Wardy

Andrew Ward is the CEO of 3 Minute Angels Australia’s largest massage company and one of my old fellow members of Entrepreneurs Organisation. +Andrew is actively involved in shaping the debate on Crowdfunding and has created a community website www.csef-Australia.com.au to help stimulate discussion and formulate a submission for the Australian Crowdfunding Legislation review.We all know him as Wardy

The Law of Effective Marketing

Some business laws are like gravity – one of those is The Law Of Effective Marketing. 

This Law states: Effective Marketing = Customer Growth while lifetime value of customer < cost per customer acquisition. 

Right now there are many business models – Apps or platforms of some kind – where this law is being violated and some startup Founders are being rewarded.

As digital marketers and startups weigh up the funds they have at their disposal lifetime customer value and customer acquisition costs a strange anti-gravity effect can be observed – inefficient growth is encouraged. 

This is growth where you are paying more each time to get your next customer or service an existing one. 

Just like the law of gravity the law of effective marketing always works.  But lets explore how this plays out in our day and age.

A start up or possibly two will make the case that they can ‘disrupt’ a market – usually via a platform or app of some kind.

After working out ways via Google or Facebook to reliably get customers.  They start looking for capital.  Finding the traffic, working out what works, hiring people to think – it’s expensive – and a few startups take on funds to continue their growth within a vertical.

A few more ventures start in the same space and they are now also bidding on search terms and digital conversion funnels to generate customers.  Prices rise.  More capital is raised.  Competition ensues.

Now a bunch of startups all aiming at the same space with similar proposition are all trying to out-raise and out-spend each other on customer acquisition.

When you do this you force your competitors to burn through their capital faster than they anticipated and return to their investors without having hit targets on runway time-line or acquisition costs.

Nevertheless the case of the global addressable market is now made.  Investors can smell blood in the water and tip more money in.  The result: bigger investment rounds and more of that is pocketed by Google and Facebook.

(No wonder they themselves are keen investors the money they put in is like a boomerang)

All this while prices for advertising and customer acquisition go up and up.

At some stage some of the ventures begin to sputter.  Their investors lose the ability to easily compete for funds in an ageing space where the half life of the market is weeks not years – some fold, some look for niches to “own” and some try and make themselves acquisition targets.

Normally at this stage usually one or two ventures remain at the top of the pile.  Usually those with the biggest war-chests Uber and Lyft come to mind for car sharing space.

At the bottom of the pile of “also runs” searching for niches, paying more for their next customer and going through their last gasps are the likes of every other car sharing business that hasn’t raised $8bn in funding in 4 years.  Often they (and their investors) don’t even realise these are their last gasps. 

Businesses like Australian in taxi App Ingogo, or car sharing models Car Next Door, Carhood, Go Get might find their niche, be acquired, or somehow return their investors funds, but they can’t win the war.

But it’s just as likely they won’t exist in a couple of years because soon the law of gravity will take effect again for the big couple of remaining players and they will be paying next to nothing to acquires customers or service their existing ones.

These large players in effect, just raised the marketing ineffectiveness to such an extent that like Icarus’s a number of businesses flew too high and must come down.

The few big spenders have bought the market-share, first of mind dominance needed for the global addressable market.  Now their costs per customer acquisition are going to plummet.

They possibly will withdraw some of the incentives they self impose like “share with friends and both get credit” because now all their friends already know.  Why should they take $50 off their earnings?

The dominant remaining platforms do not have to advertise any more.  Instead they spend their time working out how to comply with The Law Of Effective Marketing.

Conclusion

Clearly there are winners in these Icarus-like pursuits but more often than not there are losers. 

If you are not the best-funded or best located for funding (ie Silicon Valley) you must not get sucked up in the violation of The Law Of Effective Marketing.

You must instead look for ways to grow at less cost per customer.  Perhaps this way you will occupy a niche or be worthy of acquisition.  Maybe you can even get your marketing to be cashflow positive (that would be nice). 

Perhaps you’ll create a merchandise, product sample or way of getting a profit-leader instead of a loss-leader.

Do this and you might have a business.

Photo by TheTruthAbout

As promised: The Results of the 3 Minute Angels Crowdfunding Experiment

ED: Who is Andrew Ward? “Wardy” has been an active campaigner about the benefits of Crowdfunding to Government, Treasury and CAMAC as well as a fundraiser for Rare Cancers cutting half his dreadlocks off and wearing a rare cancers T-shirt for a month.  He’s used rewards crowdfunding campaigns to support the creation of an app around healthy venting and has assisted a dozen or more friends with their crowdfunding campaigns.

When he’s not crowdfunding, he is the CEO of 3 Minute Angels, which focuses on short massages for corporate clients, Angel massage that does full body massages and Get Angels Now, which connects customers with nearby spas and therapists.

Ed: I saw a demo of the new Get Angels Now app yesterday and its very cool, think Uber for Massage

The Crowdfunding Experiment

Throughout March, my business, 3 Minute Angels, ran The Divine Truck campaign.  I wrote about its launch after the first week and now want to tell you the final result.  

