Reinventing debt with crowdfunding

Just before Christmas we took a big step toward launching a new way for Kiwis to fund the things they care about. Applying for a peer-to-peer lending licence was the first public step we’ve taken toward offering a new product: PledgeMe.Debt.

To get this far it has taken months of research, picking brains, and blending ideas, now our application rests in the capable hands of the Financial Markets Authority. So while we wait for them to go over all the paperwork we wanted to give you a heads up about what this means because it’s not at all as scary as the name implies!

What is it?

PledgeMe.Debt will allow organisations (more on what that means below) to reach out to their crowds so they can fund bigger and better campaigns. An organisation’s crowd can lend it money and the organisation pays their crowd back with interest. It is a really simple way PledgeMe can further democratise what gets funded in New Zealand and offer an alternative to big ol’ banks.

It is going to work similarly to our existing project and equity platforms. Organisations will offer a campaign, their crowd will pledge, and if it is successful they’ll receive the money to go do the thing they said they were going to do. The difference with PledgeMe.Debt will be that the organisations will pay back the money they receive plus interest (and potentially other rewards).

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The back story.

Debt crowdfunding is a growing space. Internationally it makes up two-thirds of the crowdfunding market — a market that’s doubling every nine months.

Modern debt crowdfunding started in the UK in 2005, with Zopa launching the first personal lending platform. After the Global Financial Crisis in 2008/9, debt crowdfunding platforms started popping up to provide fairer, more accessible and more transparent ways of funding. Moving into the twenty-teens, there has been further developments, the emergence of specialist platforms, IPOs for a handful of platforms, traditional institution buy-in, and government endorsement — particularly in the UK.

So this new way of lending is a growing space that is allowing a whole bunch of organisations to do amazing things.

Why we’re excited

We think we’ll be the first platform this side of the equator to run project, equity and debt crowdfunding campaigns on the same site!

We truly believe that crowdfunding is the future of making things happen; raising money, growing crowds, and making decisions that serve communities, big and small. Debt crowdfunding is a large unserved piece of the New Zealand crowdfunding pie and the time to sate the hunger is now.

Adding debt crowdfunding to our platform strengthens our ability to help Kiwis fund the things they care about. While equity is just for companies, debt allows a broader range of campaign creators raise larger amounts of money. It’s a more transparent way to raise money, compared to traditional avenues. Having this choice in crowdfunding options gives PledgeMe an edge when it comes to Kiwis seeking funding.

How is PledgeMe.Debt different from what’s happening already?

In 2014, debt crowdfunding began to trickle into New Zealand. Harmoney launched its peer-to-peer lending service which matches individual borrowers and lenders anonymously through their marketplace.

PledgeMe.Debt is going to do debt crowdfunding a little differently.

We’ll be offering a transparent campaign-led platform. Campaigners will be able to reach out directly to their crowds of friends, family, supporters, and customers.

This means growth companies, social enterprises, not-for-profits, schools, co-operatives and communities — organisations wanting to involve those around them to achieve their purpose — could be able to borrow from their crowds.

Unlike many peer-to-peer platforms, PledgeMe isn’t backed by a bank. This means borrowers will have a greater say over what, when and how they borrow and their crowds will be the decisive factor. This means the relationship campaigners will have with their lenders will be a lot different and, we believe, a lot more beneficial.

Who will be able to raise money?

Put simply, any organisation that can prove they will be able to repay the loan will be able to use PledgeMe.Debt.

One of the reasons we want to offer debt crowdfunding is that there is a demand for alternative funding sources. We’re seeing that in all sorts of organisations from companies to social enterprises, not-for-profits, schools, co-operatives and community projects. PledgeMe.Debt provides an attractive and realistic option for any of these groups.

Here’s the kind of scenarios that PledgeMe.Debt will work for.

Companies

Companies with a strong customer base and a few years of success in their back pockets, with intentions to grow their product/service. Using PledgeMe.Debt they will be able to serve new markets and achieve a new level of engagement. They may be looking to bridge a gap between equity raises, buy new equipment or bring in new expertise that will enable them to do more good. SMEs in New Zealand already borrow a significant amount from banks every year for these same reasons. For many it makes more sense to go out to friends, family, supporters, and customers for this money and activate a crowd rather than borrow from a bank!

Social enterprises

Social enterprises which are changing our world by activating communities and changing perceptions could really capitalise on PledgeMe.Debt. For many social enterprises, especially early stage ones, selling a large chunk of the company through an equity raise doesn’t fit with their values and borrowing from a bank seems like a misfit with their motives.

