5 Equity Crowdfunding Myths Busted

    As New Zealand’s first licensed equity crowdfunding platform and one of the first in Australia, PledgeMe has seen a lot of misconceptions about equity crowdfunding over the years on the part of companies considering their capital raising options. However, there are just as many (if not more) on the part of potential investors too (which can be almost anyone in the case of equity crowdfunding). They pop up on equity campaign pages in the ‘questions’ section, in articles about equity crowdfunding, and in conversations with people we talk to. If you’ve ever asked yourself ‘Should I invest via equity crowdfunding?’, it may be because you’ve also come across these misconceptions and want to do your research thoroughly before investing (as any good investor should do). There are probably countless variations of myths and misunderstandings about equity crowdfunding out there, but we thought we’d highlight just five of them in this article. We’ll also delve into why we believe equity crowdfunding crowds have just as much to offer as venture capitalists and angel investors.

    PledgeMe founder, Anna Guenther, has seen many misconceptions about equity crowdfunding over the years.

    Equity Crowdfunding Myth #1: You ‘donate’ to an equity crowdfunding campaign

    Having a charitable cause does not mean you’re a charity

    Merriam-Webster Dictionary defines the word ‘donate’ as the following:

    ‘to make a gift of..to contribute to a public or charitable cause’.

    It’s true that many equity campaigners have an environmental or social impact at their core. In fact, 70% of equity crowdfunding campaigners on the PledgeMe platform last year had impact at their core. This includes campaigners like Happy Cow Milk (who do kinder, greener dairy) and Eat My Lunch, who have a ‘Buy 1, Give 1’ model. Although these core values could be called ‘charitable’ (which is defined as ‘relating to the assistance of those in need’), they are not public, nor is a pledge to an equity campaign a gift.

    The screenshot above shows the supporter of a recent PledgeMe equity campaign referring to a $25,000 investment as a ‘donation’. Names have been removed.

    Equity crowdfunding campaigners are for-profit companies with employees, expansion plans, marketing and sales departments, offices (even if that’s an at-home office, like the PledgeMe team has)…everything you’d expect from a regular company or social enterprise. The major difference is that solving a social, environmental, or community problem outside of their organisation is often their core reason for existing (purpose before profit). This impact-focussed business model is the reason why they have enough of a crowd in the first place to do an equity campaign. Every pledge to these kinds of equity campaigns is an impact investment. Which brings us to our next point.

    Founder of Ethique (right) at the launch of their equity crowdfunding campaign. Ethique was the 4th fastest growing company in 2019 on Deloitte’s Fast50 list, with a 999% growth rate.

    A pledge to an equity campaign is an investment

    Pledging to an equity crowdfunding campaign is an investment, not a donation. You’re buying something of value which could increase in value or be sold over time. Of course, there is always the risk that a company could close without anything paid out to shareholders, which could mean you lose your investment. However, we’re just going to leave this here: 

    We’ve only had two companies close down so far out of 50 that have run campaigns in the last six years. Possibly because, if people believe in you enough to invest, it shows you have a solid crowd of customers (or potential customers).

    Anna Guenther, PledgeMe Founder, 2020 in Is it time to relaunch lending?

    Two companies out of 50 is not bad when you consider the success rates of companies funded through top venture capitalists: 

    Of the 200 (companies) per year that are funded by top VC’s, 15 of those startups will generate nearly all of the economic return. The rest will either go to zero or limp along without generating much return.

    Corporate Finance Institute

    Equity Crowdfunding Myth #2: Equity campaigners need the funds to survive, or are somehow failing companies

    Sorted states that businesses who are equity crowdfunding “need all the funds they can to keep the business alive.” The common ‘most startups fail’ quip also appears in the article. These kinds of statements imply that companies which choose equity crowdfunding are not as likely to succeed as those who choose more traditional investment avenues. This is not the case in PledgeMe’s experience.