3MinAngleTruck

The result is that we couldn’t get it to work.  We reached much less than 50% of the total goal despite pledges of over 30% in the first week (a sign usually of a successful campaign).

The longer story has some interesting data that others may find useful too.

Like many others, I have witnessed Business-to-Consumer (B2C) products like Pebble Watch and the Flow Hive using crowdfunding with great success.

I wondered how Business-to-Business (B2B) crowdfunding would work?  And so like anyone with a question of that nature, we ran an experiment to find out the answer.

The thing we wanted to see was could we get fans of one massage product to become funders of another massage product.  Tapping that ability would be like finding a golden-egg laying goose.

Apart from the main experiment we also got to test “self-hosting” and “subscription rewards” with this campaign.

Self Hosting and Subscription Rewards

Self-hosting is bloody brilliant.  We had no issues setting up the Pozible widget, we grew traffic to our own website, we had unique features like Live Chat that were only possible through self-hosting.

We probably got too excited with the flexibility self-hosting gave us and initially had multiple videos and slideshows.  This allowed us to tell a fuller picture (or so we argued) but on mobile it just took an age to load and people were discouraged. 

When we realised that well over 60% of traffic on the campaign was mobile we optimised the campaign page down.  Other pages were clickable from the campaign page and these subsequently could also take pledges.  This feature of adding a pledge widget wherever you need it, seals the deal for self-hosting in my opinion.

Subscription rewards were only offered to businesses not individuals.  The rationale being that we could offer a heavily discounted price to B2B clients that locked in for the long term.  They didn’t take up this reward at all. 

I would caution others about using subscriptions unless the product would normally carry a subscription.  So if you’re setting up a magazine, subscription rewards might work.  If you’re trying to change behaviour then I don’t think they help much.

Why The Campaign Failed

The fundamental flaw for all B2B crowdfunding is the existing B2B purchase and procurement systems.  B2B relationships work on quotes, job orders, invoices, service level agreements and such.  Businesses who want to support you aren’t setup to deal with pledges.  We had a number of business opportunities come up where clients said they would like to support but just couldn’t work out internally how to do it.

You could argue that The Divine Truck failed and should therefore be canned (I certainly did argue this point before the campaign).  However, we feel comfortable that there is now a market for the capacities of The Divine Truck at events and promotions should we go on to create it (without the crowd).

Local radio stations often use short massages as brand activation for clients wanting to pamper their audience during a live event. Because of issues making a pledge they could not support the campaign, but would buy the truck as an activation space plus Angels service if we offered this in the future.  A similar and recurring message of support (if The Divine Truck actually existed) happened over and over again.

We failed a fundamental marketing objective of the campaign and instead of enforcing one message we managed to send mixed messages.

A friend, Lucy Campbell (who recently crowdfunded her performance of Hilary Clinton’s life story (so far) in New York), says it better than I could.  “Wardy it’s a bloody fantastic idea, but it is a mixed message putting it to people to see if they think it’s a good idea and takes the excitement out of it for me – I’m already in and then feel it a bit luke warm with you not being in your conviction – it’s a stellar idea – happy to chat further or tell me to pull my head in. I’m all for this divine truck – what a kickass vision you have xxxx”…

What Lucy is saying is that we have to be as excited and committed to the idea as we are asking our customers to be.

PR came to The Divine Truck idea easier than to other initiatives that we have launched using the ‘Angels’ brand.  During the course of the campaign we got features in the BBC, AdNews, Spa+Clinic and other smaller publications including a Japanese language newspaper.  I guess if you are reading this it’s still working on a PR front.

Despite the PR support our overall statistics dived after the first week.  In the first week we received >80% of the total pledges we would end up getting.  We could probably have pushed harder in weeks 2, 3 and 4, but by then we understood the issue with procurement processes and pledge all to well and took our foot off the accelerator.

The Results

In the end we had the following results

  • 600+ video plays of various campaign videos
  • 50 Supporters
  • 75% of the pledges were only $1
  • 140 Facebook shares

As a final assessment, I would say it’s too hard for most businesses to try B2B crowdfunding until or unless you know your pledges can be met through client purchase policies. 

Even then it may not be a great idea.

Thank You

To all of you that pledged, shared or read about our campaign during the last month – thank you.

Building Up.  Australia’s Emerging Real Estate Crowdfunding Platforms

Australia is set to see a number of new startups that are applying Crowdfunding technology to real estate assets, Australian’s love our real estate so its easy to see why these startups each potentially have a bright future.

Unlike a lot of new startups one of the keys features of this group is the pedigree and financial backing that the executive teams have behind them.

BrickX

Behind BrickX is Markus Kahlbetzer and Darren Patterson.  The Kahlbetzer Family is one of Australia’s wealthiest (of Twynam and Polo fame). The concept was born in the highly regarded Tank Stream Labs. Kahlbetzer is a private equity partner in Tank Stream Ventures along with the likes of Tim Fung (of Airtasker fame).

