Private Equity Funding versus Equity CrowdfundingFundsition
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||
|Acquiring the Capital||
|Investor Reach||Limited to the company’s and advisers contacts, normally restricted to sophisticated or professional investors.||
|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.||
|Ongoing Support||Limited and varying.||
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:
- Potentially faster for the company to raise capital via a licensed intermediary platform and the 90 day or less raise cycle
- A significant reduction in opportunity cost for the company, they can focus on growing the business rather than raising capital
- Cost of capital is lower due to lower transaction and service fees
- Potentially broader investor network from our investor database, thus delivering a more strategic and commercial approach to raising capital than previously allowed
- Ability to market and advertise the raise via multiple channels, building brand awareness and reaching new customers
- 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
- Leveraging supplier relationships to create more vertical integrations across industries
- Employees can now easily own equity in the business without the need for complicated and expensive employee share schemes
- A retail investor can invest up to $10,000 per year, per company (no limit on the number of companies they can invest in)
- Community support, the platform helps promote another great Australian business that can generate a financial return
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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