Skin in the game and investment with heart: What does equity crowdfunding look like in the era of COVID-19?

When the COVID-19 pandemic hit Australia, and the potential extent of the economic damage became clear, there was much concern about whether the startup sector was about to find itself in a funding drought.

In particular, early-stage startups were thought to be under threat, as angel investors tightened their purse strings and venture capital firms prioritised their existing portfolio.

With unemployment set to soar and households penny-pinching, surely there was no way equity crowdfunding would be a viable option, was there?

The concern was probably wise. But, as it happens, it turned out to be unfounded.

Not only have we seen startups at all levels continue to secure funding from VCs and angels, there has also been a relatively steady stream of successful equity crowdfunding campaigns, including that of Two Hands, a digital marketplace for food traceability, which closed its round last week having raised $472,000.

But it hasn’t been all smooth sailing.

Uncharted territory

PledgeMe, a New Zealand equity crowdfunding enterprise that expanded into Australia in 2018, had some campaigns delayed that were planned for March and April, founder Anna Guenther tells SmartCompany.

The economic situation has made people a little more uncertain, on both sides of the transaction, she says.

“It’s companies being concerned about raising right now, and then also people being a little bit more risk averse than they would normally be,” she says.

However, in New Zealand, which has all but eliminated the coronavirus, credit card data is starting to show spending levels back to pre-pandemic levels, Guenther explains.

That bodes well, she says.

“We think people will be more open to pledging again now that things are becoming a little more stable.”

In Australia, however, Birchal — already one of the more active platforms in the space — has had a relatively busy few months.

Equity crowdfunding is still in its infancy here, and co-founder and chief Matt Vitale was hoping for a year of strong growth.

Between this year’s bushfires crisis and the COVID-19 pandemic, that hasn’t necessarily happened. But, business has by no means ground to a halt.

In fact, in 2020 so far, Birchal has closed the same number of successful campaigns as it had at this time last year.

And, in June 2019, in the busy lead-up to the end of the financial year, Birchal opened five campaigns. In June so far, it’s opened two, and there are five more set to launch before the end of the month.

“We weren’t really sure how it was going to pan out,” Vitale tells SmartCompany.

Early trends

In the second week of March, when it became clear how serious the COVID-19 situation was, ocean-cleaning startup Seabin was nearing the end of its campaign.

The startup had already passed its $1 million minimum investment, but the Birchal team was watching closely to see whether interest would drop off in light of the pandemic.

In its final two weeks, Seabin was able to raise another $600,000, closing the round at just over $1.8 million, on March 19.

It was “a great result, obviously,” Vitale says. But there were trends that emerged.

“Some larger investors who had expressed some interest and had a few discussions with the guys from the Seabin projects — they just evaporated,” Vitale says.

“Everyone was ducking for cover.”

In typical circumstances, the average investment value on Birchal is around $1500. During COVID-19, that’s dropped to just under $1200.

It’s not a massive difference. But, there are other suggestions that the campaigns are attracting the attention of average, everyday people, rather than professional or wholesale investors.

One campaign, for ethical clothing brand Outland Denim, raised $1.32 million from more than 1000 investors.

For Vitale, that demonstrates exactly what Birchal is good at — securing large numbers of small investments.

Most deals, however, have a ‘wholesale investor’ component, with part of the funding coming from people investing $10,000 or more a pop.

These investors have to go through a process to prove their wholesale status, Vitale explains. And they’ve dropped off since the pandemic struck.

It doesn’t necessarily mean those types of investors aren’t investing, it just means they’re not putting in the big bucks that would require them being flagged.

“There haven’t been any of these really significant cheques,” he says.

Birchal co-founders Alan Crabbe and Matthew Vitale. Source: Supplied

Back what you believe

Towards the end of 2019, Guenther wrote an article for SmartCompany, making some predictions for equity crowdfunding for 2020.

We’ll forgive her for not seeing COVID-19 coming, but she maintains that, even now, her predictions still stand. Some even more so.

At the time, Guenther predicted a trend in social enterprise and profit-for-purpose businesses securing funding through equity crowdfunding. She stands by that, and says it’s yet another trend that’s only set to accelerate.

Across both equity crowdfunding and donations platforms, people are still putting money into causes they care about, but the dollar amounts are a little lower, she suggests.

The most recent business to secure funding through PledgeMe in New Zealand is Downlights, a candle business that offers employment opportunities to young people with Down Syndrome, which raised just shy of $167,000 to fund its growth plans.

“Social enterprise is definitely an area that we’ve seen is growing,” Guenther says.

“Now more than ever, I think we’re going to need companies in our communities that care about more than just making money.”

People are backing businesses for more than just the return, she says. Sure, they want to see the financial gains down the track. But they also want to support the business so it can have an impact.

“It’s a longer-term, more supportive investment.”

For Outland Denim co-founder Erica Bartle, part of the reason for going down the equity crowdfunding route was to attract shareholders who would become active brand advocates.

The brand produces jeans in an environmentally sustainable way, while also offering training and employment opportunities to women who have experienced exploitation.

A shareable campaign was an opportunity to spread the word, Bartle says.

“It’s as much a marketing exercise and building that database as it is about the equity itself,” she tells SmartCompany.

“What better time to do that than during COVID, when social media usage is at an all-time high?” she asks.

“The fact that the campaign coincided with this peak in social media usage was very, very handy for us,” she adds.

Of the more than 1000 investors who backed Outland, 85% said they were aligned with the company’s purpose of poverty alleviation and social justice, she says.

By comparison, 70% said they aligned with the ethical fashion mission, and 70% aligned with the sustainability mission.

“They’re not in it for a quick profit play,” Bartle says.