TankStream

BrickX is a wholly owned subsidiary of the Bridge Lane Group, a private equity investment company. Bridge Lane Group holds an Australian Financial Services License (AFSL) via Bridge Lane Asset Management Limited (BAML) and allows wholesale investors to purchase units or “Bricks” in residential property through its Appointee, “BrickX”.

(See what I mean about not your standard corporate setup… )

Whilst the corporate structure isn’t simple the offer is incredibly straight forward.  Each “brick” is a ten thousandth (1/10,000) of the property value and entitles the brick owner to the rental income and capital growth.

The properties are selected and managed by BrickX.  Selection criteria is tightly focused on high yielding growth suburbs in Sydney and Melbourne.  All are either modern studio, 1 or 2 bedroom units that don’t need refurbishment to attract good rental and tenancy conditions for the owners.  Management on behalf of investors includes taking care of legals, stamp duty, tenancy issues.

Investors simply get a monthly return, which is higher than bank interest and the potential capital growth.  The capital growth can be realised by the sale of an individual Brick to other investors or when BrickX determines a capital event would be advisable for the whole property.

BrickX is a platform that enables crowds to enter into the Australian residential property market.  It’s low price point on entrance ($66 for a brick in some cases) and frictionless.   As a way for investors to get into residential property, it has a lot going for it.

BrickX internal rules prevent it buying bricks back from investors and no investor can hold more than 500 or 5% of the bricks in any one property.  This certainly gives ample space for a diversified crowd, but it is not clear if these rules will help or hinder liquidity of the bricks within their trading platform.  It’s just too early to tell.

Which brings me to the opportunity for BrickX…  The investors they can currently service must satisfy the Wholesale Investor requirement of $2.5m in assets and these people would most likely be directly involved with property already and wouldn’t necessarily see the same benefits a retail investor.

When BrickX can make a retail offer alongside the wholesale offer they will attract a much larger crowd. This crowd will see an attractive way to get the benefits of residential property investing without having the high barrier of entry usually required by a deposit.  BrickX is a really smart move in this context as both Sydney and Melbourne become increasingly expensive for first time property investors.

Icon Park

Behind Icon Park is Dean McEvoy who successfully exited Spreets to Yahoo for ~$40m.

Icon Park- Paul-Dean

Paul Schell & Dean McEvoy

 

He’s paired up with hospitality guru Paul Schell and some ex-Yahoo talent to build their product.  The skillsets of this team would be the envy of most startups.

iconpark

 

Icon Park has taken another view of the way the crowd can be used to increase property returns.  The novel way they mix the crowd with real estate investing is suitable not just in Australia but internationally.

So how does Icon Park work?  Icon Park looks for hospitality space where food and beverage leases (preferably licensed premises) are coming up for vacancy.   Rather than having the crowd invest directly in the property they are creating a way for the crowd to invest in the type of hospitality concept they would support with patronage.

This partly capitalises the operators and de-risks them as a tenant for the property.  The property owner then benefits from a sustainable tenant and higher future rental yields should be expected.

In their Australian debut property they had 6 concepts create crowdfunding campaigns for their own pop-up concept and bring separate crowds to the platform.  As the first concept reached its target it got the first 3-month operating season.  After the season, the pop-up concept moves to their own “fully fledged” location with full ownership of their brand and idea, established clientele and PR-worthy story.  The subsequent ideas have then take up their 3-month seasons.  New operators with new concepts list each day for this one location.

Hospitality is a generally a “hit and miss” affair.  Even the best operators have had occasional flops – with the wrong location or offering.  With staffing, perishable goods and strong competition for customers, food and beverage hospitality can be a tough business model.  Icon Park raised over $280000 in 21 days from customers willing to put their money where their mouth wanted to be.  This was largest global raise of its type.  Icon Park is a test-bed for smart hospitality operators with novel ideas.

Properties that may be suitable are increasingly coming up in places where late night licensing laws have caused a glut i.e Kings Cross, Oxford Street.  Commercial property owners and leasing agents are looking for ways to maintain and lift performance on these assets.  By and large they are keen to get creative and see Icon Park as a de-risking strategy.

Whilst Sydney and Australia is the “home” market for Icon Park similar market conditions exist (although not for late night lockout reasons) in the US, UK, Europe and parts of China.  McEvoy and partners are acutely aware of this and want to carve a niche in the real estate industry, crowdfunding and hospitality crossover. 

If they get it right they will carve a niche in the property market where the most highest rates per meter are achieved of any property niche.

CrowdFundUp

In front of CrowdFundUp is the charismatic corporate lawyer, Jack Quigley.  Behind CrowdFundUp is various investors and importantly BDO Australia.

CrowdfundUP - Team Photo

Derek Barlow, Jack Quigley, Marc Sputore

BDO is a “second tier” verging on “first tier” accounting firm with an international presence and capacity to help fill both investors and developers into the CrowdFundUp platform. 

CrowdFundUp have launched with real estate crowdfunding, but they are keen to involve themselves with equity crowdfunding and debt crowdfunding when CSEF legislation is enacted in Australia (slated for Sept-Nov 2015). 

