There are two types of crowdfunding of interest to entrepreneurs – donation-based and equity.
Donation-based can be great as it provides early funds via pre-sales and is a great source of market validation. However, be sure you have an IP strategy as you don’t want to give away your secret sauce in the process.
The less straight forward option is equity crowdfunding. There is a lot of buzz around this right now. Within equity crowdfunding you have platforms that are for accredited investors only but with changes to regulations in NZ and overseas, equity crowdfunding will be opening up to the public. Mainly what we are talking about below is the latter.
Our advice is to proceed cautiously and do your homework, especially if you are going to need lots of capital. Learn all you can about the range of capital options and how each is applied at different stages of your company.
Some are calling equity crowdfunding the ultimate ‘dumb’ money. The best situation to be in is to raise capital from smart investors who also add value to the business through their networks, experiences and expertise.
As a rule of thumb angel investors don’t like complicated shareholding arrangements. It is unattractive to have to deal with lots of smaller shareholders especially if they want to influence the direction of the company and even more so if they become disgruntled. What donation-based crowdfunding has shown is that people get very passionate about the businesses they donate to. In an equity context having lots of small investor’s eager to have their say on the direction of the company would be challenging, and cost time and money to manage.
According to Bill Payne, the U.S. super-angel, angel investors and VCs are sceptical about equity crowdfunding. This is exacerbated by the new and untested regulatory framework. These smaller investors could not only become annoying and disgruntled, but have a legal basis for redress down the track.
We asked a couple of our investors their thoughts on this:
- Large private investors don’t need it – they already have access to deal flow without crowdfunding. So it will be a platform for people to speculate in small individual allotment sizes. Which begs the question – if good businesses get funded in any case, what is the quality of those participating on the equity crowdfunding platform?
- Potentially an investor/management nightmare – who will be conducting the due diligence? Are the board’s good enough to oversee the entrepreneur? Plus there are the significant costs and effort associated with managing a large pool of investors. So any platform that is developed needs to have an appropriate level of screening.
- Size of NZ market – and whether an equity crowdfunding platform can be economic.
At the crowdfunding symposium held in Wellington recently, people asked what the difference is between the current model where a lead investor manages the process on behalf of a consortium of investors and equity crowdfunding where they are essentially doing the same thing but with more investors. The difference is numbers (a handful versus hundreds) and capability (passionate users versus experienced people with a knowledge of business and investment). But what it really comes down to is motivation – “Can I (experienced investor) be bothered doing all of this work, does the return justify the input?”
A great business probably does not need to fundraise from the crowd. However, we understand from our fellow Global Accelerator Network contacts that some accelerator graduates are using platforms like AngelList to top up a round which has been somewhat successful. AngelList is a equity crowdfunding platform for accredited investors. Whew the terminology is getting longer and longer..
Until we understand it better, right now equity crowdfunding seems more likely to be a distraction to a high-growth potential business. If you are going to need further rounds of funding then think very hard, it might solve an immediate problem but not benefit you in the long-run.
That said, it is disruptive and as things develop it could get a whole lot more attractive but for now proceed with caution down the equity crowdfunding route.
About the author:
Tui Te Hau runs the Wellington-based Creative HQ‘s programme development around incubation, acceleration and science commercialisation. Tui has spent eight years at the coalface of New Zealand’s start-up community. Tui developed the strategy, setup and execution plan behind Lightning Lab and the Activate Business Training programme, including attracting investment and securing international accreditation with the Global Accelerator Network.