Equity crowdfunding in Australia has so far been a big disappointment
Equity crowdfunding launched to much fanfare in January, but it’s struggling to live up to the hype with at least seven businesses failing to reach their fund-raising targets.
That’s from a total of 17 campaigns that have so far run full equity fund-raising campaigns according to crowdfunding platforms Stockhead has contacted.
It’s understood one business went broke after its crowd-funding campaign finished. Another four that successfully reached their fund-raising goals were still chronically underfunded for their ambitions.
One of those has had to renegotiate a major outside funding deal because it didn’t meet its maximum target.
Equity crowdfunding was promoted as a new way for early stage companies to raise money without having to go cap-in-hand to professional venture capital investors or to the ASX.
The concept has been popular in the US and elsewhere for years but only started here in January after the regulator granted the first seven crowdfunding licences.
The system allows businesses to raise up to $5 million from retail investors, who can each put in up to $10,000.
Before January early stage companies were effectively only allowed to raise money from professional investors.
But despite the enthusiastic claims that it would open doors to Australia’s hundreds of thousands of self-directed investors and unblock a constipated funding funnel, the numbers aren’t yet stacking up:
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None of the 17 campaigns Stockhead reviewed has reached its maximum fund-raising target and four only just scraped in above the minimum.
Xinja, a digital bank, is the most successful equity crowdfunding campaign so far — raising $2.2 million.
It was the only company to pass the $1.75 million median point of its fund-raising range. Even success stories PT Blink and DC Power did not meet their median figure.
In total, the 17 companies raised $9.4 million of the $31 million they were aiming for.
In the wider world, when a business only just meets its minimum capital-raising goals, it’s an indication of an uphill battle to raise money and bring new people onto the register, says Cube Capital partner Hani Iskander.
And companies that are chronically underfunded for their business plan expectations are likely to fall short of key milestones.
But owners of crowdfunding platforms say their sector is different.
“I wouldn’t say it’s a bad thing — I would say it’s just the way the market has gone so far. It’s a new industry,” says Equitise boss Chris Gilbert.
“The maximum is more of a stretch target, the minimum is what you actually need to run the business. “
But at least in some cases, it appears to have turned out that the “minimum” figure has not been enough to get the business to where it wants or needs to be, and further attempts at fund-raising end up being sought down the track.
According to its offer document, restaurateur Sash is likely to require an $80,000 loan to finish the fitout at its new Sydney location, adding to $93,000 in debt it’s already carrying.
Movie tickets reseller Choovie needs to raise money again after scraping in over the minimum by $34,000, although founder Sonya Stephen told Stockhead they were talking to an investor after the campaign closed.
Digital gold ‘money’ app Sendgold will need to cut marketing and product development spending and go back to its 25 existing investors for more cash to carry out its proposed plan after coming in $27,914 over its minimum target on the last day of the campaign.
Solar power startup DC Power will need to negotiate with major funder the Australian Renewable Energy Agency (ARENA) to receive a $750,000 grant “to confirm that the proposed business model is sustainable before the funds will be released” because it didn’t receive its campaign maximum of $3.5 million or 35,000 investors.
And soccer ball maker Park SSC will have to cut back on marketing, which it said it’s planned for the next 12 to 18 months.
Only Birchal CEO Alan Crabbe said meeting only the minimum was a problem.
“You can’t raise above the target, so if you set it too low you can’t oversubscribe like many other raises,” he told Stockhead.
“We’re saying there is too big a range between the minimum and the maximum and we’re trying to encourage companies to set their target being the maximum because if you can put away the maximum there’s demand [for a subsequent raise].”
None of the representatives of the nine companies spoken to by Stockhead thought hitting the minimum was a problem.
Hashching CEO Mandeep Sohdi said Australian investors were not educated enough about equity crowdfunding to embrace it and it wasn’t being well explained.
The valuations the 17 companies have raised at, or tried to raise at, have been based on everything from comparisons to ASX companies — PT Blink measured itself against Parkd (ASX:PKD) — to holding a finger in the air.
Downrounds, when a company has to raise money at a lower valuation to its previous rounds, are coming.
Choovie has already slashed its valuation from $4 million when it last raised to $2.5 million for the campaign. Ms Stephens said they had better numbers for a valuation by the time they chose to do a campaign, but Equitise’s Mr Gilbert says they required the company to cut its valuation.
Mr Gilbert, Birchal’s Mr Crabbe, and OnMarket founder Nick Motteram agree that downrounds post-equity crowdfunding are likely.
“I’d say in the next couple of years a fair chunk of the companies using these platforms might not be existing,” Mr Gilbert said.
“There will be downrounds.”
Mr Crabbe says the question will be whether those companies are considering how they will look after those retail investors who bought the promise in the equity crowdfunding campaign.
“[I hope] the companies that do [a downround] recognise that they may need to consider how to look after investors… before they raise again, or risk their reputation because it’s going to be very hard to raise again on a down round.”
It remains to be seen just how many of the early crowdfunders will think of their new retail investors. Few of those spoken to by Stockhead even admitted that a downround was a possibility in the future.