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Equity crowdfunding tipped to end innovation aversion

Michael Bailey
Michael BaileyRich List co-editor
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The perception of 'innovation' as a job destroyer and a vote loser could be turned around by the newfound ability for Australia's 2 million private businesses to offer shares to ordinary investors, industry observers say.

"We have the opportunity to invest in established companies on the Australian Stock Exchange, but there is no comparable marketplace to invest in start-up ideas that could change the world," said Ben Bucknell, the founder of OnMarket Bookbuilds.

"The ability to source equity from the 'crowd' brings entrepreneurs and consumer investors together for the first time."

Prime Minister Malcolm Turnbull with CEO of On-Market BookBuilds Ben Bucknell. Dallas Kilponen

Mr Bucknell predicted the passion of the former would rub off on the latter when portals like his can start selling stakes in small businesses after September 29, following Thursday's introduction of legislation by Treasurer Scott Morrison which enables proprietary companies to crowdsource equity for the first time.

Once the new legislation passes the Senate with opposition support as expected, all proprietary and unlisted public companies with annual turnover or gross assets of up to $25 million will be able to advertise their business plans on licensed crowdfunding portals, and raise up to $5 million a year to carry them out.

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Investors can put up to $10,000 a year each into an unlimited number of ideas.

"It might be organic macadamia nuts, or a social justice initiative that wouldn't satisfy a bank's strict lending criteria," Mr Bucknell said.

Despite almost losing the 2016 election where it campaigned heavily on the 'ideas boom', the government must be hoping he is right.

Nearly 12 months after former prime minister Tony Abbott said it was "good we're no longer talking about innovation", Industry Minister Arthur Sinodinos will on Tuesday give the opening address at the AFR Innovation Summit, an annual event discussing Australia's progress toward a future-fit economy.

At the conference, the chair of the Innovation & Science Australia independent statutory board, Bill Ferris, will outline the national innovation strategy out to 2030 which he is developing for the government.

Elsewhere, the head of CSIRO Data61, Adrian Turner, will join a discussion on Australia's readiness for 'Industry 4.0', where the industrial internet-of-things looms large.

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These concepts are beyond the everyday concerns of the average voter, however equity crowdfunding would help bridge the gap between them according to Angus Harris, the co-chief executive of Harris Farm Markets, who earlier this year said he would likely use it to bankroll the building of new-concept stores.

"It's a good fit for a community-focused business like ours. You give people in Lindfield or Newcastle the chance to join a syndicate that invests in the stores we're building locally, you lock in brand loyalty before you've even opened," he said.

Equity crowdfunding might bring ordinary investors closer to innovation, but it's also likely to give them the rollercoaster ride hitherto reserved for professional venture capital investors.

Crunching the numbers on the UK's equity crowdfunding regime, research house AltFi found last November that out of 955 equity crowdfunding campaigns launched since they became legal in 2011, only five had exited and produced a positive return to backers.

Nearly 12 per cent of equity crowdfunding companies had gone bust, and a further 15 per cent were identified by AltFi as "at risk", being either uncontactable or having raised a subsequent 'down round' at a lower valuation than their initial campaign.

However nearly 29 per cent of equity crowdfunding companies had raised 'up' rounds and were tracking strongly.

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Australian equity crowdfunding investors will be able to back a company with as little as $50, and a similar minimum investment size applies in the UK. AltFi advised investors to take advantage of this and diversify widely, as just as in traditional venture capital the "80:20 rule would likely apply" and a majority of positive return would come from a small minority of the equity crowdfunding campaigns backed.

Mr Bucknell predicted there would be no shortage of companies wanting to crowd-source equity, pointing to 2015 research by Macquarie Equities, which had found Australian entrepreneurs wanted to borrow up to $60 billion a year more than they currently were allowed, to grow their businesses, hire new staff and innovate.

He acknowledged some investors would be put off by the risks, but that financial returns mattered less to the tech-savvy millenials who were likely to be early adopters of equity crowdfunding campaigns.

"Young Aussies want to make a difference and invest in businesses they believe in," he said.

Mr Bucknell pointed to a 2016 report by research house Toniic in which 79 per cent of millennials described themselves as 'impact investors' seeking both financial and social return.


Michael Bailey writes on entrepreneurship and the arts. He is also responsible for the Financial Review's Rich Lists. He is based in Sydney. Connect with Michael on Twitter. Email Michael at m.bailey@afr.com

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