Charities / not-for-profits / NGOs

Charities, NFPs and other NGOs wishing to educate and serve more people, scream their cause from the rooftops and grow and strengthen their relationship with their funder base may be eligible to debt crowdfund. Currently options for raising money are very limited for these groups.

Schools

Schools which want to improve facilities, become more self-sufficient and help teach students about basic economics and business can use PledgeMe.Debt too.

Co-ops and communities

Co-ops and communities that have a plans to reinvigorate their area and build capacity are perfect candidates for PledgeMe.Debt. If their vision is for sustainable communities, eco-villages and sharing economies built on pooled resources, trust and interdependence crowdfunding will support and reinforce their efforts.

When will we be launching PledgeMe.Debt?

We’re waiting on approval of our licence from the FMA. Once this is (fingerscrossed) granted, we’ll be rolling out the tech side of things for testing. It’s being worked on currently, so we’ll be ready to hit the ground running.

We’re already looking for organisations and campaigners who will benefit from PledgeMe.Debt and hope to have our first campaigns up later this year.

If you think debt crowdfunding might work for you or if you’re curious about how it works, drop me an email. Looking forward to hearing from you.

 

International debt crowdfunding stories that have inspired us

What originally caught our eye were the Burrito Bonds of London Mexican food chain, Chilango. They raised £2m from 700 investors and garnished the bonds with extra burrito rewards. Still a bit peckish for growth, they followed it up last month with a £3.4m equity raise.

Gibbon, the simian name synonymous with slacklining, decided to shift away from bank borrowing to fulfil demand for their product Stateside by going out to their crowd of devoted followers.

Pod Point wants to make moving around less damaging for the earth. A social enterprise making electric vehicle chargers, they’re Open Charge Bond raised £385,000 to fund the roll out of their Open Charge network of public, electric vehicle chargepoints.

Not technically a crowdfunding campaign but rather an insight into the power of debt for not-for-profits, Autism Plus, a charity that supports adults and young people with autism, learning disabilities and mental health conditions, borrowed from Charity Bank to transform derelict barns into a chocolate factory and horticulture enterprise, run by people with autism and other disabilities.

A Seattle adventure and nature travel tour company borrowed US$25,000 through Community Sourced Capital to design and fit an adventure hub for travellers to come together to learn, chat, share and plan. What’s more is that they provide proof of the model, having repaid their loan fully over 18 months.

A Californian school district issued municipal bonds (loans to fund state organisations) through a Neighbor.ly campaign, using the money raised to renovate and upgrade thirteen schools.

Aus-merica

Early last month, I spent two days in Melbourne and one day in Sydney meeting with local companies, co-working spaces, government, funders, and startup supporters.

Australia trip

My trip had two goals. Firstly to assess where Australia’s proposed legislation on equity crowdfunding was headed and secondly to get a sense (read sanity check) of whether PledgeMe should hop across the ditch.

Apart from realising that my American heritage felt strangely at home in the rule-focused country, here are my main findings:

Change of government is helping change the law

The Australian government has recently gone through a change of leadership (to the relief of most Australians it seems), and a shuffle of portfolios means there is a new minister in charge of the changes to their securities legislation. The Corporations and Markets Advisory Committee (CAMAC) which wrote the original report around equity crowdfunding has been abolished, leaving Australia with the mouthful of a moniker “crowd sourced equity funding” for equity crowdfunding. Now, after two rounds of submissions, the equity piece is slated to enter the innovation statement set to come out by December 2015.

There is a general sense of optimism around the changes. The new Prime Minister, Malcolm Turnbull, has a background in tech. This seems to leading the industry to believe he will make changes to support SMEs. He’s already shown he is capable of doing this with recent employee share scheme changes.

We believe that government’s role is not to tell citizens, let alone businesses, what is best, but rather to enable them to do their best.” Malcolm Turnbull

However, many predict Australia is more likely to follow the American way of equity crowdfunding. People I spoke to said as much: “Australians like rules”. This means there will probably be investor caps on how much individual investors can invest, both per campaign and per year. This stems, in part, from a general fear from institutional investors that retail investors would lose all their money in this space. New Zealand originally discussed investor caps, but decided not to go down that path. We agree with this. Caps on investment assume that retail investors need protection from themselves. This could be seen as somewhat patronising and counter to Prime Minister Turnbull’s above statement.

