What was billed as a way of democratising investing is finding a role in digitising financial services.
Two years after craft beer maker Renaissance Brewery kicked off the first licensed crowdfunding offer, another high-profile brewer – ParrotDog – is tapping the crowd for at least $1.2 million to expand.
However, the platforms haven’t limited themselves to craft beer – among 44 successful deals from 59 offers are the sale of shares in a film production, a hydro-turbine maker and a mortgage broker.
Seven firms have been licensed – Snowball Effect, Equitise, PledgeMe, Crowdcube, Liftoff, Alphacrowd and Propellar – though it’s been dominated by the first three, which have closed 42 successful offers from 55 deals. Snowball accounts for 70% of the market, facilitating the raising of $20 million of new capital from 10,000 investors in public retail offers and wholesale deals limited to eligible investors.
Snowball’s typical investor is someone 35-plus who has bought stocks before and is cannier than your average punter when it comes to investing. That’s not quite the broad church people were hoping for when equity crowdfunding first hit the market, but the sector is still finding its feet.
Snowball, for instance, has branched out into wholesale offers for sophisticated investors and provides wraparound services through its platform to keep its customers informed of how investment targets are tracking.
“We always knew that providing retail investors with that opportunity to invest was a starting point,” co-founder and chief executive Simeon Burnett says.
Early stage opportunities
Snowball’s rival Equitise, which has raised $7 million through its platform, takes a similar view. Co-founder Will Mahon-Heap initially saw crowdfunding as a chance for people to access early-stage opportunities that were limited to the closed ranks of venture capitalists and angel investors.
Since then, Equitise has also gone down the wholesale route, offering investor services.
Both Mahon-Heap and Burnett tout their respective platforms as being able to provide investors with a cheaper, easier proposition than the traditional way of buying and selling shares, removing much of the paper trail and making it easier to jump through regulatory hoops such as identity verification.
“If you have advisers helping someone raise capital, with due diligence and investment management, it makes sense to use a platform to offer all that information – it’s more efficient than a broker or adviser,” Mahon-Heap says.
Auckland economist Will Taylor, who’s invested in about a dozen offers, has noticed the platforms talking about online capital raising rather than simply crowdfunding, and hopes that will lead to cheaper transactions for investors.
“The infrastructure these guys have put in place streamlines any capital-raising process,” Taylor says. “Rather than filling out a bunch of forms every time you participate in an IPO or wholesale offer, you register with the platform once, then every investment from there is logistically simple.”
As an investor, he’s found companies have been pretty good at communicating with shareholders. However, Taylor sees an opportunity for some firms to build a co-operative relationship with their investors.
“To me, that’s what crowdfunding can be for certain companies where your customers are your shareholders. That doesn’t make sense for every company.”
Taylor’s approach to crowdfunding has been to go with what he knows. As a keen home brewer, he was happy to take part in Snowball’s Renaissance offer, and having used Squirrel’s mortgage-broking services and understanding a thing or two about financial services, he was comfortable taking part in that Snowball issue too.
Breathe Easy, which is developing a drug to treat cystic fibrosis, raised $613,000 last year from 155 shareholders through Snowball. Chief executive Andrea Miller says the company got a lot of support from families dealing with cystic fibrosis and had expected people to take part for philanthropic reasons.
“We had already raised $1.2 million from angels and corporates, so we went in in a really strong position,” Miller says. “For our capital raise, we got people at the grass roots.” The due diligence process raised a number of “great questions” that as an entrepreneur “you should be able to deal with”, she says.
That isn’t always the case, as PledgeMe can attest. “It’s a lot of work to get ready to equity crowdfund, and some of that work should be done anyway,” chief executive Anna Guenther says.
PledgeMe has started running education campaigns for companies wanting to use its platform and has more than 10 firms going through the process. Having already run project-based offers before the equity regime came into place, it’s raised $9.7 million through 12 equity offers and more than a thousand one-off projects.
PledgeMe puts emphasis on the crowd, with about 80% of its investors also customers, and recently expanded into peer-to-peer lending to give organisations an alternative to selling shares.
Building a pipeline
Stock-market operator NZX is watching the crowdfunding space closely, and sees it as building a pipeline of companies that might list at some stage.
“The equity crowdfunders have clearly had early success in building distribution channels and we will watch developments on this front with interest,” says NZX head of markets Mark Peterson.
The proof for financial markets veteran Ralph Stewart, who’s previously led ACC and fund manager Axa, will be in how the platforms respond when companies fail, as some inevitably will. “It’s still early days and the failure rates are not yet known. You can never lose sight of that. Platforms have an obligation to communicate to their members what they learn about failures, why did they fail, and sharing that.”
Stewart sees crowdfunding opening doors for early-stage companies. Last year he raised money through Equitise for his annuity savings business Retirement Income Group.
That experience was enough to entice him back for a second round, and he says it compares well with doing deals at the top end of town. “The post-issue involvement has been genuine and [conducted] in a structured, considered way. When I’ve done IPOs in the past, the underwriters and issuing brokers are pretty keen to look for the next one.”
The crowd seems content so far, but as Stewart says, it’s still early days.
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