The appeal of equity crowdfunding: why investors invest without a promise of financial return
In the last five years, a new avenue for investment has gained significant traction among retail investors in Australia: equity crowdfunding. This alternative form of financing allows individuals to invest in early stage companies, often start-ups, and receive equity in return. What makes equity crowdfunding intriguing is the fact that there is no guarantee of immediate financial returns, yet, it has continued to increase in popularity amongst investors.
So why do retail investors choose to participate in equity crowdfunding, otherwise known as crowd-sourced funding (CSF), offers if financial returns aren't guaranteed?
In this article, OnMarket addresses the reasons why retail investors participate in CSF offers, with the help of Calvin McDonald, Head of Australian Operations at BrewDog.
Engagement and community building:
Equity crowdfunding offers more than equity in a company; it provides investors with a sense of ownership and involvement. Investors can interact with the founders, ask questions, receive business updates and provide feedback. This level of engagement fosters a deeper connection to the business and all stakeholders involved, allowing investors to feel like active participants in the entrepreneurial journey.
Additionally, CSF campaigns often attract like-minded individuals who share similar interests, fostering a sense of community around shared hobbies and values.
Knowing this, many founders run a CSF campaign as a means of building an engaged database who they can use for R&D and alternate promotional activities. The way in which they involve their investors, who are also their shareholders, for many is as valuable as an annual financial return.
Initially, our use of CSF went hand in hand with the growth of our hospitality business. Before our first raise in 2009, we didn’t have bars. We leveraged a CSF raise to open a bar, and investors backed us to create a tangible asset for their community more so than investing for financial return in a company.
- Calvin McDonald, Head of Australian Operations @ Brewdog
It’s in human nature to crave belonging, and equity crowdfunding satisfies this desire through enabling investors to join a business' exclusive owners community.
Discounts and rewards:
As the CSF space has continued to develop, more commonly than not, founders offer investors rewards for participating in their raise. The form of investor rewards vary based on industry and company offering but can include discounted food and drink, free products, company merchandise and exclusive access to events or social gatherings.
For retail investors, the above benefits can outweigh the few hundred dollars cost of investment.
We were able to create a demand for shareholders by opening venues in communities where they lived! And while we had our product in more shops and so on, creating a BrewDog bar in a community that did not have one before, that a shareholder could visit and get an immediate benefit from their owner’s discount, really drove investment. And this provided a tangible return to the shareholder that was not associated with financial returns. They are investing in the venue, the people, the product – not the stock market. So that has been a nice journey for us over the last 14 years.”
- Calvin McDonald, Head of Australian Operations @ Brewdog
Beyond the financial aspect, equity crowdfunding is a means to support social causes or initiatives aligned with personal values. Many start-ups focus on areas such as sustainability, clean energy, social entrepreneurship, financial wellbeing and healthcare. By investing in these companies, retail investors can contribute to positive change and feel a sense of purpose beyond pure financial gains.
The excitement of early stage investing:
Investing in CSF offers the chance to be part of the exciting world of building a company from the ground up. Many retail investors are drawn to the potential for discovering the "next big thing". They enjoy supporting innovative ideas and entrepreneurs, particularly those companies who fall within their personal interests and offer services or products that support their beliefs. Not to mention the prospect of contributing to the success story of a budding enterprise is rewarding.
Crowd-sourced funding offers investors an opportunity to diversify their investment portfolios beyond traditional investments such as real estate, stocks and bonds. By allocating a portion of their investments to start-ups and small Australian businesses, retail investors can potentially enhance their overall risk to reward profile. The appeal lies in the potential for high returns, even if only a few of their investments are successful, offsetting the risk of loss in others.
Access to exclusive investment opportunities:
Historically, early stage investments were predominantly available to venture capitalists, angel investors, and wealthy individuals (such as sophisticated investors). CSF platforms like OnMarket have democratised access to these opportunities, enabling retail investors to participate alongside professional investors and receive the same returns.
This accessibility empowers individuals who are passionate about innovative ideas and supporting businesses locally to directly contribute to the growth of start-ups, regardless of their financial status.
I think CSF sits as a good doorway for new businesses and brands to raise capital without having ASX pathway or an immediate ASX listing. I was shocked with the amount of $500 and $1,000 investors, people are willing to throw $500 in the business as an investment because they like the idea and they like the story. CSF is actually about backing businesses and joining them for the journey.
- Andrew Morgan, Co-Founder of Hydrowood
By participating in equity crowdfunding campaigns, retail investors can not only support the growth of start-ups but also be part of a vibrant community that fosters innovation and entrepreneurship. While the promise of immediate financial returns may not always be guaranteed, the engagement, sense of ownership, social impact, and learning experiences associated with equity crowdfunding make it an appealing option.
As the popularity of equity crowdfunding continues to grow, it has the potential to reshape the landscape of startup investment and empower retail investors to participate in the entrepreneurial ecosystem. To inquire about running an equity crowdfunding campaign, click here.