Crowdfunding For Business Growth
By Chris Sheedy - December 2012
Raising start up and early stage business funding can be terribly challenging in today’s economic climate. But if you put your plans in front of the right crowd, anything is possible.
The biggest mistake you can make when pitching your company to a crowdfunding platform, says CEO of the Australian Small Scale Offerings Board (ASSOB), Paul Niederer, is to over-value your company. A good business idea is a powerful thing, he says, but without funding it will likely come to nothing. So don’t make the mistake of assuming the idea is worth more than the funding that will make it a reality.
ASSOB, a business introduction and capital raising platform that has brought in over $130 million for companies since mid 2005, puts organisations with high growth potential in front of investors who are excited by the opportunities offered by early stage businesses. The difference between an organisation such as ASSOB and several other crowdfunding websites that operate on a pledge system is that ASSOB manages investment in a highly professional and legal manner. Investors are transparently buying shares in the organisation and as a result, in some instances are taking on their investors as consultants or directors. The matchmaking of entrepreneurs and investors is a powerful offering.
“Australian corporate law says a company can only have up to 20 Australian ‘mum and dad’ investors, but what if there are more people wanting to invest in your company? What if there are people overseas who would like to invest?” Niederer says. “We enable small businesses to raise capital in a process that is around 50 per cent online and 50 per cent offline.”
Businesses that tend to succeed in such a crowdfunding environment are early stage and high growth companies. “It’s really best to be in a field that investors can get truly excited about,” Niederer says. But any business with a new idea that solves a current problem has a good chance of financial support. Perhaps even more importantly, if a business owner does receive funding then they also often take on the wisdom of the person behind the funding.
“We are seeing a trend of advisors and board members having skin in the game because they genuinely believe in the company’s chances of success,” says Kylie Hammond, CEO and founder of Board Portfolio. “Some cynics say it’s simply a way to buy a board seat, but actually the endorsement can be very important and can have enormously positive effects. Obviously the experience of the investor is of fantastic value to the entrepreneur. The investment and the advisory role or board seat should always be two completely separate discussions, but they are both discussions worth having.”
Hammond says it is currently very difficult for businesses to raise money for sub-$5 million investments in Australia, but often the first $500,000 of seed capital is critical to the chances of the business ever getting off the ground. An organisation such as ASSOB makes such a fundraising effort far simpler for businesses with the right mix of credentials and growth prospects. Then, once the original investment has been made, crowdfunding actually becomes easier as investors are comforted and encouraged by the fact that others have already put a cheque on the table.
While such investment is a very positive sign for those looking at a business, so is the fact that the founders, and their friends and family, have also put their own money in.
“A business such as ASSOB makes this entire process very transparent and offers a platform for investment in a very professional manner,” Hammond says.
Essential Ingredients For Success
If you’d like somebody to hand over their cash then you’d better capture their imagination, Niederer says. Give them something they can become truly passionate about, something that interests them. This must begin with a story.
The story of the business, the reason it came about, the problem it solves and the service offering, must be completely compelling and credible. The story of the business must clearly describe why it is of benefit to society.
Following on from the story of the business, the team behind the brand must also be worthy of investment. The best idea in the world could be totally wasted on a group of people who have no talent for what it is they claim to be doing. Investors will see through such inexperience in no time at all. “The right people need to be in the right places,” Niederer says. “This can mean bringing in good people to fill vital roles, rather than presenting yourself as a one-man band.”
Finally, Niederer says he looks for whether the business already has passionate followers, people who will help to spread the word and assist with growth. Such a following will also reproduce itself over and over as the company grows.
“Passion is contagious,” Niederer says. “If you already have a large, healthy group of followers then that group will grow with the business. It also proves that you have discovered a niche area that few other businesses inhabit. People become passionate because you help them to scratch an itch. If they already had a way to scratch that itch then they’d have no reason to be passionate about you.”
What’s The Process?
ASSOB’s platform puts private, unlisted and pre-IPO businesses in front of potential funders for capital amounts between $250,000 and $5 million. The investors can be anyone from friends, family and staff to sophisticated private investors in Australia or overseas.
The entire process is transparent from the very beginning, including facilities such as cooling-off periods, minimum subscription amounts and professionally prepared investment documents.
Companies seeking funding must show that they have a viable business, demonstrate growth prospects and require a realistic valuation that can withstand scrutiny. ASSOB specialists will then put the business through a due diligence process before deciding whether to welcome them on to the platform. The company’s directors are researched for integrity, capability and character and the business’s presence in the marketplace is also considered.
So it’s not a set-and-forget type of process, but no important business process ever is. Instead it’s a system that ensures an organisation is looking as good and running as well as it possibly can. Such a process, Hammond says, is a valuable one for any organisation as it forces the directors to develop a clear understanding of their strengths and weaknesses before seeking vital funding.
“Remember that it’s only the first piece of funding that is difficult. After that it becomes easier,” Hammond says. “But the benefits of the funding are far greater than just cash. The knowledge offered by the investors, their networks and the public endorsement of a business offered by an investment are all very powerful.”