Survey results – your feedback

Thanks to all who completed our survey over the last few days. It was humbling and energising to receive the quality of responses - we're very lucky to have an engaged community that genuinely cares about growing this fledgling market in New Zealand.

We've outlined your key points and how we're responding to each below.

Quality over quantity

There was overwhelming feedback to keep the quality of deal flow high. Many people expressed that they'd like to see more companies on Snowball, but only if the existing vetting standard remained.

We've aimed to keep the deal flow quality up by only facilitating offers that we think will have a good chance of funding success. As a platform, we do not give financial advice or comment on the merits of an offers - it's up to investors to determine whether an investment opportunity makes sense to them. However we've tried to weed out offers that investors would not find worth assessing. We remain committed to this approach. We want investors to have good experiences, and to make repeat investments over time. We think that investors will get more value from a curated marketplace as we currently provide.

Types and stages of company

Investors were most interested in early stage companies, but there was significant appetite for startup and growth companies.

Here are the responses to preferred type of company:

We plan to facilitate companies across a range of types and stages, subject always to our judgment of whether there's likely to be sufficient investor demand for a particular offer.

Liquidity

We received a large amount of feedback regarding the secondary market trading of shares. This supports the research we did before launch which indicated that liquidity is an important characteristic for some investors. As a result, secondary market development is something that we have given significant thought to.

First, some background.

There are broadly 4 ways to realise a return on investment in a private company:

• Exit (sale of the business and distribution of the proceeds)
• Sale of shares after listing (after floating the company on a stock exchange like NZX)
• Dividends
• Private sale of shares (finding someone to buy the shares)

Many early stage companies will not be successful. They will not reach listing, or sale of the business, or pay dividends. In these cases, some or all of the investment will be lost.

But others will come alight and return multiples of the entry price. Those that are successful may have a long period before listing, or sale of the business, or high dividends. During that period, many investors will have absolute comfort with the longer term liquidity pathways that are outlined in an offer. For others, their investment objectives may change, or their views about the company may change, or their personal circumstances may change. As a result, they may start to think about early liquidity.

For most investments in private companies, the only short or medium term option for realising a return is by selling shares privately. The problem is that there's currently no central market for people to trade shares in private companies, so it can be hard to find a buyer.

Without a central market, it's also difficult for traders to feel informed about current valuation, making them less likely to trade. The advantage of disclosed share trading prices is that the uninformed can rely on the informed to bid up unduly pessimistic prices, and to sell down from unduly optimistic pricing. You see this every day in the way people refer to Trade Me to get a feel for what their car may be worth. They do not try to work out what it should be worth by its specs. Instead they look for similar transaction to understand what others think that kind of car is worth.

We've developed a proposed market design, and have spent the last 6 weeks seeking feedback on our design with companies, investors, brokers, NZX, and investment bankers. The decision whether to proceed will be driven by demand from companies.

How has our proposed market design been received?

Most investors we spoke to were accepting of the lack of liquidity with unlisted equity investments. However in terms of the proposed secondary market, investors and other stakeholders were very positive about its design.

Companies that have raised through Snowball were more hesitant. They haven't had their new shareholders banging on their doors wanting liquidity (which we were happy to hear, because investors shouldn't expect liquidity with unlisted equities). So companies were inclined to wait until liquidity became a higher priority.

We've been relatively quiet about our proposed secondary market because we don't want investors to have overblown expectations of the limited liquidity that may result. A market won't make it easy to trade shares. Investors are likely to experience a "liquidity discount" when selling. It would not be nearly as liquid as a regulated market like NZX. But it would be better than what we have now - it will bring buyers and sellers together into a market at a point in time.

Valuations

There was significant comment about pricey valuations. We see the following tensions arising as a company works through its valuation process.

First, there's the obvious incentive for a company to value itself high so that existing shareholders retain more equity.

However there's a number of incentives for a company to set a valuation that's perceived as fair by the market:

• A company will face a negative response from sophisticated investors if the valuation is perceived to be too high, decreasing the chance of the offer succeeding and potentially resulting in a waste of time and money for the company. This can happen with companies of all sizes - we saw this with Hirepool last year, a larger company that was looking to IPO but was shunned by brokers on the basis that the valuation was too high. A failed offer may be more than just a waste of time and money, it could actually damage the company's reputation.
• Many high growth companies will require multiple funding rounds to achieve their desired rate of growth. Early funding rounds which are overvalued will cause disappointment to early investors, and potentially alienate them from subsequent rounds.
• Snowball vets companies based in part on our view as to whether an offer will be successful. Valuation is a factor we consider when making that judgment.

We're well aware of the comment about valuations creeping too high, which would unbalance the risk / reward profile of this market and ultimately make it unattractive. Our offer preparation process has evolved as a result of this feedback.

While it's up to a company to set its own valuation, we now engage with companies to help them set a reasonable valuation in 4 ways. The most recent group of companies have found these tools very helpful. We will continue to monitor market feedback on valuations and evolve our process accordingly.

• Lead investors: Ideally, a company will arrange commitment from one or more credible investors that are close to the company and are investing a significant amount. This helps to set the terms and valuation, and is also a good reference point for other investors. We encourage companies to seek a lead investor before making a public offer.
• Financial advisors: We encourage companies to take independent financial advice. We expect that competent financial advice will shake any legacy ideas and help the company to approach valuation with a clear understanding of the relevant factors. In certain circumstances we arrange a pro bono meeting between a company and a financial advisor to discuss the financial function of the company, financial forecasts, and valuation. A couple of well-reputed firms with experience in valuing early stage growth businesses have kindly agreed to support this initiative.
• Independent valuation panel: We've brought together a group of individuals with investment expertise and experience in valuing early stage companies. With some offers we seek feedback from this panel on valuation (with the company's consent), and relay this anonymous feedback to the company before its offer is approved to go live.
• Deal structure: Where relevant, we can suggest alternative deal structures that aim to provide investor protection around valuation. For example:
  • Offering shares at a value based on a conservative forecast scenario. If the company hits its base or aggressive forecast scenarios, the pre-offer shareholders would be issued or retain a higher percentage of equity as though the valuation was based on those more aggressive forecast scenarios.
  • If there is a "down round", shareholders would be issued further shares as if they invested at that lower valuation.
  • If the company is wound up, shareholders can be partially protected through a liquidity preference, meaning that they are paid back their investment in preference to other equity holders.

Please let us know if you think there are other things we could be doing. For this market to thrive over the long term, investors need to be making returns that are commensurate with the risks. We're committed to taking action where appropriate to assist in the sustainable growth of this market.

Thanks again to everyone who provided feedback. Please get in touch with Josh Daniell at [email protected] or 027 634 2463 if you have further comments.