The New Zealand government is backing innovation and we in Australia seem to be watching on as our smaller neighbour becomes more agile and starts to get noticed overseas. The recent introduction of crowdfunding is just one example of how the entrepreneurial landscape in New Zealand is changing. With platforms such as Snowball Effect signing licensing agreements with the new regulator, the Financial Markets Authority, Kiwi entrepreneurs and investors are off to a flying financial start.
Lawyer Hayley Buckley
of New Zealand based Wynn Williams Lawyers
estimates more than $NZ7.2 million has been raised via equity crowdfunding; $NZ5.7 million of that with Snowball Effect. Six companies have received significant investments to date, including Invivo Wines raising $2 million and capping out.
Wynn Williams Lawyers has found that the average investment for an individual is a mere $4500 with the investment range between $100-$500,000 ($500,000 being the individual cap for a single investment).
What do these recent movements in New Zealand mean for Australia? While the Australian government has made progress supporting start-ups in the past year with reforms to employee share schemes and tax cuts, it still needs to take steps to reduce the red tape when it comes to small businesses accessing equity crowdfunding options.
Equity crowdfunding could create an accelerated small business and entrepreneur environment, a segment that many now recognise as the engine of our country. Of course, all investments have risks. There is an enormous appetite for equity crowdfunding here, but self education is required and this requires the availability of information that can be easily understood. However, I believe crowdfunding should not require a detailed Investment Memorandum, which many investors rarely read.
I think you would be hard pressed to find a boot-strapped start-up who knows how to write an Investment Memorandum or even understand the investment structures of the Australian investor landscape.
The Australian population needs to become vastly more informed of the nature of equity crowdfunding and what that can mean for the prospect of a burgeoning SMB market and the larger entrepreneurial landscape in general.
What is crowdfunding?
In short, crowdfunding creates a two sided marketplace that anyone can enter. The angel and seed fund investors don’t necessarily get exposure to the best deals first and the market becomes an open playing field.
There are three tiers when it comes to crowdfunding:
A minimum viable product is resold in single and multiple units, sometimes packaged or bundled to create value for a higher volume of bought items. This allows the entrepreneur to have working capital to produce the product in the quantities ordered without the guess work around over stocking the produced item - for instance Rare Birds pre-sold our first book
, Australia’s 50 Influential Women Entrepreneurs
, via a crowdfunding platform prior to production.
As above, but for services rather than products. For example, Rare Birds used Indiegogo offer to offer services, such as events and seminars conducted by myself, in exchange for funds.
These first two forms of crowdfunding are often referred to as rewards-based crowdfunding. It is hosted through platforms such as Kickstarter, Indiegogo and Pozible and there are no legal restrictions on who can create or support projects.
Exchange of units of equity for capital, essentially exchanging money in return for shares. In Australia this is legally restricted to wholesale investors who qualify because of minimum net worth or income. However, a number of other countries, including New Zealand and the UK, have opened it up to retail investors. This form of crowdfunding is relatively new and is really what is leading the way in New Zealand.
For example, currently Mad Mex (Mad Group) a chain of Mexican restaurants has the aim to raise
between $NZ750,000 and $NZ1.5 million for up to 13.3 per cent of the business using the Snowball Effect platform. The investment is to fund the growth of the Mad Mex business, with a vision to expand to more than 100 stores across three or four brands, both franchised and company owned, over the next five years. To date the company has raised $NZ166,500, 22 per cent of its $NZ750,000 target.
Australian equity crowdfunding landscape
In Australia, a Treasury discussion paper written after the final report of the Financial System Inquiry called on the government to enable equity crowdfunding for retail investors. Several submissions to the inquiry indicated that Australia was already lagging other countries in equity crowdfunding and called for a new regulatory body to enable it. The inquiry report, led by former Commonwealth Bank boss David Murray found that “a well-developed crowdfunding system can aid
broader innovation and competition in the financial system”.
The Small Business Minister, Bruce Billson, has flagged his intention to introduce legislation to open up equity crowdfunding to retail investors
Who should invest and what are the benefits?
Ideally, anyone can invest. This means even peer-to-peer funding becomes accessible for university and high school students and those wishing to validate ideas to minimum viable product before they have even entered the workforce or finished studying. This offers an incredible avenue for young people to try their ideas out when risk and failure is almost obsolete and the confidence to try again becomes greater.
Crowdfunding is critical for start-ups and younger entrepreneurs who may not be able to access capital from a traditional lender. If you look overseas, you see that the United States, Britain and New Zealand are all ahead of Australia in allowing equity crowdfunding, and it’s time the Australian government caught up.
All crowdfunding platforms are brilliant for marketing, often offering global exposure and potentially garnering free PR. For example, Indiegogo has exposed many start-ups to the international investor community.
For existing entrepreneurs, small businesses and students, crowdfunding can be a platform to test and trial new ideas, to see market appetite and to test validation, prior to large wasted investments.
Ultimately, alternative financing is going to be very disruptive as we move forward. How entrepreneurs interact and use tech to finance companies to trade and exchange assets, is evolving and will continue to do so in the coming years. The major banks mostly have debt raising facilities, with nothing much on offer for the start-up. The risk profile just does not fit an entrepreneur at ideation, MVP or seed stage.
Engaging potential customers in the early stages of these ventures via crowdfunding could be vital to their success. Being at the front of such potential is incredibly exciting, if Australia can just manage to get themselves into position.
Should the government want a willing participant that believes in values, fair play and enabling entrepreneurs and start-ups with a shot at starting strong with crowdfunding, Rare Birds will be a willing player.
To view the original article please click here.