Crowdfundup

CrowdFundUp have commenced within the framework that ASSOB has been using for 14 years. Legislation that allows CrowdFundUp and ASSOB to operate is an exemption of the Corporations Act, which allows compliant platforms to operate as a business introduction and matching service.  The big step CrowdFundUp has made is to make entirely digital and relatively frictionless for the commercial exchange.

Previously people had to exchange letters of interest, offer documents and other formal notices for the transaction in a “snail mail” environment.

Commercial property developers are the first real estate market that CrowdFundUp have partnered with to help them finance developments with the crowd.  These developments can attract funding from investors who put in as little as $100.  The first property developer Megara has raised $145,000 in the first few days of being listed.

CrowdFundUp unlike many platforms is not limited only to sophisticated investors.  Retail Investors can get involved too. Retail Investors typically can’t get access to commercial property deals (that typically outperform residential property) because of the capital entry level is often larger.

CrowdFundUp with their digital platform and ability to engage retail investors are the first-mover to offer the whole crowd an opportunity for real estate crowdfunding.  Though they will not be alone for long.

What Next

None of these teams lack experience or sophistication, all of them have a long-term vision (Ed: plus a busload of cash), which will take them well down the runway before losing any steam.

They’ll need every bit of their respective nous in order to get off the ground in a big way. Aside from the commercial skills every startup needs, they’re all operating in Australia which hasn’t settled on equity crowdfunding legislation, which was necessary in international jurisdictions before real estate crowdfunding took off there. 

Despite an unknown future regulatory system and the fact that others will be watching to see how it develops all these businesses are operating right now.

The next six months will probably see massive improvement and clarity in the real estate crowdfunding space.  In part because now investors, platforms and issuers will start getting real-world experience and in part because clear CSEF legislation should develop.

Overseas real estate crowdfunding has been one of the more successful applications within the crowdfunding space, you can expect similar results in Australia.

Business to Business Crowdfunding: Does It Work?

Wardy ED: Who is Andrew Ward? “Wardy” has been an active campaigner about the benefits of Crowdfunding to Government, Treasury and CAMAC as well as a fundraiser for Rare Cancers cutting half his dreadlocks off and wearing a rare cancers T-shirt for a month.  He’s used rewards crowdfunding campaigns to support the creation of an app around healthy venting and has assisted a dozen or more friends with their crowdfunding campaigns.

When he’s not crowdfunding, he is the CEO of 3 Minute Angels, which focuses on short massages for corporate clients, Angel massage that does full body massages and Get Angels Now, which connects customers with nearby spas and therapists.

Can Any Business Use Crowdfunding?

Nowadays the short-hand for reward crowdfunding is: Kickstarter.

Platforms like Kickstarter and Indigogo have helped many people with passion, talent or a worthy causes raise much needed funds for their project. 

Companies producing a cool business to consumer products like Flow, Pebble Watch  or Coolest Cooler use crowdfunding as a first port of call when getting off the ground.

However, more traditional, already established SME’s (Small and Medium Sized Businesses) by and large have steered away from these sites because unless the organization is a not-for-profit, most backers would rather see commercial ventures look after themselves.

Businesses that have other businesses as customers face increased issues because crowdfunding is pledges and rewards not purchase orders, quotes, accepted terms and service level agreements.  Businesses crowdfunding from other businesses is a virgin area.

The Divine Truck – Mobile Massage Experiment

So, I’m running an experiment with one of my own businesses in the massage industry, 3 Minute Angels, to see what I can learn firsthand. We are launching the Divine Truck  crowdfunding campaign, a mobile massage platform for festival, community events, school fund raisers and corporate events.

To see if rewards crowdfunding can be used as a pre-sales tool.  I’m hopeful I’ll find a way of validating ideas, reducing risk and engaging customers all at once with the result being a continued successful business.

 

Allow me to give you some details and back-story for context.  My goal is to take fans of my current products and have them be funders of the next.  However, I realize that only a small portion of people will back a project compared with the number who look at it.  So for most of the communication I need to treat this as a marketing activity.

As with any marketing activity you have to know your target market and in this case my target is my existing customers, their staff and various fans of massage.  For all of these people I have access to them via email and most of them via social media.   Simply put, they already are familiar with my brand.  Attracting people outside of this core would be nice, but not essential.

Knowing who your target market is makes self-hosting an attractive option.  The theory I’m working with is that when crowdfunding to your previous customers who you have a relationship with, you will have an easier time getting them onto your own site than a crowdfunding platform that they may or may not have heard of. 

Self Hosting

Self-hosting is an appealing product for SME businesses but apart from Pozible, it’s hard to find many platforms that offer self-hosting for raisers.

As a business with a crowdfunding campaign on your own site you have a greater degree of flexibility with how you present your campaign.  You can for instance have “live chat”, multiple video rich presentations, marketing opt-ins to other products and complete control of look and feel.  This just simply isn’t possible for crowdfunding platforms to provide on their site, but is made possible through self-hosting.

Live Chat within your own website allows you to handle any confusion your customer has about the campaign, offer or reward they are investigating.  By offering a solution right there and then you can increase conversion rates of interest to pledge. 