There has been some talk recently about the law change excluding debt/peer-to-peer(P2P),  and existing only for public companies. Both of these comments are strange, for the following reasons:

 

P2P

Debt crowdfunding, crowdlending, peer-to-peer, whatever you call it, is two thirds of the international crowdfunding market. Yep, bigger than all the equity crowdfunding and kickstarter-esque platforms combined. So it seems odd that it’s being left out of the conversation. In fact, in New Zealand, equity crowdfunding was actually an afterthought added after one of the P2P platforms made a side comment about it in a meeting in the lead up to our legislation changes. And, it’s a space that we’re really interested in ourselves as it helps more than just companies find funding – it supports individuals, other organisational set up, and social enterprises. So interested in fact, that we’re exploring an SME / organisational product for kiwis.

There are P2P platforms operating already in Australia, but under the old legislation with high compliance costs.

Public companies

Company structures in Australia are different to New Zealand.

In New Zealand, the companies coming through are private companies. They are not tied to the same continuous disclosures that a public company would be required to do, and are not required to create a public prospectus for funding. While equity crowdfunding may trigger the Takeovers Code (eg. a company has more than 50 voting shareholders) and a company may be required to audit their financials if their voting shareholders do not opt out, these companies are not classified as public.

In Australia, if you have more than 50 non-employee shareholders, you immediately move from being a proprietary (or private) company to being a public company (albeit unlisted). This means you are required to have 3 directors (2 need to be Australians) and are required to provide a directors statement, financials and an auditor’s report annually.

 

 

There is a need for funding (and a crowd)

Australia is seeing more Venture Capital funds coming through for tech, a maturing startup ecosystem, and a growth in impact investment. But, there was also a general sense that while Australia is generally wealthy, it is more likely to go into traditional investments (eg. asset classes), not currently into start ups. Also, Basel III has made it harder for SME’s to access bank loans. But there are some companies that need growth funding that aren’t supported by the current ecosystem, with 10% of Australian SME’s stating they have difficulty accessing capital to grow in a recent Deloitte report. Often, these companies either wouldn’t fall in the traditional investment space or would not choose to go down the traditional investment route.

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My conversations made me realise that the other side of crowdfunding (the crowd) had been seriously downplayed in the discussions around legislation changes. Everyone was hung up on the funding (and potential to lose money) and overlooked the other skills, support, and insight a crowd of consumer investors could bring.

I told the story of Brianne from Sorbet pretty much on repeat. How she went out and raised $200k from her crowd in two weeks, but not only did she get cash from her crowd; she also had three chemists invest. There was a problem she’d been working on for weeks if not months, which they came in and fixed in half an hour.

 

 

It’s a big (and complicated) market

Australia is large compared to New Zealand. With five times the population, there is more individual wealth (one person ball parked 10x that of NZ), and there are more layers to bureaucracy (city, state, federal).

There was a comment that Australia is more likely to back Australian owned, and that we would need distinctive entry plans tailored to each city. Which really made us think that if we wanted to go to Australia, we’d need partners. Companies or organisations that reflect our values, but aren’t already in the crowdfunding space.

 

 

It’s a crowded market

There are quite a few players getting ready to launch in the space. Some platforms have already completed their technical development, and there is a sense of waiting to see how the legislation lands.

Some platforms believe  the changes could come through this year (as stated in one of the documents released by government) where others think it will still be at least 6 months before the first platform is licensed and launching campaigns.

There are a range of platforms getting ready to enter the space, some with project based crowdfunding experience, some currently in the equity crowdfunding space in NZ (Equitise, My Angel Invest) and some specific niche crowdfunders (all the property….).

 

 

Where to from here?

I feel like there is little sense for PledgeMe to try and enter the Australian market on its own. But, we are open to partnering with companies in Australia to set up a platform (with us bringing the tech / expertise, and a partner bringing the potential base of campaign creators / presence / brand recognition). Partnering would be a stronger proposition than setting up a new platform from scratch.

So if there are any folk that would like to continue conversations or start conversations, get in touch with me (anna@pledgeme.co.nz). We’re keen to support the democratisation of funding in Australia, and are actively waiting to see how the final legislation pans out.

 

Final thought

For all that’s good Australia, please don’t go down the path of over regulation. If you write 635 pages of guidance for platforms like the USA, you’ve already stifled the innovation of your 140 character fueled future.

 

And…

a big thanks to everyone that took the time to meet with me and share their thoughts on the future of funding in Australia.