Fintech may be grabbing all the headlines but promising start-ups still come up against the same major roadblocks that they’ve always faced.
“If you ask any room of startups what's their biggest problem, it’s access to capital,” Jeremy Liddle, chief executive of capital raising accelerator CapitalPitch, recently said at the Afiniation Showcase fintech conference.
More than 93 per cent of US-based start-ups fail at the fund raising stage according to the US Securities and Exchange Commission and “it's a lot worse here” says Liddle.
The Afiniation Showcase, held in Sydney in September, attracted more than 30 fintech startups eager to raise capital. CapitalPitch has worked with a number of them, evaluating and strengthening their businesses in preparation to find a lead investor, who is then likely to propel the capital raising to its ultimate target by bringing in other investors.
While global fintech financing activity jumped to an estimated $US12 billion in 2014 from just $US3 billion the previous year, Australian venture capital has been traditionally hard to come by.
Liddle said the CapitalPitch platform had raised about $30 million in September with about $9 million committed.
“Interestingly the majority of money is coming from individuals but the process that we're putting in place has been really well validated by all the big funds.”
Institutional investors such as super funds have long shied away from the sector, which has a notoriously high failure rate, until First State Super and Hostplus Super backed a $200 million-plus Blackbird Ventures-managed technology fund in September.
It is little surprise then that many start-ups are looking across the Tasman to the success of a more enterprising solution: equity crowdfunding.
The wisdom of crowds
Traditional crowdfunding, where supporters pledge money to a project in return for token incentives, has successfully launched tech start-ups such as smartwatch Pebble (which raised more than $US20 million on the Kickstarter platform) and virtual reality gaming headset Oculus Rift (which raised more than $US2.4 million).
Equity crowdfunding is the natural next step: the sale of Oculus to Facebook for $US2 billion would have netted the original crowdfunders a return of more than 145 times if they had equity instead of gifts.
Global equity-based crowdfunding grew 182 per cent to $US1.1 billion last year, according to massolution’s 2015CF – Crowdfunding Industry Report. It has become a well-accepted part of business in countries such as the UK while the New Zealand government rolled out its own legislation in April 2014.
My Angel Investment is one of a growing number of NZ firms helping companies raise equity crowdfunding capital – about $NZ14 million has already been raised across the local industry according to the company’s chief investment officer Blair Pritchard.
“In Australia the strategy of the Abbott government was to introduce a crowdfunding regime,” Pritchard said at the Afiniation Showcase: “There is crowdfunding in Australia but it is somewhat hampered by the lack of a law that enables it – it is quite stifling.”
It is a situation expected to change under new tech-savvy Prime Minister Malcolm Turnbull.
“He told us that if he had his way he would just simply take the New Zealand legislation, cross out ‘New Zealand’ and write ‘Australia’ there,” Pritchard said. “So we’re very optimistic about reform here being quite soon and [it being] a very streamlined and effective regime. If that happens we're certain that the adoption and expansion of crowdfunding in this country will be very rapid.”
My Angel Investment recently took up residence in Sydney-based fintech hub Stone & Chalk, where it will roll out its Australian operations.
In October, the Turnbull government confirmed that it would consult on draft legislation to implement crowd-sourced debt and equity funding legislation by the end of the year. It remains to be seen what caps the government places on equity crowdfunding and whether the legislation will only apply to public companies, which would likely stifle the number of start-ups participating.
Protecting investors remains a key concern particularly given the high-risk nature of the venture capital sector and the difficulty that retail investors have in assessing the viability of any business.
In New Zealand, equity crowdfunding is overseen by its regulator, the Financial Markets Authority, which limits individual offers to $2 million over a 12-month period. Minimum investments can be as low as $100 (depending on the fund raising) although My Angel Investment co-founder Mark Malcolm suggests investors take a portfolio approach to lower risk.
The US SEC has also now rolled out draft legislation enabling equity crowdfunding, which requires companies to lodge certain financial information (depending on how much money they aim to raise) and disclose it to potential investors. The SEC will also limits retail investors to investments of $US2000 (or 5 per cent of their annual income) or 10 per cent of their income (or aggregate net worth if it exceeds $US100,000).
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