In our case it has been really interesting watching people who come in on the crowdfunding campaign links but then go to our event and corporate offerings to check them out.  It’s only been a week so statistics on broader sales increase are not yet sound, but by month end we should know if this has had an impact (or not) on existing product sales.

There is very little technical know-how required to do self-hosting.  The method for doing it is simply to create a campaign goal timeline, rewards, and parameters as you would normally.  We chose Pozible over others because of the subscription rewards feature.  With Pozible you simply imbed code and paste into your own page.   Simple.

Rewards

Rewards are central to a traditional crowdfunding campaign and so far they are proving as important when a business is making the offering to its network. 

For example, 3 Minute Angels is a massage “supplier” to larger businesses that have lots of staff.  The purchase decision is from a “key contact” who is not going to experience most of the product.  This contrasts with most people’s idea of massage where they pay a therapist or a spa for a personal massage service that they receive. 

Another portion of our database are previous full body massage clients.  These are people that have worked with our Angel Massage business.  They have usually purchased the massage for themselves or for a loved one.

As such, we have segmented the rewards in our campaign so that there is appeal for Businesses and Consumers within the campaign.

For B2C crowdfunding campaigns the most frequent reward value on Pozible is $50.  We have rewards priced at $1, $50, $75, $200/week and $500.  I’ll discuss the $200 week reward soon when covering subscription rewards.

What we have already noticed from the first week of pledges is that the B2C rewards, where pledgers get a personal massage are weaker than expected and the strongest reward category is actually $500.  The $500 reward is probably attractive because it’s a reward that saves the client at least $1000 if they were to buy later.

However, it’s noteworthy that the B2B price point is working at 10x the price point of the B2C prince point.

Pre-Selling and Subscriptions

Inherently we understand that crowdfunding is actually a pre-sales tool and a research tool that enables you to work out if this is a business idea worth pursuing.  This is more valuable often than the money raised.

I can’t talk with experience about other platforms, but with Pozible self-hosting you can pre-sell  “subscription rewards”.  The nominal value of a subscription reward is usually less than your normal retail prices would be, which encourages clients to pledge now, but also be subscribed to pledge again (weekly monthly or annually). 

The subscription rewards are great in theory because you can offset the margin with regularity right up front.  In practice, despite the savings offered in this reward type, it hasn’t yet been taken up.  It’s too early to call but perhaps business 2 business subscription crowdfunding is a bridge too far.

It’s simple to install subscription rewards when setting up your campaign.  All you need is a Stripe account and then your recurring payment collection is setup when the Reward is first established.  Clients would be required to setup a Stripe account too.

Risk and Margins

Bringing together a new product with your fans-as-funders is an incredibly exciting relationship building exercise.  It is not unreasonable to expect such an activity to give you long lasting brand value well after the campaign is finished.  Of course, there could be downside risks too.

As we have seen in many cases with B2C crowdfunding on novel gadgets when a person with an idea gets a lot of pre-sales and money they then have the issue with delivering what they sold.  Just think of the issues Tile went through delivering their rewards (finally).  For more Crowdfunding Fails see this Gizmodo article

You should also consider these sales in light of your reduced margin.  Whilst you want enough of these sales to validate the idea and spearhead growth.  You don’t want to commit your next 6-months of capacity to zero margin business unless this is a planned event.

As a business organization you should at the very least be able to deliver the rewards that are promised.  If you don’t, the “crowd” (i.e your customers) may go from supporters to being an angry mob. 

When Will The Experiment Finish

Right now it’s a week into the 3 Minute Angels Divine Truck campaign.  We’re sitting just under 40% of the funding goal achieved.  We have a second round of communications to our database coming up this week and think we may end up with some PR.

At the end of the month we will be closing the campaign – perhaps we will have hit our funding target and will be on the road to building a new product.  Or potentially we will have fallen short or smashed the target. 

I honestly do not know…

However my promise to you is to let you know how it goes.

If you have any enquiries contact andrew@3minuteangels.com

To see the campaign www.3minuteangels.com/the-divine-truck

Australia’s Emerging Crowd Sourced Equity Funding Marketplace

The development of a Crowd Sourced Equity Funding Marketplace will come down to how you and other participants and the regulators view it, you could see CSEF as an Asset Class, Marketplace or Punt.

Word on the street is that Equity Crowdfunding legislation will be introduced to parliament in the Spring Session (September – November) and not as first thought in the June July Session.

This has set tongues wagging in the scene as Platforms (aka Intermediaries) ponder the shape this legislation will take and how it will affect them in connecting Issuers and Investors.

There seems to be irreconcilable differences between those who believe that the Intermediaries role should be minimal and those who believe the Intermediaries can not only enforce regulations but offer increased value by qualitatively assessing early stage companies.

Market enthusiasts want to reduce friction in the marketplace by placing the responsibility for what Issuers provide to Investors solely with the Issuers and believe Investors should be responsible with and for their own investments.

