Crowd Funding – the NEW economy (Part 2)

crowd funding, raising capital, grants, fundsLast week we looked at Crowd Funding from a pledge or donation perspective, this week its the turn of Crowd Funding from an investment perspective.

I won’t go over what Crowd Funding is again, you can look at the last blog to get that information. What I will focus on now is Crowd Funding legislation for investment purposes and how it will fundamentally change the way small business raise capital in the next few months, or 2 years in Australia’s case.

Most people know (or should know) that you are not allowed to raise money from Tom, Dick or Harry unless you have registered a prospectus with ASIC or if you have managed to operate under another ASIC class order such as CO 02/273 which the Australian Small Scale offerings Board (ASSOB) uses, which allows companies to raise up to $5 million from up to 20 “sophisticated” investors in any 12 month period. This basically cuts out over 95% of the population from being able to participate in these investment opportunities.

Well, the above landscape is about to change in a big way, well in the US anyway, and hopefully sooner rather than later in Australia.

Barack Obama recently enacted his US Jobs Act to promote jobs growth in the US economy following the GFC. He recognised that to to do this the US Government needs to help small business as they are the back bone of the US economy (much like Australia). The biggest constraint for small business in the US is their ability to raise capital as credit policies are too restrictive meaning that the small business owner cannot easily access capital to grow his or her business (much like Australia – hmmm a common theme is occurring!).

As a result it was proposed to allow companies to use Crowd Funding as a means for businesses to raise up to $1 million from the “Crowd” where the maximum amount from any one individual will be capped at $10,000 per annum. Essentially meaning that you can stand on a street corner and promote the sale of shares in your business to everyone passing by without breaching the Corporations Act, PLEASE don’t try this now!

This bill passed through the House of Representatives with a huge amount of support (over 90%) and is now sitting in the US Senate awaiting approval. As you can imagine the Securities & Exchange Commission (the US equivalent of ASIC), are very concerned that investors (the man in the street) will be fleeced by unscrupulous business people promising spectacular returns in exchange for your trust, faith and oh yes your money! BUT as a number of supporters of Crowd Funding have pointed out, you can go to Las Vegas tomorrow and put $100,000 on RED and nobody will stop you, so why should somebody tell you not to risk $10,000 to buy shares in a business?

The implication for small business in the US is huge if the legislation is passed through the Senate, it will essentially free up the capital markets and give small business a “fair go” to raise capital from the crowd without the onerous paperwork or cost normally involved.

No doubt it will come with its problems including a fair share of unscrupulous business people trying to make a quick buck, but hopefully that will be the exception rather than the rule.

So what needs to change in Australia before similar legislation is considered? Well there are a few things to consider:

  • Cost – A cost-effective share transfer service, there’s no point being able to invest $10 in a company only to get an invoice for $20 to process the transaction.
  • The policy – ASIC won’t change the rules, their actions will be governed by the policy decisions made by the politicians and that does not happen quickly or easily in the current political environment.
  • Governance – What form of governance should a company that has “Crowd Funded” itself be adopting, can they remain a private company or do they have to convert into an unlisted public company?

My money is on at least a 2 year wait before anything similar is allowed in Australia. ASIC are already engaging with some of the existing crowd funding platforms but its early days and I’m pretty sure they won’t want to rush into something like this which can fundamentally change access to the capital markets in Australia.

In the UK and Netherlands there are already investment style crowd funding platforms up and running, notably Crowd Cube in the UK and Symbid in the Netherlands, and they’re doing well.

The point is that Crowd Funding is here, in one form or another, and it’s only a matter of time before it becomes a main stream form of funding for small business.

So what could this mean for your business? Do you think Crowd Funding is a viable source of finance for small business and would you consider using it?

Next week we’ll start working our way up the funding ladder and take a closer look at Grant funding in Australia, what’s available and how to go about getting it.

Contact Lattice Capital on info@latticecapital.com.au for more advice on raising capital.

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Crowd Funding – the NEW economy (Part 1)

raising capital, iPledg, “What on earth are you talking about!” tends to be the initial repsonse when you ask someone if they have heard of Crowd Funding, but it happens to be one of the fastest growing forms of eCommerce in the World. According to Gartner the Crowd Funding industry worldwide is expected to grow from a $1.2 billion industry in 2009 to almost $7 billion in 2013, that’s big!

So what is it and how can businesses use it to raise capital?

Essentially Crowd Funding is about using the “Crowd” to raise capital for your projects. A project creator will load their project onto one of the many and growing Crowd Funding platforms, set a funding target and timeframe and then use their social networks such as Facebook and Twitter to ask their family, friends and fans to make financial contributions towards their campaign, typically in exchange for a reward.

