VentureCrowd: funding startups

GOOD NEWS for innovative early stage businesses, especially those in the digital technology space. Someone in Australia has figured out a way to better fund you, buying equity.

VentureCrowd is Australia’s first online equity based crowdfunding platform and it opened for business on February 20 with more than 200 registered investors and 36 start-up businesses onboard.

The key difference with the VentureCrowd platform in dealing with Australia’s peculiar regulatory financial environment, compared with other early efforts in this space, is that it allows wholesale and so-called ‘sophisticated’ investors to take equity positions in innovative high growth-potential start-ups that have effectively been pre-qualified. Because of existing Federal laws, that are currently under review, retail investors are still excluded from the buying in.

The start-ups positioned on the VentureCrowd platform are pre-screened by what Artesian Venture Partners managing partner Jeremy Colless believes are “the best” Australian accelerators, incubators, angel groups and university programs.

“Because the cost of a start-up is dramatically reduced – tech start-ups especially – the barrier of entry is lower,” Mr Colless said of the investment appeal. “So it is different from the traditional VC (venture capital) model. 

“And now the funnel (for processing investment opportunities with start-ups) is enormously bigger. That’s why we get partners, like the incubators and universities, to do the analysis.”

VentureCrowd has been developed by Artesian Venture Partners, one of Australia’s leading early stage venture capital firms, and VentureCrowd lets start-ups pitch and secure funding online from a crowd of investors in exchange for equity in the business.

In contrast to existing crowdfunding platforms such as Kickstarter and Indiegogo, which allow people to support causes, or gain access to a new product at a discounted price, VentureCrowd offers business ownership and the potential equity upside of the start-up. 
According to Mr Colless, there are a very large number of sophisticated investors in Australia who have not previously invested in the start-up space. At this stage, he said, VentureCrowd was focusing on Australian wholesale investors and start-ups.
“The wholesale investor market in Australia is large with 207,000 wealthy individuals in Australia sitting on $US625 billion ($684 billion) worth of assets,” Mr Colless said. “Until now there have been major barriers to entry for investors in start-ups. An investor either had to have a large amount of money and time available to screen and review each potential start-up investment personally, or had to commit as much as $250,000 to a venture capital fund to qualify as a limited partner.”
VentureCrowd provides investors with a selection of start-ups from a pipeline of potential opportunities, pre-screened by its partners which includes more than 20 accelerators, incubators, angel groups and university programs. Wholesale investors can invest as little as $1,000 in a start-up.

VentureCrowd encourages investors to build a diversified portfolio of over 15 start-ups, over time, to mitigate the risky nature of the asset class.
“While traditional asset classes have been slowly recovering from the global financial crisis, the Australian start-up ecosystem has been enjoying remarkable growth,” Mr Colless said.

“The last three years have seen the arrival of an array of startup accelerators and incubators including Startmate and BlueChilli (Sydney), AngelCube (Melbourne), Slingshot (Newcastle), UOW iAccelerate (Wollongong) and iLab (Brisbane).
“Corporate incubator programs including Telstra’s muru-D and OptusSingtel innov8, and new venture capital firms such as Blackbird Ventures, Blue Sky Ventures and Square Peg Capital have contributed significantly to the growth of the start-up environment here in Australia.

“There have also been successful and sizeable technology listings on the ASX by OzForex and Freelancer. In 2014, other successful Australian start-ups such as Atlassian and Bigcommerce may see $1 billion plus listings in the US,” Mr Colless said.
“What VentureCrowd will do is provide new avenues of funding for start-ups, enable a new generation of investors to take an equity interest in early stage ventures that could potentially be the next OzForex, Freelancer, Atlassian or Bigcommerce.
“With the recent passing of the JOBS Act in the US and closer to home, (Federal Communications Minister) Malcolm Turnbull’s support for revised crowdfunding legislation, there is a decided shift in attitudes to online equity crowdfunding as an investment proposition.”
Speaking about the launch of the VentureCrowd platform, Steven Maarbani, a director of the Venture Capital team at PwC, said, “There is no doubt that equity based crowd funding is growing globally and that this is the beginning of a significant change in the way finance is delivered more broadly.
“Early stage finance is undergoing a significant evolution globally. The gap in supply of early stage capital is gradually being filled by equity based crowd funding platforms that are able to provide a more efficient and cost effective way for SMEs to obtain growth capital than traditional methods.
“Equity crowdfunding platforms are opening up the early stage securities asset class to a new group of investor, characterised principally by a desire to have greater control over their investment decisions and the flexibility to make small investments in a wide range of early stage companies. It is likely that SMSFs will be interested in the investment opportunities presented by online platforms.”
The Australian Government is currently in consultation on the issue of equity based crowdfunding. In October 2013, the Federal Government issued a discussion paper titled Crowd Sourced Equity Funding which considers legislative amendment in Australia.

If legislative changes were passed in Parliament, it would open up online equity crowdfunding to a larger proportion of Australians.
Until the current legislation changes, VentureCrowd is open to wholesale investors only and each potential investor must submit to a strict screening process in order to be eligible to invest via the VentureCrowd platform.
“While equity crowdfunding sites can provide investors with low cost, frictionless access to an emerging alternative asset class, it is important to acknowledge key risks in investing in start-ups,” Mr Colless said. “More than 50 percent of start-ups fail, and the distribution of outcomes is asymmetrical. Approximately 90 percent of the returns in a diversified portfolio will come from 10 percent of the start-ups.

“As a result, investors interested in accessing this emerging alternative asset class should look for a platform that encourages investors to build diversified portfolios of start-ups rather than the far riskier strategy of attempting to pick a small number of winners.

“I think we can show a responsible was of investing in this space – and we can help keep out the charletains.”
Some of the first startups on the VentureCrowd platform include:

TokenOne – A sophisticated security technology which allows users to log into secure sites with just a single unique TokenOne PIN

Whispa Music – An online music collaboration tool that allows musicians from around the world to write music together.

Simply Raw – A startup specialising in raw snack bars suitable for coeliac, vegan, and other dietary requirements. Currently stocked in over 200 locations nationwide.

www.venturecrowd.com.au

ends

POSTED MAY 2014.