Crowdfunding taking off, but beware

NZ Herald

6 Apr, 2015 05:00 PM5 mins to read

Tim Lightbourne and Rob Cameron of Invivo Wine, a crowdfunding success story. Photo / Steven McNicholl

Investors need to be wary but crowdfunding is offering many fresh opportunities.

Equity crowdfunding is taking off, but prominent market figures warn about the potential dangers facing investors.

The capital-raising method, which became possible in this country last year through a once-in-a-generation overhaul of securities legislation, allows companies to issue shares to the public through online platforms.

Three equity crowdfunding providers - Snowball Effect, PledgeMe and Equitise - are operating.

Snowball Effect has raised $5.5 million through five successful campaigns since August, while PledgeMe's two successful offers since September have netted $600,000.

Equitise launched on January 30 and has raised $85,000 for Tourism Radio NZ, which is looking to secure a minimum of $200,000 through its offer, which remains open.

Equity crowdfunding - which allows businesses to raise up to $2 million in any 12-month period - is giving small companies valuable access to the capital they need to grow.

And the public is getting investment opportunities that previously have, for the most part, been available only to professional investors.

However, questions are being raised about the forecasts and valuations some issuers are putting forward, and whether investors fully understand the risks.

Veteran venture capitalist Tony Bishop, of GRC Managers, described some of the forecasts as "very ambitious" and said the lack of due diligence into offers was "scary".

"And they're also justifying their high valuations with the strong sales traction they say they're going to achieve," Bishop said.

SellShed, a mobile trading app running a PledgeMe campaign to raise up to $1 million, is not currently earning any revenue but has forecast $9.4 million in two years.

The business, which is positioning itself as a potential competitor to Trade Me, has also forecast an enterprise value in the range of $26.7 million to $69.4 million - based on multiples of projected earnings ranging from five to 13 times - by March 2017.

SellShed reached its $250,000 minimum target this week.

In many cases you simply don't know what you're putting your money into.
John Hawkins, Shareholders Association chairman

Shareholders Association chairman John Hawkins said crowdfunding could provide good investment opportunities, but many offers came in near the "Lotto end" of the investment risk scale.

"The problem is trying to determine what the risk is, because the amount of information that is required to be given is extremely limited," Hawkins said.

"In many cases you simply don't know what you're putting your money into."

Hawkins pointed out that the Financial Markets Authority checks and licenses only the equity crowdfunding platforms, rather than companies raising money.

And it would be difficult, if not impossible, to get out of a crowdfunding investment because there is no exchange for trading shares as there is for stock exchange-listed firms.

"You shouldn't invest money that's essential for your ongoing life for the simple reason that a number of these companies are going to fail."

Technology investor Lance Wiggs said that while investing in crowdfunding was "punting" it also provided the public with some interesting investment opportunities.

"Some of the forecasts have been ludicrous," said Wiggs, whose Punakaiki Fund is considering raising cash through crowdfunding.

But he said the campaigns that were not getting funded were generally the ones that should not be.

"Something's working," Wiggs said. "I would hope that most people looking at these [offers] would realise that you've got to apply a heavy reality check to those forecasts."

Snowball Effect head of platform Josh Daniell said there was a "huge variance" in the risk profiles of different companies raising money through equity crowdfunding.

"For example Renaissance Brewing and Invivo Wines [which raised $700,000 and $2 million through Snowball Effect, respectively] have both been profitable and been around for a while," he said.

"They're less likely to burn through the cash and fall over like might happen to companies that are cash-flow negative and have unproven technology or products."

Invivo's record-breaking Snowball Effect campaign, completed last week, valued the company at $10 million. That is 26 times the $384,000 in earnings before interest, tax, depreciation and amortisation (ebitda) the Auckland-based firm had forecast for the 12 months to March 31 this year.

To compare, listed NZ wine firm Delegat Group is currently trading at a price-to-earnings multiple of 13.6 times, according to NZX data.

Daniell said it was issuers, rather than crowdfunding platforms, that made forecasts and established valuations.

"The company has an incentive to have a higher valuation because it means they sell less equity for the capital they want to raise," he said.

"They also have some incentives to get it right, the first being that if the valuation is too high there's an increased risk of the offer being rejected by the market."

Daniell said issuers could be liable if they were found to have provided false or misleading information as part of their offers.

Equitise co-founder Jonny Wilkinson said valuing and providing forecasts for early-stage firms, which did not have an established track record, were notoriously difficult. "We do what we can to help companies present reasonable forecasts," he said. The focus should be on the company.

Wilkinson said people invested in crowdfunding offers for a range of reasons and Equitise encouraged investors to go into deals with their eyes wide open.