    PledgeMe’s equity crowdfunding campaigners are usually not startups

    The vast majority of equity campaigners on PledgeMe are SMEs (small to medium sized businesses). They are not just starting up. The average number of years companies have been around before launching their equity campaigns on PledgeMe is 5.25 years. And while we admit that we can’t all agree on what a startup is exactly, we’d argue that companies that have been around as long as two decades (like Mungalli Creek Dairy, who raised $771,000 in 2018) are probably not startups. If they’re just starting up, then it probably means they don’t have a very engaged and loyal crowd, which is one of ‘the 3 C’s’ we look for when determining whether a company is suitable for equity crowdfunding.

    Mungalli Creek Dairy was founded in 2000, and ran their equity crowdfunding campaign in 2019.

    PledgeMe’s equity crowdfunding campaigners are all growing companies

    Another important ‘C’ we look for is ‘Good Company’. While this means ‘doing good things’, it also means ‘doing well’. We ask ourselves ‘Does the company have a solid growth plan?’, and ‘Is this company growing or can it show that it should grow post-raise?’. 

    A highly typical example would be a company who has reached its production capacity in its current facility, such as a craft beer brand whose demand has outgrown their brewing capacities, limiting their growth. Though the demand for their products may be up, they still need a cash injection to open a new brewing premises. They can show that they should grow even more post-raise because the funds raised can boost their brewing capacity to meet the demand. This is Parrotdog Brewery’s equity crowdfunding story.

    The Parrotdog team at their brewing facility.

    Companies who equity crowdfund often grow even more during their campaign

    Another thing to consider is that companies often experience spikes in their sales during an equity crowdfunding campaign because brand awareness is at an all time high. Take Downlights, for example, which raised $166,000 in equity in the middle of the Covid-19 pandemic. During this period of economic uncertainty, when almost every other business was experiencing a downturn, their sales for April were 92% higher than projected, while May sales were 3x higher than projected just halfway through the month! 

    During their equity crowdfunding campaign in early 2020, Downlights’ sales increased by more than 90%

    Equity Crowdfunding Myth #3: Equity crowdfunding is far riskier than other forms of investing

    All types of investment involve risk

    Is equity crowdfunding risky? You bet your bottom dollar it is (pardon the pun)! By investing in an equity crowdfunding campaign, you could very well lose your investment. It’s risky. However, so is every other form of investment. 

    From our point of view, equity crowdfunding is actually potentially less risky because it’s a crowd of people investing in a company rather than just a handful of investors. Our line of reasoning is that if hundreds of regular people (and by this we mean everyone not in a suit with buckets of money to throw around) love a product or service enough to collectively raise upwards of $500,000 to see it grow, then that company probably has a customer base loyal enough to help keep it growing. And (we hate to repeat ourselves) but only two of our past successful equity crowdfunding companies have closed down out of 50. 

    Having clear information can help mitigate the risk of equity crowdfunding

    The difference between equity crowdfunding and VC/Angel investing is that buying shares is open to members of the general public. For many people pledging to the equity crowdfunding campaign of a company they love, it will be their first investment experience. They may not have experience analysing financial information like a full-time investor might. That’s why having a really clear information memorandum or offer document is very important, and why we’re legally obliged to place risk warnings in these documents, on our website, and in our communications (which may elevate the perception of the risk). 

    A clear timeline from Puro’s 2019 information memorandum for their record-breaking equity crowdfunding campaign.

    Equity Crowdfunding Myth #4: Equity crowdfunding is only for tech companies

    Over the years, the PledgeMe team has heard this myth repeatedly: that equity crowdfunding is only for tech companies and that people who invest are only interested in tech. That couldn’t be further from the truth. Equity campaigners come in all shapes and sizes, and so do the people who pledge to them. The common denominator of successful equity campaigns is having something special enough to attract a crowd. 

    There’s something special about successful equity crowdfunding campaigns

    In a webinar hosted by PledgeMe earlier this year, Happy Cow Milk founder Glen Herud spoke to a crowd of eager listeners and said the following:

    I simply cannot stress enough the fact that you need to have something unique for crowdfunding to work for you. You need to be different

    Glen Herud, Happy Cow Milk founder, 2020

    In his case, ‘unique’ was trying to revolutionise dairy to be kinder, greener and fairer. Despite the hardships he first faced when trying to get his idea off the ground, he persevered. He wanted to do things which were radical in the dairy industry, such as leave the calves with their mothers after they were born, take the milking station to the cows where they were in the fields, and invent a ‘Milk Factory in a Box’ which facilitates zero-waste, zero-plastic packaging and more profits going back to the farmer. The reason he did an equity crowdfunding campaign was because his crowd urged him to in order to change the direction of the company for the better.

