Winging it with crowdfunding

The old and the new went head-to-head at the recent Angel Summit, as equity crowdfunding took to the platform to sell its case to more traditional start-up investors.

By Lesley Springall

Internationally-known Scottish angel investor and angel fund manager Nelson Gray has travelled the world discussing best practice in early stage investment, to help encourage more business people to dig deep, don wings and take the early stage investment plunge.

But the 2015 winner of the prestigious Queen’s Award for Enterprise Promotion says he’s yet to find one single experienced angel investor who’d put money into an equity crowdfunded enterprise.

“There is no validation of the valuation. There’s nobody helping the company understand how much money they should raise and what they should spend it on. And a big issue is these companies end up with a shareholder base of three, four, five hundred people – thousands in some cases – so how do you herd all those cats? How are you going to get 500 people to agree to the terms that you’re going to offer them? [Experienced angels] are just not going to do that.”

Citing a recent University of St. Andrews study, Harnessing the Crowd: The Demand-Side Dynamics of Equity Crowdfunding in Nascent Entrepreneurial Ventures, Gray says equity crowdfunded-company founders were attracted to equity crowdfunding because they know they get a higher valuation, with less strings attached from the less-investment-savvy general public.

For a high-growth, cash-hungry company, this can be a big mistake in the longer term, says Gray. “You can have a moral debate about whether widows and orphans are going to get ripped off because they don’t understand the risks, but that’s a completely separate matter. What is more important is if you are a genuine high-growth business, if you’re in life sciences or technology that’s going to need $5 million to get to the US, you have to think about your follow-on funding.”

Currently angels do get involved in crowdfunding, both the more traditional non-equity or donation route offered by the likes of Kickstarter and the far newer and more controversial equity route. But this tends to be only when angels have taken the lead in an investment and either want to top up an investment round, gain wider public exposure for their company or test out the public’s appetite for their investee company’s new technology.

Kiwi angel investor Marcel van den Assum, who heads up the NZ Angel Association and thus hosted Gray at the Annual Summit in Queenstown towards the end of 2015, says there’s definitely a place for crowdfunding in rounding out angel deals, but agrees there’s less to support the relationship the other way around.

“Crowdfunding businesses are businesses, so they have to be very careful they don’t compromise the integrity of the decision around the company [looking for capital] with their own desire or need to meet their operational KPIs, which could suggest a higher risk could be taken. I’m not saying that has happened, but certainly the opportunity is there for that to happen.”

Investment banker David Wallace, who’s a director of the New Zealand version of UK equity crowdfunding firm Crowdcube, says for him it’s all about what’s best for the company. And that could be the traditional investment bank route, the angel investment route, CrowdCube NZ or indeed something else, depending on what type of company it is and what stage the company is at.

Attracting smart investors
Josh Daniel, co-founder of home-grown Kiwi equity crowdfunding platform Snowball Effect, which currently has more than 70 percent of the equity crowdfunding market in New Zealand, says it wouldn’t be in Snowball Effect’s interest not to give the best advice they can to the companies who approach them.

“We are building an audience of smart investors. To attract that audience we need quality deal flow and to get quality deal flow we need to show quality companies that if they come with us they have a good chance of success.”

He says in general Snowball Effect prefers to take on companies that have a few runs on the board, have already attracted some investment and, ideally, have an independent director or two on the board to give the wider investor market confidence and some assurance that there’s someone else looking after their investment for them – adding that he “often” refers companies to angel investment groups first rather than taking them down the equity crowdfunding route.

Daniel does, however, dismiss angel concerns about investing in already equity crowdfunded companies, saying his firm advises companies to think of the longer term and if they are going to need more capital. If they are, they can easily structure shareholding agreements and governance documents in a way that will make it easy to attract strategic groups of investors at a later stage, he says.

Equity crowdfunding companies, like Snowball Effect, are also about more than just public offers, says Daniel. They can do private offers, where distinct types or numbers of shareholders are targeted, as well as wholesale investment offers to support, say, larger investment banking offers.

“So it’s a distribution platform as well as being a licensed platform to offer shares to retail investors.”