…. and it’s an important one. Raising capital via crowd-sourced funding can be a fast and relatively inexpensive way to procure capital while at the same time promote it to a large audience. In saying that, success is not guaranteed and a lot more work is required than most people think.

From the lessons and learnings of the companies TWIYO Capital & Advisory has advised through the crowd-sourced funding process, we will attempt to answer the aforementioned question by breaking down all aspects of crowd-source funding.

What is Crowd-Source Funding (CSF)?

Crowd-sourced funding allows start-ups and small businesses to raise funds from a large number of investors that invest small amounts of money (as low as $50, in fact). This is facilitated through CSF intermediaries, such as Birchal, that hold Australian Financial Services License(s) (AFSL), and provide crowd-sourced funding services through an online platform. According to the Corporations Act, these intermediaries are bound by certain gatekeepers’ obligations and act as a bridge between the business and potential investors.

Over the last four years, crowd-sourced funding has become a popular source of funding for Australian SMEs. So popular that in 2021 CSF broke the $1bn mark as the industry saw more companies come back for second and third offer rounds (The Australian). This was made up of 89 successful CSF offers, worth $71m, and 37,000 active investors.

According to Birchal, who have facilitated 75% of all CSF activity in Australia, there was a 140% uplift in industry activity from 2020. And that was in the midst of the COVID pandemic - perhaps even because of the pandemic.  

Now back to the big question. If you’re reading this to figure out whether CSF is right for you and you are growing business, please keep reading. We’ll attempt to tackle the question - just note that there’s no one-size-fits-all answer.

Can I raise money through CSF?

Yes… if your startup/small to medium-sized business has less than $25m in assets and less than $25m in annual revenue you can raise up to $5m within any 12-month period. There’s more to it than that, but let’s start there.

CSF allows companies to offer shares to the public with retail investors able to invest just $50, which differs significantly to traditional private capital raises, where typically only sophisticated investors have access.

Advantages of CSF raises

A CSF raise allows companies to access a pool of estimated 1.25M retail investors in the Australian market (who are limited to $10k investment cap/year) (Australia Online Investing Report). If successful, it can be a relatively fast way to raise capital, while simultaneously promoting your company to a large audience. We have found that CSF investors respond very well to consumer product companies, B2C businesses and impact focused ventures - but virtually any company can attempt to raise money through one of the many CSF providers (more on that later).

In addition to getting access to the CSF provider’s network, companies can also promote the offer to existing customers and partners, followers and fans. Converting customers into shareholders can be a great way to create alignment and build long-term relationships. These investors will be your biggest champions, having experienced the value of your product/service and, once they are shareholders, have a strong incentive to see your business thrive.

CSF can be an alternative to companies that may not have the network to sophisticated investors or have attempted a traditional capital raise without success. Although what many don’t know is that in addition to marketing to retail investors, you may be able to find wholesale and sophisticated investors through a CSF raise as well. While the majority of investors will be small retail investors, there are also potential “big ticket” investors you can reach through your campaign.  

Further, CSF campaigns can double as a tool to gain media exposure for your business. A well executed campaign will get your business in front of thousands of relevant stakeholders which can turn into potential partners, customers, vendors or open other doors.

In summary, here is what we like;

• Raising via CSF can be a relatively fast way to raise capital
• An alternative to a traditional capital raise, in particular if the idea does not appeal to sophisticated investors but rather to “the masses”
• Ability to roll customers & other stakeholders into the campaign and create alignment
• Likewise investors can become your most loyal customers and champions of the brand
• CSF raise can be turned into a marketing campaign with broad exposure to a large audience

Now it is time to weigh up the risks

Like with any financing campaign, there are risks associated with this process and crowd-sourced funding is no different.

Firstly, if you think this process is easy - it is not! In fact, it will not necessarily be easier than a traditional capital raise, and quite often it is much harder. A lot of effort (and money!) will go into building a successful campaign.

Be prepared to turn on significant marketing spend to capture interest. This might not be cheap, and if sufficient interest isn’t captured and funding targets aren’t reached, any finance already pledged will be returned to investors and the raise will not be completed. In the case this does occur, there is also the chance business reputation may be damaged. Imagine being the business that failed to raise the minimum target.

CSF intermediaries charge variable fees from intermediary to intermediary. By ensuring companies are aware of the fee structure prior to the raise, this ensures they have sufficient funds to accommodate for the entire process. Generally intermediaries charge a fixed fee for the Expression of Interest campaign (EOI) and Offer Administration, and a variable fee on funds raised.

