Crowd-funding’s first year more than meets expectations

Since the first offer closed in the latter part of 2014, equity crowdfunding has grown into an important part of New Zealand’s alternative finance landscape, particularly in the growth / early-stage space. How have the various platforms differentiated themselves, what lessons have been learned, and what might be next?

The Platforms

Snowball Effect has raised considerably more money than any other platform, and boasts the only two offers so far to hit the $2 million regulatory cap. One of these was Punukaiki Fund, an early stage investment fund exposure to several technology, internet and design-led companies, rather than the ‘norm’ of direct investments in a single venture. Snowball Effect targets companies seeking later stage growth/expansion funds rather than seed capital, and has developed additional services within their platform, such as private raising options and offerings for wholesale investors.

PledgeMe is the only platform who offer equity crowdfunding alongside project crowdfunding (where cash is pledged in exchange for incentives rather than shares) and is looking into crowdlending (crowdfunded debt). Pledge Me has had the most successful offers to date (12). Several of these campaigns were social enterprises such as Ooooby whose organisational purpose extended beyond maximising profit. PledgeMe has also launched the first (and so far only) follow-on offer when it followed its $100,000 raise for its own shares in November 2014 with another in July 2015 which raised $365,820 at an increased valuation.

Equitise markets itself as The Trans-Tasman Investment Platform. Their founders have their gaze fixed on growing their presence beyond New Zealand and into Australia once the legislation to enable equity crowdfunding beyond habitual investors comes through. The Dongfang Modern raise in August was a very innovative use of equity crowdfunding in more ways than one: an established agricultural company, based in China, conducting an ASX IPO with a pool of shares reserved for crowdfunding gave us a glimpse of the potential of equity crowdfunding beyond funding early-stage companies, and the cross-border opportunities it can open up to investors.

Crowdcube is a big player in the United Kingdom crowdfunding scene, having raised over £114 million there since inception. The brand has been brought to New Zealand by Armilliary Private Capital, and the New Zealand incarnation maintains strong connections with Britain, which is one of the world’s most-established equity crowdfunding markets.

Liftoff, Propellar, My Angel Investment and Property Mogul are more recent addition to the market, which have had licences granted but are yet to have their first offer close successfully.

The Lessons

Momentum is critical: Momentum has proven just as important as in traditional financing, if not more so. Validation from sophisticated investors helps build early offer momentum and helps to validate the proposition, which parallels the role institutions play in a traditional IPO bookbuild. What is different about equity crowdfunding is potential investors can see, in real-time, how much of the money has been raised and how much is still left to go, which tends to exacerbate the importance of momentum even further, as investors get total visibility over whether an offer is “hot” or “not”. Companies that have got their launch right have closed in as little as under an hour. Failures have tended to be big rather than finishing just a little short.

Strong disclosure:  Many founders have underestimated the amount of work necessary to get an equity crowdfunding offer ready for launch. While the rules say it is permissible to run an equity crowdfunding offer without fulsome disclosure, it has nonetheless become an essential commercial requirement. Good offers to date have featured professionally-produced videos, detailed business plans and forecast financial information, and the observed trend is these are growing more comprehensive over time. 

Investors are choosy: A common complaint about our regulatory regime has been that disclosure requirements are too lax, leadng to fears of a “wild west” with investors being fleeced. In fact, investors have shown themselves to be very selective over the opportunities that get funding – most platforms have by now had at least one failed offer. By and large, investors will punish starry-eyed valuations and don’t simply believe everything the company founders tell them. 

Team reputation matters: Offer information is seen as more credible if the business has a strong team, including individuals on the board with impressive governance track records. Having well-known people put their names behind an offer helps control the quality of the offers themselves.

Value of offers beyond money: Significant publicity has been generated by crowdfunding offers, often leading to more interest from media, commercial partners and consumers. Some companies have reported significant increases in revenue due to exposure from their offers bringing on board loyal brand advocates.

The Future

There has yet to be enough time pass for much visibility to emerge on the post-raise performance of the companies that have successfully funded. It will be interesting to see how the market responds to the first companies that go on to achieve successful exits, and conversely, the first failures. The United Kingdom’s equity crowdfunding market has a few more years behind it, and failures there haven’t killed investor appetite – quite the opposite, in fact. Over 40% of UK angel investors had used equity crowdfunding platforms by the end of 2014, and research house Massolution reported worldwide equity crowdfunding activity at US$1.1 billion in 2014, a 182% increase over 2013.

It will be interesting in the next year to see how some of our more traditional financial institutions react. For example, could crowdfunded opportunities make its way into ‘growth’ oriented Kiwisaver providers? How will angel groups react to this entrant in their territory? Will venture capital look to participate in crowdfunding directly?

One thing is clear: equity crowdfunding is here to stay. New Zealand’s progress is not going unnoticed across the Tasman, who are busy reforming their own legislation, and other countries are adding to the momentum seemingly every month. As a world leader in the space, New Zealand can be proud of its first year.

Nathan Rose is director of Value My Venture, which helps entrepreneurs with financial models, pitch presentations and information memorandums

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