At the other end of the spectrum, there are market commentators suggesting that Investors in CSEF be required to complete a short course provided by Registered Training Organisations before being able to invest. ED: What a joke the nanny state has become, but sadly you could imagine this actually happening.

This would be an extra requirement levied on CSEF investing that is not applicable to any other equity class and the market enthusiasts find this sort of idea repulsive.

Clearly not everyone will be happy with what the framework is when it does get introduced.

You might think after reading the above that nothing therefore very interesting was happening in the Australian CSEF scene.

Well that’s not correct.

One of the interesting things that has evolved through not having specific legislation is the spectrum of ways in which Intermediaries are making it possible for Investors and Issuers to engage in Crowd Sourced Equity Funding.

Platforms have adopted and adapted to meet areas they think will be fertile even in the absence of CSEF legislation.

Offer Boards

The Australian Small Scale Offer Board was established 12 years ago and has seen funding of $140m go to over 200 companies in this time.  This platform has operated according to an exemption in the Corporations Act that allows business matching services.  Recently CrowdFundUp and TMEffect have launched platforms operating within the same exemption as ASSOB.

www.Assob.com.au

assob-funded

www.TMEffect.com

Deal Types

CrowdFundUp differentiate themselves by having a focus on Real Estate Crowdfunding.

Real Estate Crowdfunding has proven to have commercial traction overseas and so with the appetite for real estate investing in Australia this platform may find itself well positioned.

www.CrowdFundUp.com

Crowdfundup

 

Small Raises

Lite Raise – The Capital Exchange and ASSOB have teamed up to produce a DIY set of workbooks, guidelines, courses and of course the legal framework that would allow anyone to handle and manage a raise of upto $100,000.  The cost is $495 and is backed by a 60-day guarantee and returns policy.

This strategy clearly looks to a minimal role of the Platform and puts the responsibility for what is presented onto the person looking to raise funds to present compelling and accurate information.

The Lite Raise is aimed at competent, time-rich, cash poor entrepreneurs.

Neighbourly Support Bro

This week saw Equitise commence trading on its platform (based in NZ).  Investors can invest from Australia but Issuers must be  incorporated in New Zealand.

EQUITISE

Much like an Offer Board the deals are assisted, particularly at this early stage of the platforms life, with preparing the Issuer for making compliant statements to regulators and compelling statements to Investors.

New Zealand has placed a lot of responsibility on Platforms to conduct due diligence through a licensing regime of the Platforms.  The “headstart” Equitise (an Aussie company at heart) has should bode well for its future when legislation for CSEF goes ahead in Australia as it is likely to be modelled in part on the New Zealand framework.

Within the NZ framework the role of the Platform is to make sure market players like the Issuer (business trying to raise funds) is compliant.

Equitise has no stake in the first company listing on their platform however New Zealand regulation allows them to take shares in Issues on their platform so long as this information is disclosed to Investors.

Equitise is hoping to be the CSEF destination for the majority of the market

www.Equitise.co.nz and www.Equitise.com.au

The New VC Model

FatHen

FatHen has a model operating under a completely different system.  They have an Unlisted Public company which attracts money from retail investors and puts it directly into hand-picked deals.  This model is called Crowd Backed Venture Capital.

Retail investors can invest as little as $100 and get a stake (albeit indirectly in crowd funded businesses).  Issuers on the other hand must meet stricter requirements and are reporting back to FatHen instead of the individuals in the crowd.  FatHen takes care of all the compliance and administration, due diligence and legal work on behalf of Investors.

Investors can direct their investment to a single company or opportunity listed by FatHen or the FatHen portfolio of companies.

This value proposition aims squarely at the cash-rich, time-poor profossionals who would likely look to diversify their portfolio by becoming investors in CSEF.

www.FatHen.vc

The Rabbit Hole

The degree of thinking and engagement in CSEF already out there is really exciting.  However, this could be just the tip of the iceberg.

There are other players in the market who are yet to show there cards.  Venture Crowd for one has access to great deal flow and may move their offering in time from Sophisticated Investors only to Retail Investors.

Pozible may bring with them a game changing database of successful crowdfunders from the rewards space that the other platforms are only just starting to cultivate.

Industry specific, regional or self-hosted formats of CSEF may also emerge.  One thing that is sure to emerge is plenty of options for Investors and more options for Australian Entrepreneurs and that has to be a good thing.

Crowdfunding – A request to Australian Startups & Interested Parties

A request from the Crowdfunding Institute of Australia to Startup88 readers.
Our Editor (Mike) has been really solid on presenting startups that solve real problems.  This tends to provide a better quality of article for you, our readers.
High quality content is only possible if we have a healthy startup ecosystem.
The health of the ecosystem has been changing with the relative merits of starting overseas attracting many startups away from the Australian scene.
As many of you would know Australia lags behind the world in many respects because of our skew towards natural resources.
This skew has seen us remove match funding and tax incentives in the commercialisation area.
Australia lacks Crowd Sourced Equity Funding (CSEF) legislation and givernment will, when most of our trading partners are implementing the power of the fan, follower and friend to support startups.
But it is not all doom and gloom and there is something you can contribute.  Take 15 minutes now to complete a survey on behalf of the Crowd Funding Institute of Australia.
By completing this survey you will contribute to an anonymous dataset that will be inform Treasury by early February – of the appetite (or lack of) – for CSEF in Australia.
It sincerely my hope that you will find time to make your voice heard on this very important issue.
I’m reliably informed that in “policy world” every complete survey we get is somehow magically transformed to determining how many votes this issue could account for in a coming election.
So, please take the time to fill out the survey and help shape the CSEF debate in Australia.
Thanks
Wardy & Mike

 

Equity Crowdfunding – An Asset Class, A Marketplace or A Punt?