Many are skeptical, Why would you just give money away? Well if I told you that one site in the US was successfully funding  over $12 million in new projects every month would that change your mind?

Kickstarter, a US based Crowd Funding site was the front runner of modern day Crowd Funding. In the last 12 months they raised almost $100 million on over 27,000 projects without the project creators having to give away any equity in their business or having to repay any funds raised!

Admittedly they have more of a focus on creative type projects but that doesn’t mean it cannot be applied to more commercial purposes. One example was the creator of the Tik Tok watch strap.

An entrepreneur in the US wanted to make a watch strap whereby you could clip an iPod Nano into it and walk around with it on your wrist. He approached Apple and they said nobody would go for it. So he started a Crowd Funding project asking for $15,000 in 30 days to build a protoype. At the end of that month Apple were phoning him after he had raised almost $1 million from over 13,000 people. He is now selling his strap in every Apple store around the world!

So why was this project successful, well there are typically 3 reasons why someone would back a project:

  1. They know and like the person (family and friends);
  2. They have an emotional connection with the project , e.g. Save the Whales (fans); or
  3. They just want the rewards.

In the above case many people backed the project as in exchange for their pledge they received a cool reward, e.g. pledge $50 and you will receive one of the first protoypes with a retail value of $150, etc.

So as an entreprenuer or small business owner, Crowd Funding is certainly an option in relation to the funding of new product development for example, especially where you are able to offer creative and cool rewards in exchange for pledges.

There are very few Crowd Funding platforms in Australia at present but you should expect to see this form of funding grow as it gains traction. The one to look out for in Australia is iPledg, (that’s right, no e on the end) which is a relatively new platform but which is gathering traction quickly.

So lets conclude by looking at our checklist:

  • Cost of funding – anywhere between 5% and 10% typically but many Crowd Funding sites will only charge their fees if your project is successful, i.e. if you meet your funding target.
  • Ease of obtaining – Its easy to set up a project, typically the costs are negligible (anywhere between $0 and $250) but you are responsible for marketing the project to your social networks.
  • Speed – You have control over how many days you want your project to run for, typically anywhere from 30 days to 120 days.
  • Security – none, zilch, zippo
  • Consequences – You are responsible for making sure you deliver on the rewards you have promised.
  • Size of funding – the sweet spot seems to be around the $3,000 to $30,000 mark but, as you can see above, there are basically no limits to what can be achieved.

So who out there has used Crowd Funding and what was your experience? Let us know how easy or hard it was to use.

The good thing is at the moment it costs you nothing to try, i.e. if you don’t succeed the chances are no fees are payable.

The focus above has been on raising capital using Crowd Funding from a pledge perspective, next week we’ll take a look at using Crowd Funding from an investment perspective.

Contact Lattice Capital on info@latticecapital.com.au for more advice on raising capital.

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Business Finance – Climbing the Funding Ladder

Most of us have been there……You have a small business that wants to grow but you don’t know what form of funding is most appropriate given the size and maturity of your business, many questions typically spring to mind:

  • What is the cheapest form of funding?
  • Which funding is easiest to obtain?
  • Which funding is the quickest to obtain?
  • Which funding requires security and how much?
  • What are the potential consequences of obtaining certain funding?

Over the next few weeks we will be taking a close look at the funding ladder and what funding is available and appropriate for businesses of different sizes and at different stages of development.

We’ll use the funding ladder as a tool to help understand the different forms of funding and we’ll start right on the bottom rung.

raising capital, capital raising, crowd funding, venture capital, angel investors, private equity

The funding alternatives above don’t necessarily have to happen in that order of relevance or importance but this is typically the way these are viewed.

The funding options we will consider will include the following:

  • Crowd Funding – this relatively new area of e-commerce is one of the fastest growing industries and can be used for creative, charitable, community and commercial projects to raise project funding.
  • Grants – There are many local, state and federal grants available and we will look at some of the most popular.
  • Angel investors – How do they make their investment decisions, how many pitches are successful, what are the consequences of bringing on an Angel investor.
  • ASSOB – The Australian Small Scale Offerings Board, a great way of raising investment form sophisticated investors.
  • Venture Capital and Private Equity – what type of businesses are they looking for, what expertise can they bring to the table, what is their investment criteria?
  • Trade Finance – using your working capital more efficiently to better manage your cash flow.
  • Bank loans – what is more appropriate, overdraft or term loans and how do they work and what security is required?
  • ASX/NSX – the pinnacle of capital raising, listing your business on one of the stock exchanges in Australia and the impact this will have on your business in terms of more onerous corporate governance requirements and being in the spotlight.

So what funding options have you tried and what has worked or not worked and why? Over the next few weeks we’ll try and help you get some clarity around the above issues for your business.

Contact Lattice Capital on info@latticecapital.com.au for more advice on raising capital.

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