blatant usurpation of a good idea by venture capitalists who are looking for a safety net, a screening platform if you will, of potential projects. What none of these ill-intended people understand is that their usurpation cannot function as there will be a scarcity of interest.

    The crowd funding is just that. Ordinary people helping other ordinary people with an interesting idea. This is not some new way for capitalists to take over other people’s projects or even companies, as it has always been the case. This is not a platform for those so-called “angel” investors to simply steal your good idea and cut you out of your own business. But, in Australia, that is exactly what is happening.

    The good thing is that these capitalists cannot stop the people to communicate and fund each other. In the true spirit of the concept, which is so blatantly usurped by those in Australian circles, and by the sound and look of it in New Zealand too, the people funding someone’s project do NOT get shares in a company, nor do they share the profits.

    The true crowd funding works on an entirely different level from that basement level Australian capitalists are crowding.

    Sad to see hyenas and jackals trying to take advantage of people by hijacking a concept that is actually a contradiction to their intentions.

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    • Site Editor says:

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