This was a fashion brand operating during an economic crisis while retail stores were closed. The wholesale and retail data in the investment document, and the risks attached to the investment “which we laid out quite bare”, did not paint a pretty picture, Bartle admits.

“There was clearly something that really spoke to people about the brand beyond the cashflow statement,” she says.

“These are people who are really invested in the brand … and who wanted to buy in on that deeper level.”

Skin in the game

GigSuper, a super fund for sole traders, gig-economy workers and self-employed people, raised just under $160,000 from 154 investors on Birchal, in a round that closed at the end of May.

Co-founder Peter Stanhope tells SmartCompany the idea behind the campaign was to give the super fund’s customers a piece of the pie.

“It was a great way for us to be able to hand over ownership of the super fund that is being built for the community, to the community,” he says.

Stanhope saw this as a good time to be promoting GigSuper. The pandemic has caused a shift towards flexible work, and people are feeling the benefits of being at home, spending more time with loved ones, and not necessarily working a nine-to-five schedule. Many might not be keen to go back to the traditional office job, even when they can.

At the same time, many people have found themselves in financial hardship.

“We’re probably seeing that as a result of COVID, people’s habits and attitudes towards saving have changed a bit,” he suggests,

“People have first-hand experience now of what it’s like not to have a nest egg when you need it.”

Some of GigSuper’s customers have been among the hardest hit by the coronavirus-related recession.

While the JobKeeper program has offered support to many of them, there’s still uncertainty in the air, Stanhope says.

But, there are others working in sectors like digital marketing, or who work as virtual assistants, who have been busier than ever.

GigSuper’s campaign attracted significant support from the sector, and Stanhope theorises those are the sole traders who backed it.

About 50% of the investors were self-employed people “who understand the problem that we’re addressing, and want to be part of building the solution”, he says.

And, again, they also act as advocates. Each customer who becomes an investor also becomes an influencer in their own way.

“Social media nowadays makes it so easy for those people to have a voice en masse,” Stanhope says.

“They may not have the followers of a Kim Kardashian, but they’re micro-influencers in their own way, and they tend to have much higher levels of influence over a smaller number of people.

“It’s an incredibly powerful force.”

GigSuper co-founders Branka Injac Misi, Peter Stanhope and Martin Batur. Source: supplied.

Is equity crowdfunding in for a COVID-19 boom?

Vitale sees the potential for a boom in equity crowdfunding as Australia emerges from this crisis.

“It’s tricky,” he says. “We don’t want to delight in misfortune.”

But, the model gained traction in the UK following the global financial crisis, he says. Early-stage businesses needed capital, and the capital just wasn’t available from traditional sources.

“A better way was found,” he says.

A similar thing is happening in Australia now, and businesses who may not have previously considered equity crowdfunding are turning to it as a means to raise capital.

At the same time, the physical distancing requirements of COVID-19 have meant people are moving online in a big way.

People are becoming more familiar, and comfortable, with managing financial matters online. There’s no reason that shouldn’t include their investment choices.

“People are having webinars and Google Hangouts and Zoom meetings with investors,” Vitale says.

“Where in the old days you had to have lots of coffees with people and literally walk around and press the flesh, it’s a process that doesn’t require that.”

COVID-19 has also created a much-discussed rush to remote work, which may be here for good.

Guenther was already predicting a move towards regional businesses securing investment from the crowd. As people move away from city centres, that’s another trend she expects to see accelerate.

“We’ve seen that you don’t need to be in the office to do the work, for some jobs. You can be anywhere,” she says. “People don’t need to be spending as much on housing as they are.”

Consumers are also more conscious of supporting local companies, not only by buying locally but by investing locally too.

That also makes room for more diversity in business. And, as the Black Lives Matter movement continues to create crucial conversation, that’s more important than ever, too.

Making it easier to run, and fund, a business from anywhere has the potential to “create more opportunities and more space for Indigenous people”, Guenther says.

“That’s something I’m hoping for coming out of this.”

PledgeMe co-founder Anna Guenther. Source: supplied.

Down with the crowdfunding

At the same time, COVID-19 aside, there’s a whole new generation of investors emerging — millennials who have found themselves in possession of disposable income — who don’t want to invest in the same ways their parents do.

Rather than investing on the ASX, or employing a wealth manager, they’re taking matters into their own hands and trying to do some good while they’re at it.

Some 80% of PledgeMe investors are under 35, Guenther says — although she notes that the other 20% typically pledge more money.

Younger people are conscious about where they spend and invest their money.

Bartle explains how the 19-year-old son of a friend of hers invested in Outland, because he believed in the purpose.

“For this younger demographic of investors, who might be entering investment for the first time and testing the waters, obviously this is a brand that they see as being a great gateway,” she says.

For a lot of young people, the stock market can feel intimidating. And for those who are not so financially literate, equity crowdfunding offers a way to invest in a company you feel familiar with, and are able to learn about before you take the plunge.

“I think this is a less risky way to dabble in this sort of investment, despite the fact that this is a very high-risk investment at the same time,” Bartle says.

“People do want to engage with companies at that level. Perhaps there is something to be learnt for the bigger companies … about engaging with potential investors and educating them along the way.”

Vitale notes that among these new-wave investors there’s also an appetite for risk.

People are opening online trading accounts for the first time, and trading in volatile markets.

“There’s an increasing appetite for risk or alternative asset classes, for people to build wealth,” he says.

And, while he admits it’s an entirely predictable thing for him to say, he suggests that investing in early-stage businesses through equity crowdfunding is a good way for people to build wealth, “but also to help the economy”.

“The majority of the businesses we raise money for are putting funds into things like employing staff and growing their businesses,” he explains.

“Rather than trading volatility on the ASX, which I don’t think creates new jobs, actually giving money to early-stage businesses has a real potential to grow our economy.”

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