Advisory fees may also come into play, this again will vary from firm to firm. Generally a set amount is charged for the development of the offer document. Additional money may need to be set out for the lawyer to amend/create the Constitution, the graphic designer to visually enhance the offer document, and accountant to make changes to the updated registered address if any.

Post raise there may also be reporting and auditing requirements depending on the amounts raised. Remember that after the campaign you will be reporting to potentially 300+ investors, who may scrutinise your business strategy and financial performance and ask questions if things don’t go as intended.  

Lastly, crowd-sourced funding may not always be seen as a ‘valuable asset’ to your brand. Slime traditional venture capitalists may see it as a burden or an unattractive structure and there is a risk it could stop you from getting follow-on funding.

In summary, here is what you should be aware of;

• There is usually an upfront and success-based fee component.
• Be prepared to turn on marketing spend - we have found that campaigns that do not sufficiently invest in marketing are more likely to fail
• If you fail to raise the minimum target, funds must be returned and you have wasted significant money, time and resources into an unsuccessful campaign
• There is risk of reputation damage if the campaign fails and your company is likely to lose public and investor confidence
• Be aware of added complexity post raise with 300+ shareholders on the register and reporting requirements to ASIC
• Some large investors / venture capitalists may not want to invest in companies who have raised capital through crowdfunding

How can TWIYO help with Crowd-Sourced Funding?

We describe ourselves as a positive change corporate advisory firm and our aim is to empower visionary business owners and entrepreneurs who are dedicated to building a better world and brighter future. While we offer Virtual CFO and Capital Raise services, we have recently pivoted into supporting crowd-sourced funding campaigns and assisting with offer documents. What makes us unique is our ability to leverage our VCFO capabilities to allow optimal success for our Capital Raise clients (and vice versa). For our VCFO turned CSF clients, this means we have been able to ensure financial statements and forecasts are accurate and readily transformable for CSF requirements (two birds one stone!).

We also have a great relationship with most CSF providers in Australia and are happy to guide you through the entire process and provide valuable insights on how to make your campaign a success.

With the expertise of your CSF intermediary and advisor, your business has access to feedback and guidance throughout the entire process to naturally have the best chance of succeeding.

So far, here are -

A few lessons from advising CSF campaigns

Every campaign is different and every company has different requirements. However, there are a few common themes and lessons we have learned along the way:

Did you know that when proceeding with a CSF raise your company must retire its shareholder’s agreement? In its stead, a Company Constitution is created/updated, which outlines the rights and duties of members, directors, and other relevant company members. Once agreed by each member, and a special resolution gathering all directors is passed, the constitution comes into effect. This is something your appointed corporate lawyer can assist with.

Something we cannot emphasise more… Marketing. Takes. Time. And. Money. As easy as campaign filming and photography may seem, this process can take up to three weeks to complete. And depending on the size of the company, this may take up much of the Founder’s time - especially if they are the star of the campaign selling the product/service. Crowd sourced funded company founder beware! You may even need to recruit film and photography extras for marketing purposes.

Additionally, for companies raising less than $3m, upside is that there is no requirement to provide audited financial statements. Although given the reliance on financial statements by potential investors, financial statements will most likely need to be general purpose financial statements (including comparatives). The caveat to that is once the raise has been completed, it becomes mandatory for companies to lodge their financial statements with ASIC - not needed in an ordinary capital raise. Our Virtual CFO service can assist with disclosure and reporting.

The last lesson we want to share is that the overall process is potentially more time consuming and costly than you might anticipate, and will require much of the founders time, focus and energy. While running a start up is hard enough, be prepared that the raise process will entirely consume you for  not being able to be across all changes or forgetting to update the advisory or legal teams, causing a roadblock for other stakeholders. Therefore it’s imperative that there is active communication of decision making across all relevant parties.

Conclusion

So "to crowdfund or not to crowdfund,” that still remains the question. Sorry to disappoint, but there is no simple answer. We wish we could offer you a one-size-fits all approach, but it has become clear to us that crowd-sourced funding may work for some companies but not for others. You need to weigh up all of the potential benefits and risks and consider speaking to us before diving into a campaign. Be aware of added reporting requirements and additional complexity in managing stakeholders and weigh up your budget to determine whether CSF is right for you.

Now that you and your company are more aware of what crowd sourced funding is and what it entails we encourage you to check out a few CSF intermediaries like Birchal, Equitise, or OnMarket, and if you wish to learn more please feel free to contact us for a chat.