The first in a three-part series about various forms of fundraising, this story looks at crowdfunding and how it works, who it works for and how to make it work for you.

When the dental-plan business called smile.com.au was ready to go into a period of rapid growth, it needed the funds to do so. Instead of seeking cash from a single source, the company was instead advised to fundraise via the Australian Small Scale Offerings Board (ASSOB), Australia’s largest business introduction and capital raising (aka crowdfunding) platform. Within two days, smile.com.au had raised $500,000 from various investors. Since then, the business has doubled in size.

What is crowdfunding?

Crowdfunding is the practice of seeking small amounts of capital from a variety of sources in order to fund a specific business, project or venture.

There are several bodies that facilitate this, putting new businesses in front of interested investors. For example, Pozible is an Australian business that helps find crowdfunding for creative projects and ideas. And US-based Kickstarter provides crowdfunding for projects with specific goals, while allowing the project creator to keep 100 per cent ownership. (Kickstarter is currently operating in the US and the UK but may be looking at expansion into Australia.)

Paul Niederer is CEO of ASSOB, which has raised more than $130 million for businesses since mid-2005. ASSOB enables businesses to raise money from friends and family, as well as investors, but does it in a transparent, legal and professional manner. Each investor essentially buys shares in the company. Those seeking funds must allow their company to be run through a due diligence process to ensure it is suitable for promotion to potential investors.

The crowdfunding process

“The process, once a business gets through to investment stage,
is about 50 per cent online and 50 per cent offline,” says Niederer, describing the marketing of the business and the collection of funds.
“If somebody is giving $1,000, they may be okay to do it online. But
if someone is putting $40,000 into the pot, then they will most likely want a meeting with management.

“In terms of businesses that best suit this investment model, it’s really about early-stage start-ups and high-growth businesses. Investors expect expansion in order for healthy returns to be generated.”

Niederer says the biggest mistake he sees business managers making is the over-valuation of their company. If you’re looking for investors, the percentage of the business that they are offered for their money must be fair, rather than an imagined value of future earnings once the business idea becomes a reality. Without funding, the idea will never become reality. So, the money is often worth as much as the idea.

Checklist: perfect your pitch

Whenever he meets a business owner seeking crowdfunding, Niederer gives the business a mark out of 30, after asking many probing questions. If the score is 25 or over, the company has a good chance of success.

The score comes from a total of 10 possible points from three specific areas:

1. Story: “The story of the business, of its reason for being and of its product or service offering must be compelling, convincing and credible. It really needs to be of benefit to society,” says Niederer.

2. Team: “If an investor gives you money, are you capable of looking after it, investing it in the right areas of the business and providing returns? In other words, do you have the right people in the right places in the business, such as marketing, sales, production, technical and so on?”

3. Followers: “If you’re selling meat and there are only vegetarians around you, then you will fail. Are there fans and passionate followers around the company? Who loves what the company does? If people are passionate about what you do, they will make more people passionate because passion is contagious.

“The people interested in the niche or area of the business are assessed as well. Is this business or expansion opportunity in an area where there are a lot of rabid fans or passionate followers? As an example, an ASSOB company called Self Wealth recently raised $1.2 million predominately from those who were passionate about self-managed superannuation funds. There are hundreds of thousands of people in this niche wanting to more effectively manage their superannuation, which they can do through Self Wealth.”

The views expressed in this article are those of the author and the interviewees, and not of Australia Post.

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