Governments the world over re-define the dictionary definition of slow; the Australian government take it to a new level. Small business is already suffering badly from the well documented capital gap that exists within the finance markets. The major banks, bless their little cotton socks, if they graciously choose to support early stage businesses, want property to back their facilities – 100%. Now I am not naively saying banks should support every business – after all they aren’t charities and don’t want to lose money. Equally, from an entrepreneur’s perspective what greater way is there to show you support your business by putting your property on the line as security for any debt facilities that the banks may make available. That’s all well and good – but what about the tech start-ups that have perhaps the greatest promise to change the world through innovation and disruption? They are placed at great disadvantage…
Tech start-ups are typically started by guys and gals in their twenties – where energy, passion and drive thrive in overdrive. Their deep understanding of the nuances of modern technology and its usage is taken as given. The challenge is that given the relative youth of the founders and the state of the property markets that have grown in leaps and bounds over the past two years, they will have little or no chance to have got on to the property ladder. As a result, they will have no property or equity to offer for any bank facilities. So how do they raise money?
Early stage investment, seed investment if you like, whilst potentially being provided by external angel investment, is more likely to come from friends and family. After all friends and family will know a founding CEO well, and can judge their character based upon many years of experience. But a tech startup CEO’s friends are likely to be in the same position as the CEO themselves – little or no asset backing. So the options come down to family and external angels to help get the business off the ground, meaning the tech start-up’s options are very limited.
Equity crowdfunding would present the opportunity for retail investors to invest. It would enable friends and family to commit small amounts of money, which cumulatively add up. If 50 friends contributed $2k it would be $100k – probably enough to develop the technology and get the founder out there selling their wares and disrupt. Equity crowdfunding has the potential to fulfil a massive void that exists for tech start-ups, who don’t have the assets to support external debt.
What concerns me is that New Zealand have had Equity crowdfunding since February 2014 and in Europe and the USA it has been prevalent for a number of years. So we are way behind the rest of the world. It has taken nearly three and a half years to get the legislation in front of Parliament yesterday (3rd December ’15). An expert in the equity crowdfunding field, Matthew Pinter, the chairman of the Crowdfunding Institute of Australia suggests that it is likely to be late 2016 before we will see the first equity crowd funded transaction in Australia.
With Malcolm Turnbill’s commitment to innovation, it is frustrating and some could say inconsistent that his own legislation is unlikely to be in place for the next twelve months or so. Caution about retail investors not being ripped off I fully understand, but perhaps the government should take a page out of the Lean Startup manual and get an MVP (Minimum Viable Product) version of Equity Crowdfunding out there to enable Disruptive CEO’s to go out and disrupt. After all Singapore is said to have had a 7 page document, which was agreed in 14 days.
The funding gap that exists for small business is worse for Tech start-ups. Without equity crowdfunding, the Tech bubble has the potential to deflate well and truly before it even gets a chance to pop. Come on Malcolm get some energy behind this equity crowdfunding legislation and pivot from the original BHAG and give start-ups, especially tech start-ups, an MVP to work with. Sure it will be a lesser model but at least it can stimulate growth before it’s too late.