The Rai$e Rundown: Insight into equity crowdfunding in Australia from Neutrog
Click here to view OnMarket's live investment opportunities.
To assist Australian founders who are interested in launching an equity crowdfunding campaign to raise capital, we interviewed Angus Irwin, CEO & Founder of Neutrog. Neutrog raised A$3m from 784 investors (read their case study here), and in this article, Angus will reveal his learnings.
Why did you choose to raise capital via equity crowdfunding rather than alternate capital raising methods?
The decision to raise capital via crowdfunding arose out of having an advocacy model. Many years ago, when we were trying to make a mark in the home garden market, and up against large, established players, we needed to find a way to crack the market. So, we carried out market research and found that there was a hierarchical system that existed in the home gardening market.
We found casual gardeners would look up to their green-thumb uncle or aunty – generally an older person, who would give them advice on gardening. We quickly saw a way that we could spread the news about Neutrog – by getting to the green-thumb individuals. When we asked what was seen as a ‘serious gardener’ the research pointed to Garden Clubs, members of Botanic Gardens, and other gardenig communities around Australia. So, we started to build a relationship with these people by visiting them and giving them show bags of our products. We then started to record their details on our database and from there, we built our advocate base.
Then I invited John Uhrig, who was the former chairman of Rio Tinto, Westpac and Santos, onto my board. He said he thought Neutrog could list on the Stock Exchange at some point in time, but in order to do that we would need to build a relationship with our current and future shareholders. So, I started thinking ‘that's really pretty much the same as what we're already doing with our existing advocacy model’. Then crowdfunding came up and I saw crowdfunding as a step in that same in the same direction. That was in 2010, but it wasn’t until about 2016 that crowdfunding started sitting in a sweet spot for Neutrog.
Basically, we chose crowdfunding because it was a combination of all the things we wanted to do. It's an extension of our advocacy model - it enabled us to give our advocates the opportunity to buy into the company, which really took them to a different level of advocates.
So your advocacy model was the primary reason you decided to crowdfund?
Absolutely, and to make our advocacy model stronger - I mean, it makes loyalty a hell of a lot more meaningful. We've had some great examples already – on Thursday last week I received a phone call and the lady says ‘Hi, I’m X, and I’m the CEO of X. I’m ringing because I've been speaking to my friends who are shareholders and I thought I'd give you my phone number in case you need it.’
How awesome is that? And this is just one example out of many, but it shows how valuable advocacy is. The whole point is to be able to engage with people and we’re now able to actively engage with 784 people because they are shareholders. We’re also receiving phone calls from friends of shareholders asking how they can become a shareholder too. It’s been a fantastic journey.
You created discount-based investor rewards to suit the different audiences that Neutrog planed to attract. Can you explain your logic behind investor rewards?
Our logic was simple. We had an online store in existence, we had advocates in existence, and we had roughly 25 Garden Clubs that endorse our products. The reality is that our whole business is about advocacy and so the goal was to structure our rewards around our products to increase the advocacy whilst benefiting the shareholders. It was important for us that our advocates could personally experience our products at a discounted rate. The benefits of this are two-fold – firstly, if they like it, they’ll tell their friends. Secondly, they act as primary R&D because we encourage them to provide us with feedback.
What two audiences did you created investor rewards for?
The first audience was a standard home gardener. The second was a Garden Club. We used the rewards to incentivise the Garden Club to expand their club and increase their membership, so the rewards outweighed the cost of a membership. Our rewards had a very profound effect in Garden Clubs – which obviously has a benefit for us.
Post closing your crowdfunding raise, have you noticed any benefits from offering hybrid rewards?
We're still setting up the process, but we did send our welcome pack out to all shareholders! I suppose we've already felt it in the amount of positive feedback and introductions. Once we get the product process specifically out there, we'll see a much bigger and more formal outcome.
Neutrog uniquely decided to open a Low Volume Share Market. Why did you decide to apply for this secondary market, and what will it enable investors to do?
Basically, a Low Volume Share Market is a private secondary market. The decision came from two perspectives. First of all, a lot of our raise was aimed at mum and dad shareholders, and it dawned upon us that it would be completely contrary to the purpose of the raise if we had mum and dad investors who needed to get out of their shareholding because they had financial difficulties but couldn't do so.
So we wanted to set up a mechanism which gave an ability for those shares to be traded so we weren’t tying up people’s money. That was the main the main driver. At the same time, we've had we've had many people phone us who are eager to buy shares in Neutrog, or buy more shares. We have a list of about 30 or 40 people. Therefore, it becomes an opportunity for people to sell and people to buy.
To clarify, this is not a listing on the ASX?
No, but it works similarly.
Having this type of secondary market means Neutrog acts as an introductory agent. In effect, people who want to sell their shares will be in touch with either Automic (our share registry) or our company secretary. They will then list their shares anonymously. Once listed, a buyer can negotiate the price of the shares. Once the buyer and seller decide on a price, the interested investor can purchase the shares. Therefore, the transaction is between the the buyer and the seller – not Neutrog. We’re just the facilitator.
What do you wish you executed better in your CSF raise and what can other founders learn from your experience?
I think we went into the raise so hyper-focused on our consumer group that we didn't think with a wide enough lens about the strategic opportunity, potentially with some of our bigger commercial customers. By focusing on advocates in the home garden sector we missed out on a massive market of a very high end, massive farmers, growers, and viticulturist that may have wanted to invest a larger sum than mum and dad type investors. It would’ve been interesting to go down that path, but we were too focused on the obvious play, so the strategy of who to target could have been done better.
Founders who are looking to run a crowdfunding raise should brainstorm before launching and determine the main groups and sub groups they can and should target.
What advice would you give to founders who are looking to run an equity crowdfunding offer?
You need to be authentic and true to your brand. If people raising aren't authentic, then potential investors can't find an emotional connection and won't invest. What I love about crowdfunding is that it's very much like branding. You can see through company's who are trying to pin a purpose or cause for the sake of it. It's easy enough for people to review your socials and website, dating before your capital raise preparation begun, and know if something doesn't add up.
Unless there's authenticity, the crowd will find you out because finding that emotional connection is critical to attract shareholders and it’s impossible to fake. So, my advice is, know your brand, know your vision, and stick to it. Don't change for the crowdfunding raise, you want to attract people who truly align with your business values.
Finally, I want to ask about your growth journey. Since scaling Neutrog, have you had any significant learnings you would like to share with founders looking to scale and grow their business?
I have a theory and my theory is that a lot of the things that Neutrog got right at the start became our Achilles heel. Down the track they became our Achilles heel because we didn't know how we got them right in the first place, so we had to go through the process of being wrong before we could be right again with an understanding of what makes certain processes and initiatives right. And so, the learning from this for other founders is that there's not too many ways you can fast track growth and avoid having to experience things - good and bad. I see so many people trying to fast track things but what they need is to appreciate the slow road. The slow and steady road where they learn about their business, what works and what doesn't, and why. You can't form a strategy without knowledge that has come from experience.
To learn more about Neutrog, click here.