The below is an article I wrote for NZ Entrepreneur, as part of an ongoing crowdfunding column.
The global space
Crowdfunding is an exciting new space in the New Zealand spectrum of finance, and is referred to globally as alternative finance.
Alternative finance is often associated with its brother term “fintech” or financial technology. The evolving definition of alternative finance is fintech which is revolutionising banking and investing.
Nomenclature aside, alternative finance is no longer a storm in a teacup, but a worldwide flood. In 2014 lending based crowdfunding grew by 223% to reach a contribution of total worldwide crowdfunding of US$11.1bn, representing 68% market share when compared to 57% in 2013. Over the same period equity based crowdfunding volume nearly tripled, with an annual growth rate of 182% to reach $1.1bn.
Traditional rewards based crowdfunding involves a donation en masse with no economic return, and has distinguished if somewhat forgotten roots. For instance, in the 1870s Joseph Pulitzer asked for donations to help complete the pedestal of the Statue of Liberty. Popular brands like Kickstarter modernised this concept allowing individuals to donate to their favourite causes.
Equity crowdfunding on the other hand has a primary focus of raising equity capital for companies. It allows companies, which are usually high-growth, to raise capital through offering shares via an equity crowdfunding platform. The general public, and often sophisticated/wholesale investors, then subscribe for the shares through the platform.
Unlike traditional crowdfunding equity crowdfunding should be associated with solid economic returns. Successful equity crowdfunding campaigns draw on the company’s own networks, but also have to appeal to the general public by demonstrating a genuine and compelling investment opportunity.
It is having a demonstrable effect on businesses worldwide. In the UK for instance since raising capital through equity crowdfunding 70% of businesses have increased turnover, and 60% have increased employment (Nesta, The UK Alternative Finance Industry Report 2014).
Equity crowdfunding in NZ
In line with our number 8 wire roots, New Zealand is a leading figure in the equity crowdfunding space, being one of the first countries in the world to regulate equity crowdfunding last year (through a once in a generation reform of NZ’s financial regulations – sounds exciting doesn’t it?).
The new Financial Markets Conduct Act removes traditional cost and compliance barriers of small-scale public raisings by allowing companies offering shares through crowdfunding platforms to raise up to $2million dollars from the public in a 12 month period.
This is an area that the government is enthusiastic and committed to growing, to use their own words “internet-based markets facilitate innovative ways for small businesses and individuals to raise money more efficiently”. (MBIE, 2014 Business Growth Agenda) In other words, equity crowdfunding is here to stay, nurture NZ business, and grow alongside them (it’s a start-up industry in itself!).
So why equity crowdfund?
This is definitely a future article. However, briefly, the first obvious answer is capital. There is a global trend of smaller businesses struggling to gain access to the cash they need to grow. Equity crowdfunding can help solve this by providing a lower cost way to raise capital from a large pool of potential investors. Secondly, if you’re early stage, equity crowdfunding can provide market validation. And, finally engagement. You don’t just gain investors, you gain advocates, advisers and marketers for your brand.
Where to from here?
This column will provide some ongoing commentary in the equity crowdfunding space. We look forward to addressing some of the following key queries, such as; how does equity crowdfunding interact with venture capital, and other traditional funding rounds? Complementary we think! Stay tuned for further information.