Click here to view OnMarket's live investment opportunities.
Let’s begin by differentiating equity crowdfunding to rewards-based crowdfunding and donation-based crowdfunding.
A well-known crowdfunding platform is GoFundMe. This is where individuals can create a raise and the crowd can donate – with no strings attached. Similar to a donation, reward based crowdfunding is as it sounds, rewards based. As a token of appreciation, the company you give capital to will send you some sort of reward; a t-shirt, a prototype of the product, a product relating to their business – you get the gist. Equity crowdfunding however, differs again, it is where individuals who invest in a company receive equity, therefore becoming shareholders of said business.
A legendary example outlining the difference between rewards-based crowdfunding and equity crowdfunding is the story of Oculus Rift. In 2012, Oculus Rift raised US$2.4m on the rewards based crowdfunding platform Kickstarter. Then in 2014, Oculus Rift was sold to Facebook for US$3b. This sounds fantastic, right? Those investors should be well off from their smart investment! Unfortunately, this isn’t the case. The capital raised from over 9,500 people was rewards based – meaning they didn’t own a share of the company… but hey, they got a cool t-shirt! However, if they had participated in an equity crowdfunding raise, every individual would’ve been an equity shareholder and received a (big) return on their investment.
Tell me more about equity crowdfunding?
Equity crowdfunding (ECF) is relatively new to the Australian investment landscape, having only been legislated in 2018. Despite the legislation on ECF in Australia being recent, the growth of this capital raising method doesn’t reflect its novelty. Before we dive into the ECF globally, let’s distinguish what it is!
Very simply, equity crowdfunding gives power to the crowd, and has quickly become the ‘go-to’ source for growth funding. Historically, if you wanted to invest in a start-up company, you had to be a sophisticated investor. To be a sophisticated investor according to ASIC, you must earn over $250,000 in annual income or own over $2.5m in assets. Considering the average annual income in Australia is $60,000, this significantly limited the opportunities for everyday investors and small businesses looking to raise capital. Now, with ECF legalised in Australia, everyday people can invest in businesses that align with our interests and beliefs, and in return become a shareholder. Everyday people are classified as ‘retail investors’ and can invest up to $10k in a single ECF raise. Whilst companies can still partake in a wholesale raise (sophisticated or ‘experienced’ investors only) ECF offers a huge incentive – their reach captures all types of investors; sophisticated and retail.
Companies that raise capital via ECF tend to include a hybrid offer – this will differ depending on the company’s product or service and tends to come in the form of a discount or free trial. The reason? Start-ups seeking capital growth are not only interested in capital from investors, but they are also seeking new customers, business advocates and assistance in improving their business model to elevate their market reach. Therefore, an ECF can best encapsulate the advantages of different types of crowdsourced funding – that being part equity, and part reward. In summary, equity crowdfunding is unique in purpose – its primary focus is to generate growth capital for businesses and enable everyday people to help grow start-ups.
Let’s look at the global equity crowdfunding market.
Historically, Australia hasn’t been known as a ‘trend setter’, it’s quite the contrary. we tend to follow global macro trends. This is neither good or bad, in fact it’s quite useful in assisting investors to make smart decisions as they can analyse the global market and find solidarity in knowing the status quo will encourage Australia to follow.
Equity crowdfunding is one of these macro trends, so let’s analyse the global ECF market.
According to Finances Online, the global equity crowdfunding market was estimated to be US$12.2b in 2019 and is expected to reach US$25.8b by 2026 (CAGR of 16%).
Equity crowdfunding was initially legalised in the U.S. in 2016 under the bill ‘Title III of the JOBS act’. Since then, the annual market has grown steadily. Since 2016, over USD$514m has been raised – primarily in the most recent years.
In 2020, 1034 companies raised an accumulative total of USD$214.9m – a growth of 105% from 2019. In 2019, the accumulative total raised was USD $104m. Similarly, the U.K market in FY20/21 saw 549m British pounds invested (over $1b AUD). See Figure 1 on the left. These outcomes demonstrate the upward macro-trend of ECF as a capital growth method – and suggest the best is yet to come for Australia.
Figure 1: Annual market value of equity crowdfunding in the UK from 2013 to 2020. Source: Statistica.com
So, how big is the equity crowdfunding market in Australia?
In Australia, FY20/FY21 saw a total of 139 successful raises, accumulating over AUD$94m raised through 66,147 investors. This is over 100% growth from FY19/20 - and certainly align with the results of the U.S. and U.K market. Out of these successful raises, just over 20 raised over $1m.
Alongside venture capitals, as demonstrated in Figure 2, ECF has become a serious medium for SMEs to raise capital in the U.K. As mentioned, the Australia is five years behind, and we can assume our ECF market will follow suit. Although retail investors may not invest the same amount as a single venture capital, a large mixed group of retail investors and sophisticated investors just might. By widening the breath of potential investors, and leveraging an ECF raise to increase brand awareness, ECF is trending as a viable alternate to grow a business. Let’s not forget that new ECF legislations also allow companies to raise up to $5m in 12 months.
Figure 2. Investment types in the U.K over time. Source; Beauhurst.
As seen in Figure 2, ECF is rapidly becoming a desirable opportunity to raise capital in the UK market. With Australia following the footsteps of market leaders, like the UK and U.S., we can presume the best is yet to come.