How can companies raise equity capital?

Private Equity Funding versus Equity Crowdfunding

Equity Crowdfunding allows companies to raise capital and promote their business at the same time. With so many great businesses out there in the marketplace, it’s frustrating to learn that most small to medium businesses never get access to the funding they need to grow, become more successful and reach their full potential.

The federal government has recognised that there is a massive capital void for privately held businesses, so in an effort to generate investment and growth in the economy, they have opened up the investor market by introducing a beautiful piece of legislation; Crowd-Sourced Funding (CSF), also known as Equity Crowdfunding.

This allows small to medium businesses raise funds from a much larger number of investors than ever previously allowed, including retail investors and SMSF trustees.     

Using the services of a licensed intermediary platform (must have an Australian Financial Service Licence), businesses can now seek to raise capital up to $5m per year and investors can now access an array of unlisted opportunities, which wasn’t previously allowed.

Let’s deep dive into the value of CSF using an example of how FUNDSITION views this opportunity for an company.

A business manufactures compression garments, they want to increase sales and expand the range:   

  • Revenue = $12 million
  • EBITDA = $1.2 million – Profit
  • Valuation = $3.6 million (3x)

The business is pursuing an aggressive growth strategy as they have excellent brand loyalty and credibility. The owners and their management team are now actively looking for external equity funding of around $1.2M.

But where can they go? At this point the business has outstripped the owners’ financial capacity to keep funding the business from their personal asset pool. They have borrowed as much as they can from the bank, but until cash flow becomes more predictable the bank is reluctant to provide a new line of credit.

They look to their advisers and accountants for help but their experience in these sorts of transactions is often limited and very overwhelming for everyone. The owners just know how to run their business and make great product.    

The business owners’ and their advisers know the business has a strong vision, quality product and solid business model. It has the potential to double its revenues to $24 million and generate a higher EBITDA by expanding into new markets.  

Further capital is required if the business is going to break through the current revenue barrier and move into advanced growth and become a stable mid-market business. Every dollar of profit is being reinvested back into the business, but it never seems quite enough. They need more equipment and improved technology to build greater capacity and leverage their production cycle.  

Growing pains are set in and more cash is needed to fund:  

  • Better systems, technology and infrastructure
  • Expand their product offering
  • Open new channels and markets

So what are the differences with the traditional equity funding model and CSF and what is the value to the business, we have outlined them below: 

Process Traditional Private Funding Equity Crowdfunding via an intermediary platform
Deal Size Considered a small transaction size and often too small or not economical enough for them to get involved as they have other much larger deals to pursue. Fits within the CSF criteria both on the size (<$25m) and value and the amount of capital requirement is below $5 million maximum.
Due Diligence Onerous and costly due to requirements around s708 legislation and potentially confronting for the owners and their management team. Less time and cost as the ASIC benchmark requirements for CSF raises are less onerous, 2-4 weeks would be enough.
Deal Packaging & Educating the Market
  • The IM process takes months to complete and then can only put the offer in front of a limited number of potential investors, mostly sophisticated investors
  • Numerous investor presentations are required which takes time away from running the business
  • The valuation and capital amount required is determined through financial modelling
  • Development of Offer Document is developed through a template and conducted online
  • Disclosure requirements around a CSF offer document and the time taken to develop the offer document is less, reducing the costs
  • The Offer be can advertised and  marketed
  • It is promoted via an intermediary platform and can reach a significant number of potential investors
Acquiring the Capital
  • Roadshows and pitching to their potential investors leave them exposed to negotiations and a potential reduction in the valuation due to lack of take up, 6 months can go by without any investment
  • A significant distraction for the business owner and growth of the business may suffer
  • Cannot market or advertise, so investor reach is limited and only to sophisticated investors
  • Once the company is placed on the platform and the offer goes live, the funding can be raised within 45 days or less
  • On the back of the exposure from the platform comes more marketing and advertising opportunities, not just about the investment opportunity, but also build brand awareness
  • The fact that the offer can be advertised and marketed across multiple channels, ultimately builds more market awareness and engagement
  • The Offer can be made available to both sophisticated and retail investors, therefore a larger capital pool available
Investor Reach Limited to the company’s and advisers contacts, normally restricted to sophisticated or professional investors.
  • Business database of customers, suppliers, employees and channel partners
  • FUNDSITION investor database, including access to databases in wealth management, accounting and stock broking firms with sophisticated and retail investors
  • Advertising to a broader audience
Cost Often large retainers of $15,000 plus per month plus 7% to 10% on the amount of capital raised, meaning the business ends up with less capital to grow.
  • 5%-7% on the amount of capital raised, only charged on the success of the transaction, plus some other ancillary costs
  • Two tiered pricing available with FUNDSITION, if the business brings investors from their own database, the process becomes more cost effective through the platform
Ongoing Support Limited and varying.
  • Yes, including help with investor relations through the platform
  • At FUNDSITION, we continue the relationship with a business and their advisers, plus provide a channel for their investor relations
The model below demonstrates where Equity Crowdfunding is disrupting the more traditional approach to raising capital.

In conclusion, we have outlined the value that Equity Crowdfunding can create for a business:
  1. Potentially faster for the company to raise capital via a licensed intermediary platform and the 90 day or less raise cycle
  2. A significant reduction in opportunity cost for the company, they can focus on growing the business rather than raising capital
  3. Cost of capital is lower due to lower transaction and service fees
  4. Potentially broader investor network from our investor database, thus delivering a more strategic and commercial approach to raising capital than previously allowed
  5. Ability to market and advertise the raise via multiple channels, building brand awareness and reaching new customers
  6. Leveraging the customer and investor convergence opportunity:
    • Investors can become customers and customers can become investors
    • This could lead to increased “share of wallet” amongst the customer base
    • This creates advocacy in the business client base, generating referrals and sales
  7. Leveraging supplier relationships to create more vertical integrations across industries
  8. Employees can now easily own equity in the business without the need for complicated and expensive employee share schemes
  9. A retail investor can invest up to $10,000 per year, per company (no limit on the number of companies they can invest in)
  10. Community support, the platform helps promote another great Australian business that can generate a financial return 

GETTING STARTED

We look for businesses that exhibit a potential to be investable; they have a clear vision, a strong team in place, can demonstrate they have the ability to grow and scale and their products or services have good customer traction.

We are industry agnostic and can fund any business incorporated in Australia.

Of course, we are happy to chat if you your business is at an earlier stage.

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