Date posted: 10/08/2018 5 min read

Crowdfunding: the new SME frontier

Venture capital expert Erez Rachamim, head of Fundraising at Equitise, outlines why crowdfunding may be the next new big thing in Australia.

In Brief

  • Equity crowdfunding is a new investment pillar for SMEs in Australia.
  • Legal changes mean retail investors in Australia can now get involved in crowdsourced equity funding.
  • Venture capital expert Erez Rachamim is a speaker at the CA ANZ Business Valuation and Forensic Accounting Conference in Sydney from 13-15 September.

By Tina Wild

Crowdfunding is a new pillar of SME funding in Australia, according to Erez Rachamim, Head of Fundraising at funding platform Equitise. 

Crowdfunding is already a developed market, particularly in the UK and US, but is still in its infancy in Australia. The law in Australia changed in September 2017 to allow retail investors to invest in businesses not listed on the Australian Stock Exchange (ASX). “Australian businesses can benefit from fostering innovation and generating returns to fulfil their visions,” says Rachamim. “There’s a flow-on effect as businesses contribute to the Australian economy and employ people who are part of families and communities.” 

Australia joins other countries which have a regulatory framework for crowdsourced equity funding – the UK, the US, New Zealand and Canada. 

Crowdfunding is part of a holistic picture of decision making for business investments and valuations, says Rachamim. Equitise helped develop the Australian crowdfunding market and aims to focus on building trust in this kind of investing. With a background in venture capital, he looks beyond traditional investment markets and what motivates him is seeing how many businesses he can help with crowdfunding.

Green light from ASIC

Equity crowdfunding means that money contributed by many people is pooled to purchase equity in a business. Equitise was founded four years ago in New Zealand, because the concept wasn’t allowed in Australia. The founders then lobbied the Australian government for legislative reforms (as part of a larger industry body) to enable this form of capital raising. 

As of 11 January 2018, the Australian Securities and Investments (ASIC) issued a new class of financial service licence to seven intermediaries, one of which was Equitise. “We can, under a highly regulated framework, accept investment from everyday people through the Equitise platform,” Rachamim says. Previously, only the very wealthy and venture capitalists could invest in private companies. Now anyone can own a share of businesses they believe in through crowdfunding.

Rachamim says his role is to assess risks and build trust. “You need to educate people to build integrity in the quality of the offering,” he says.

For someone so young, 25-year-old Rachamim has already had some notable successes. His career is grounded in business, finance and mathematics, yet his path has been anything but traditional.

As part of Venture Capitalist firm Earlymarket in the UK, he help create and implement a commercialisation strategy for a new business within three months. He then analysed investment prospects for SMEs across the UK, Europe and the US. In Sydney, as part of an incubator, Rough Diamonds, Rachamim helped launch a business from concept through to operations and seed funding. At Medipay Financial Services in Australia, he looked for efficiencies in automation, financial modelling and operational processes before joining Equitise on the cusp of retail equity crowdfunding being legislated in Australia.

What’s involved in valuing a business?

Rachamim stresses that the funding approach needs to be holistic and individual, particularly for start-ups, as every business is different. Retail equity crowdfunding builds a community around a business. Depending on the sector, the kind of product offering – whether it’s business to business or business to consumer – and what stage it’s at, each model and strategy will be different. 

Rachamim says the approach also depends on the business valuation. Other considerations are identifying the sources of funding, the founders and their persona. 

The biggest priority is to look at the potential and “be forward-focused”. For example, he says, if we valued Tesla, we’d know that by 2040, electric vehicles will enjoy mass adoption, but they don’t right now. Technology and innovation play a huge part in the potential of a business. 

“There has to be a balance between where the business is today, where they want to be in four years’ time and what the future funding milestones are of where an investor could take them,” he says. 

Traditionally, Rachamim says, decision-making about investments has focused on quantitative factors, but qualitative factors are becoming more important. “When you make assumptions, the quantitative factors are impacted by the qualitative” such as what’s happening within the market, new technology and changes in the market.

“The ability of the business valuer to interpret trends and translate them into something tangible is significant,” he says. “Numbers are important, but it’s how you translate that, by ascribing qualitative factors and building them into the model.”

 

 

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