Tracking the highs and lows of capital raising

For the past five years, New Zealand has had the option of equity crowdfunding as a legal form of capital raising. As Simeon Burnett reports, there have been plenty of export businesses that have raised capital over this period, and like any fledgling market, and indeed asset class, there have been both successes and failures.

One of the nation’s fastest growing wine brands, Invivo & Co, was one of the first companies to raise capital through Snowball Effect in 2015. Already in 17 overseas markets, it had eyes on a launch in the United States, as well as to diversify its range of products. Passing its minimum target of NZ$500k, Invivo became the first to raise up to the full NZ$2 million retail investor cap implemented by the Financial Markets Authority.

Using this investment, Invivo expanded considerably, gaining listings with large offshore retailers and increasing export sales by 236 percent over the following three years. Successful branding and marketing, including a collaboration with celebrity Graham Norton, saw Invivo largely fulfil its promises to investors – growing revenue from NZ$3 million in 2015 to NZ$10 million by 2018.

The winery returned for another round of funding in June 2018, raising NZ$1.7 million with a share price approximately two times higher than the original raise. Since then, some investors have realised a cash return through internal company share sales, and the company is on track to hit new revenue and offshore expansion targets.

Renaissance Brewing

With a raise in mid-2014, Renaissance Brewing holds the title of the nation’s first public equity crowdfunding offer, but unfortunately, hasn’t enjoyed the same fortune as other exporting businesses. The award-winning brewery came with a goal of expanding its presence domestically and internationally, and successfully achieved its maximum target of NZ$700k across 300 investors.

However, after facing competitive headwinds from the overall growth of the New Zealand craft beer market, which negatively affected product distribution, the company went into liquidation in late 2017 – and all 300 investors saw the value of their shares wiped down to zero.

Zeffer Cider Co

Coming from humble beginnings, Zeffer Cider Co is another Kiwi success story. With a vision to expand beyond domestic production, particularly into the Asia market, Zeffer raised NZ$1.2 million in early-2017, with shares priced at a dollar. Following this raise, Zeffer met or exceeded all targets initially outlined to investors by mid-2018. It entered China, gained coverage in 35 percent of New Zealand’s supermarkets, and grew its revenue from NZ$1.6 million to over NZ$2.8 million.

Having grown revenue by 70 percent, Zeffer returned for another round in July 2018. It raised NZ$2.4 million, at a valuation of $1.40 per share – a 40 percent increase in value since the original raise. This raise also exceeded the NZ$2 million cap as a result of a strategic investor taking a 10 percent stake in the company. Now, Zeffer exports to over nine countries throughout the Asia-Pacific, Europe and USA, and is on track to grow revenue to NZ$4 million by the end of FY19.

Learnings  

For businesses interested in raising capital, there are some key factors to consider. Companies raising capital for the first time often underestimate the total amount needed, and how long it will last. If the business is going well, it can be very capital hungry, and founders often haven’t experienced this need for capital before.  

Timing is crucial. We’ve seen companies look to raise money too soon, or before it has sufficient market traction, revenue and processes in place to complete a raise. We’ve also seen companies look for funding too late, after growth has stalled or when it’s encountered a cash shortfall. The latter is more dangerous as nothing good comes from acting out of desperation. It’s always better to plan to raise before you ultimately need to. 

Understanding investors’ requirements and concerns when they’re considering opportunities is also key. Founders are often too occupied by daily operations and product development that they lose sight of what appeals to investors. While it’s important to be passionate about your business, founders should also set aside adequate time to focus on the capital raise.

For investors looking to invest in a business, diversification is key to managing risk. It can be tempting to throw spare cash behind one opportunity you like, but this can often create a boom-or-bust return scenario. Investors who build a solid portfolio in private markets have a much better chance of having a positive experience and seeing the asset class contribute to strong overall portfolio returns.

Companies, investors and platforms have had to come to grips with what works, what doesn’t, and the high attrition rate that comes alongside capital raising with early-stage, growing companies. What we know for certain, however, is that any new asset class will ultimately live and die by the returns it generates for investors.

Simeon Burnett (pictured) is co-founder and CEO of Snowball Effect.