Recently I chaired a meeting of people within the Australian startup scene and Crowd Sourced Equity Funding (CSEF) industry.  What occurred to me after this meeting is that we collectively have assumed CSEF is the start of a new asset class and are preparing frameworks accordingly.

But perhaps, CSEF is not an asset at all? 

Perhaps the framework needs to consider removing legislation not adding to it?

Perhaps we should just get on with gambling since that is what we do best anyways.

Is Crowd Sourced Equity Funding a new type of asset class?

If it is, logic prevails that it needs to be regulated and intermediated to make sure players behavior is codified to prevent fraud or investors being preyed on.

What sort of framework would you want for CSEF if looking through this lens? Well probably you’d want a regime that exists within the Corporations Act.

You’d want licensed intermediary to collect information and enforce standards, caps, and compliance costs on behalf of the regulator. 

You’d want Intermediaries to fit into AFSL regimes and do due diligence on listings.  (Never mind that due dililigence at such an early stage is practically impossible).

You’d calculate things like the relative costs of frameworks and the cost of legislative burdens on different players in the market.

In short, if you view CSEF as an asset class you’re going to erect barriers to creating an efficient marketplace.

Is Crowd Sourced Equity Funding a marketplace?

With CSEF the best businesses are vying for money to establish or grow.   Only the best should attract investment and ideas not worth funding will be left on the vine to wither and die.

Any investor based on the merit of the business they are assessing, can invest what they determine is the best investment for them. 

Under the existing regime only Sophisticated Investors get access to early stage startups that are growing and likely to break out, small investors miss out. The advantage of CSEF is that these deals could be available to the wider public.

Customer generated ratings and the “social contracts” that are created when the person raising funds says: “I’ll keep you in the loop” – and then does – are promoted with crowdfunding.

The market creates transparency and trust between buyer and seller.  Players in the market have equal access to information.

If you accept this type of view where CSEF is a marketplace then the legislative framework has to be completely different. 

A functional market would reduce the friction between buyers and sellers and amplify transparency.  Central ideas like issuer-liable, platform-neutral, buyer-beware and low-regulation would be at its core.

In fact, you’d probably start by removing legislation from the Corporations’ Act, like the one restricting Pty Ltd companies to no more than 50 people. 

Or the “20/12” and “non-solicitation” clauses.

Yes, just by removing those 3 clauses and putting private companies on the same footing as public ones when raising capital, you’d have 90% of what you need for effective CSEF to emerge.

As a side effect you may need less lawyers.

Do you bet?

Starting a business is a gamble,  there is no certainty. 

It’s true, when a business of any sort starts the owners expect it to succeed (why else would you start) yet most businesses fail. 

The truth is you don’t know when starting a business how it will go, but according to statistics you’re likely to fail.

Starting a business is inherently risky. 

Yet some businesses succeed and go from nothing to multibillion-dollar ventures in just a few short years.  Some people claim there is a skill to picking these winners and become VC’s.

Yet the ugly truth is this: VC’s across the world for the last 30 years have had negative returns.  VC’s don’t make money investing in new companies and they have years of experience and even occasional wins under their belt.

ED: VCs are somewhat similar to the companies they invest in, only a small portion create outstanding returns, the rest will only return capital or worse.

Once, you accept the inherent risk of starting a business then you have to logically accept that CSEF is a form of gambling. 

If you view CSEF through a gambling legislative framework then you would no longer be talking about changes or additions to the Corporations Act.  You would not be talking about governance and regulation.

If CSEF were treated like gambling (which it could be argued is true) then you would be talking about taxation, social flow-ons and harm minimisation. 

Government would be talking about revenue collection opportunities not regulatory burden costs.

You would be encouraged in Australia to add to an already thriving gambling industry.  Assuming the prevalence of gambling in Australia you may be given great license terms and land packages from your state government to kick start your ventures.  Just like they do for the casino and horse racing industries!

Australia it seems despite our love of gambling doesn’t want to admit CSEF is just that, a gamble, a risk, another likely way to lose your money.

Should we treat CSEF like Gambling?

Right now, Treasury on behalf of us all is contemplating a legislative framework for CSEF in Australia.   Having not done anything for two years they’ll be in a hurry to get something done by June 30 this year. 

This will make novel frameworks or ones that seek to put the emphasis on the consumer / investor, unlikely.

I’m pretty sure that CSEF like any private investment is a punt, but I’m absolutely convinced it needs to be a marketplace.

