Is crowdfunding for you?
Since equity crowdfunding began in New Zealand almost 10 years ago, two main platforms have helped local businesses raise hundreds of millions in funding. But when should you add crowdfunding to your funding mix?
Contributor
Kerri Jackson
Crowdfunding has become a more common method of fundraising in New Zealand but those who facilitate it, and those who’ve tried it, agree it’s neither the simple, nor last-resort option many believe it to be.
Equity crowdfunding was legalised here in 2014. Since then two companies – Snowball Effect and PledgeMe – have dominated the market. Both offer platforms allowing companies to seek direct investment from a ‘crowd’ of smaller investors.
Snowball Effect offers a pre-existing crowd of about 45,000 investors, including a cohort of wholesale investors. PledgeMe campaigns work best when companies bring with them a crowd ready to invest. Both platforms offer private and public campaigns.
Why crowdfund?
Snowball Effect’s director of partnerships and growth, Emily Heazlewood, says crowdfunding adds diversity to a company’s cap table.
“In the current market, it can be a good way to diversify the risk and when you come back for your next funding round you have multiple investors likely to reinvest, rather than one who says ‘no’,” says Heazlewood.
With funding of between $2 million and $10 million hard to find in New Zealand, crowdfunding can also provide access to mid-level funding between seed and VC-backed, she says.
A diverse investor group can also provide young businesses with a source of knowledge and expertise: “You can end up with quite a skillset behind you.”
PledgeMe co-founder Anna Guenther agrees. “You get a diverse pool of people who are brand ambassadors and often have skills that can help support your growth.”
Guenther cites beauty brand Ethique, which completed two successful crowdfunding rounds on Pledgeme, picking up three chemists as investors who helped navigate batching issues.
“It’s a common misconception that crowdfunding investors are ‘dumb money’,” says Guenther. “Our investors include everybody from professional gymnasts to economists. You just don’t know.”
Ethique founder Brianne West says crowdfunding proved successful for the company because it had a community already.
“I had always tried to bring people along on the journey. I wanted to take that to the extreme and have a community-owned business. Equity crowdfunding offered that.”
“We then had this group of people who were super-onboard with what we were doing. It’s like having a group of cheerleaders.”
That has flow-on effects for brand profile, with marketing a key part of a crowdfunding campaign, says Guenther. “We’ve seen companies have their best revenue months off the back of a crowdfunding campaign because people are out there talking about them.”
The risks
Managing a large number of smaller investors is often seen as a downside to crowdfunding, but doesn’t need to be with different shareholding structures possible, says Guenther.
AGMs and annual reports are required by law, but crowdfunders can opt to offer non-voting shares or have shares held in a nominee company.
“We do recommend people think about issuing non-voting shares so you don’t have to go out to them for every resolution,” says Guenther. “We also recommend not selling more than 20 percent of your company in that first round.”
A campaign failing publicly is the other big fear of newcomers to crowdfunding, says Guenther. “A failed campaign doesn’t stop you from being able to grow your business; it’s just one thing that didn’t work.”
“The preparation is really key,” says Heazlewood, adding that crowdfunding due diligence is more front-loaded than other funding raises. All completed financials, forecasts and valuations are needed before launch.
Companies who launch a crowdfunding campaign without a lead investor are at higher risk of failing, she says. “You want about 20 percent covered before going out to the crowd.”
West says any crowdfunding fishhooks can be self-inflicted by a lack of preparation.
“Make sure you get good advice and have the right structure in place for your new shareholders. Even if you don’t get your minimum you have still found lots of people who want to support your business.”
Guenther warns against overvaluing a company ahead of a crowdfund campaign, so it has room to grow should you want to run another campaign. A simple concept also works best, she says.
“The ones who struggle often have complicated structures so it’s not as easy to say what the crowd is investing in.”
The source of the crowd is one misconception of some companies investigating PledgeMe, she says. “There’s no crowd in the cloud. Think about the first 50 people you think are going to pledge, whether they’re from your personal or professional networks. Have conversations with them before you start.”
“Crowdfunding has been described as the funding of last resort. It isn’t and it isn’t even the easy path. It’s just another tool open to you.”
Case study: HT Systems
HT Systems makes mobility devices that help caregivers safely lift people. The company crowdfunded $378,000 from 133 PledgeMe investors in 2021. It is currently crowdfunding a second time, targeting $500,000 to $1.5 million.
CEO Richard Shepherd says crowdfunding seemed a good fit for the company in 2021 because it had a small group of supporters who could see the company’s product improved lives. The second crowdfunding round, which will help HT Systems launch new products in new markets, comes with added opportunity and pressure.
“Crowdfunding now gives our existing shareholders the chance to reinvest, while hopefully reaching other, similar people,” says Shepherd. “This time there are financial as well as social outcomes for investors.”
A key part of that is planning for annual sales of $10 million before a liquidity event in 2028, so investors know when they’ll see returns.
There are advantages to crowdfunding, but it’s not easy and not for everyone, he says.
“It can be high stress but there are timeframes around it. One of the reasons we went with crowdfunding a second time was that some other sources of funding like angel investing or high-net-worth, were taking lots of time with lots of negotiation around valuation. We didn’t want to tie ourselves up for six to eight months.”
“The hard bit is building that crowd; trying to identify who will invest and getting them to consider your message. I think authenticity is important. Having a good vision that people can buy into and being authentic to that.”
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