    Every equity crowdfunding investment is a testament

    We believe in a crowd’s power to validate. If hundreds of people are willing to invest in a company as first-time investors, that would indicate that there is something special about it. We also think there’s something very special about the messages of support we see from investors after they’ve pledged (found in the ‘Pledgers’ section of equity campaigns). Take messages like this, for example:

    Excited to be supporting, in some small way, my favourite NZ company. Love what you’re doing. Love the product. – Margaret and John L., investors in Ethique’s 2017 equity crowdfunding campaign.

    “So chuffed for you guys!! Can’t wait to see the place!” – Annika C, investor in Behemoth Brewing’s 2019 equity crowdfunding campaign.  

    “I have bought from Container Door quite a few times and have always been pleased with the products and service…I believe this is the future of retail…” – Catherine T, investor in Container Door’s 2019 equity crowdfunding campaign

    We’d argue that these messages show that a crowd of equity pledgers have the best interests of the campaigner at heart, at least more so than other types of investors. Equity investors often care primarily about the impact of the company and want to see it grow for impact purposes (regardless of whether they receive dividends or not). 

    Food Connect’s 513 shareholders in 2019 were self-declared ‘careholders’.

    Equity Crowdfunding Myth #5: Equity campaigners turn to their crowd as a last resort

    Equity crowdfunding is often not the only capital raise campaigners have done

    This particular myth follows the same vein of thinking as the previous one: that equity campaigners are crowdfunding because their offer didn’t attract VC or angel investors. We disagree with this for two main reasons. Firstly, many equity campaigners come to us to raise a second or third round of investment, after having raised the first round(s) through more traditional investment avenues. Examples of such companies include Ethique and Downlights

    Companies have very specific reasons for choosing equity crowdfunding

    Reasons equity campaigners choose to crowdfund vary from wanting to give more back to their loyal customer base, to the appeal of of retaining more control of the company by issuing non voting shares or less of the company (which, in Australia, can be written into their company constitution). Being part-owned by an equity crowd means companies can focus on doing good and doing well, whereas other funding avenues can shift the focus from impact to hyperbolic financial growth (which can be an unhealthy and rocky course). Below are some of the reasons companies choose the equity crowdfunding route.

    Puro chose the equity crowdfunding route in order to include everyday Kiwis (raised NZ$3.6 million with PledgeMe in 2019).
    Parrotdog chose equity crowdfunding because they felt a strong companionship with their crowd (raised NZ$3 million with PledgeMe over two equity crowdfunding campaigns from 2016-2017).
    CDA Health decided to raise equity through a crowd to retain their independence and to include the public in their business (raised AU$1.5 million with PledgeMe in 2019).

    Equity crowdfunding democratises investment

    Whatever the reason may be for companies to opt for equity crowdfunding over other means of raising capital, it’s clear at least that equity crowdfunding is one of the most inclusive means of raising funds. Equity crowdfunding has been legal in New Zealand and Australia for less than a decade. It’s very new compared to more traditional avenues of funding, and we believe this is one of the reasons why these equity crowdfunding myths and misconceptions exist. Additionally, we believe its inclusivity of general members of the public may make it suspicious to traditionalists, because many people pledging to equity crowdfunding campaigns are first-time investors. 

    To date, PledgeMe has processed almost $50 million across all campaigns in Australia and New Zealand from over 131,000 pledgers. The success rate of equity campaigns is 61% in New Zealand and 75% in Australia. These numbers show companies that investment crowds can be just as valuable as more traditional avenues of raising capital. Anyone can invest in impact-driven enterprises through equity crowdfunding. Does this make their contribution any less valuable? We think not. 

    Are you curious about investing in equity crowdfunding campaigns? Learn more in our New Zealand Investor Education Guide or our Australia Investor Education Guide.

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