Instead of treating it like a traditional equity investment, treating it like gambling offers a chance of less regulation, stronger market forces and greater community involvement. 

CSEF legislation will almost certainly be introduced as a framework around a new asset class.  It will come complete with all the market-limiting factors, regulations and barriers to participation required to ensure it won’t live up to its potential. 

It will work, but I predict it will be a dysfunctional marketplace, the Government will proclaim they have addressed the issue but the startups will hit the barriers very quickly and realise they still need to go to the USA or work with US based VCs.

In its current form Australia’s proposed Crowdfunding Legislation and its limits of $10,000 per non sophisticated investor per year and maximum of $2500 per company per investor could not create an marketplace like Angellist.co instead it will be a watered down version of the ideal marketplace it could be.

ED: The Feature image is a screenshot from an Angellist.co campaign for Happy Inspector, an Australian graduate of Sydney based Incubator Startmate. While Happy Inspector raised a few small Seed rounds in Australia, they have gone onto the US based Angellist to continue their fundraising from US Based Angels and other investors including 500 Startups. Right now its not clear if they are actively fundraising but the site notes they have accepted an investment in Jan 2015, this type of market place just wont exist under the proposed legislation.

Balancing Consumer Protection And The Benefits of Equity Crowdfunding

Ed: Andrew “Wardy” Ward a regular contributor to Startup88 has been pushing Australia’s regulators to adopt Equity Crowdfunding for over two years, has made numerous submissions to CAMAC and regularly arranges roundtables to discuss crowdfunding.

Yesterday he sat down with Dean McEvoy, Chris Clark from Fusesport, Robert Knight from Allens and Rachel Bui from Muru-D to discuss the recommendations.

After 2 years of consultation, first via the Corporate and Markets Advisory Commission (CAMAC) and now via Treasury it looks like Crowd Sourced Equity Funding is set to introduced to Australia in time for the new financial year.

 

The two policy options that Treasury are considering would cap the amount raised to within $2 million dollars within any 12-month period.

The legislative framework option is to copy New Zealand, which has had legislation running since April 2014.  The second option is to adopt the recommendations made by CAMAC in June 2014 shortly before being wound up as part of budget cuts.

These frameworks share a lot in common including putting the gatekeeper role squarely in the hands of the Intermediaries. 

Intermediaries will be web-based platforms given a License from the Regulator.  In Australia they would also hold an AFSL.  Intermediaries at the very early stage of a business must conduct due diligence and enforce investor caps if these end up being part of the policy mix.

As with any new financial product available to retail investors getting the balance between regulatory requirements and low-cost participation is causing most of the tension.

The industry clearly sees the need to keep unethical or dodgy listings from defrauding the investors but suggests that investors must also maintain a ‘buyer beware’ mentality as investing in business equity is inherently risky. 

Government caps on investors or issuers is unlikely to make anyone happy. 

The industry feels that the wisdom of the crowd, which has proven exceptionally good within the rewards crowdfunding space at weeding out fraud would also be effective at policing equity crowd funding. (Ed: Not sure I 100% agree with this, there have been some shockers recently in US particularly hardware devices which just don’t seem to turn up or are clearly not deliverable)

Low rates of fraud in overseas markets that have been operating for some years is usually attributed to the time, expense and complexity of creating, marketing and managing a campaign.  Con artists would probably look for easier less public ways to make money.

Treasury must determine the balance between investor protection and market economics playing out. 

In the end they can only guess and should probably take a mix from the CAMAC framework and the New Zealand framework so that we don’t go a further 12 months or more without analogous legislation to our trading partners like the UK, United States and New Zealand.

Below are listed the key differences between the CAMAC and New Zealand frameworks. 

CAMAC recommends the creation of a new corporate form an “exempt public company”.   This form is exempt from regulatory burdens like audits and annual meetings unless the business “graduates” by crossing a capital or revenue threshold.  New Zealand does not distinguish between public and proprietary limited companies the way Australia does and so CSEF legislation is open to all existing businesses with reporting increasing with size.

CAMAC limits fees and excludes equity participation for Intermediaries in Issues that are advertised on their platform, New Zealand does not.

CAMAC requires all Intermediaries to hold an AFSL.  New Zealand doesn’t specify this requirement.

New Zealand has no investor caps leaving the retail investor to decide their own risk profile.  New Zealand makes disclosure documents a requirement of all companies whilst CAMAC proposes template-driven generic warnings.

To see the full treasury discussion paper

http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2014/Crowd%20Sourced%20Equity%20Funding/Downloads/PDF/CSEF%20Discussion%20Paper.ashx

Want to contribute to the CSEF Discussion in Australia?

There is currently a national survey underway to respond to the CSEF discussion paper – co-ordinated by the Crowd Funding Institute of Australia (CFIA).

http://goo.gl/forms/kqei3dpaEX

An amalgamated anonymous dataset to help inform responses will be created.

You can find out more here

The Website:  www.cfinstitute.org

LinkedIn: http://www.linkedin.com/groups/Crowd-Funding-Institute-Australia-6790118