The democratisation of access and information quality

Snowball Effect has now successfully closed its first 3 equity crowdfunding offers, raising just under $2 million for those 3 Kiwi businesses. This is a fantastic result not just for the businesses, but also for the New Zealand private investment community.

We are told time and time again that SMEs are the lifeblood of the New Zealand economy, and yet these are the very companies that face growth constraints due to lack of affordable working capital. Whilst alternative funding sources are available these often come at a price whether it be in the interest rate of debt capital, in the loss of control in private equity, or in the increased governance and compliance costs of listing. This situation is by no means limited to New Zealand. You can find directly comparable dynamics in the US, the UK, and around the world.

Equity crowdfunding provides a very real alternative to these capital sources, and will transform capital raising for businesses over time.

The benefits of equity crowdfunding for investors are also difficult to overstate. Particularly in a low interest rate environment, investment capital needs to be directed towards growth assets that hedge against inflation. New Zealand’s listed markets are liquid enough, but the composition is skewed in a way that does not reflect the underlying economy, nor does it afford private investors a level playing field with institutions (from a transaction cost and arguably from an information quality point of view).

Across time and with more companies seeking equity crowdfunding we will see private investors have the opportunity to affordably invest in growing companies, offering exposure to sectors and industries that can’t currently be accessed through other investment channels. Without getting ahead of ourselves the eventual formation of a mature secondary market will make these investments more liquid, portable and divisible.

What I find interesting about this is that the driving force behind the early successes is very simply information. Snowball Effect is not a technology company, nor is it really an online business. The fund raising companies are vetted offline and the offer creation is undertaken offline. The only function the technology provides is to broadcast accurate and timely information about the offering to interested parties. Which is, after all, the very essence of digital technology.

Equity funding in early stage companies used to be a closed shop. Network financing as it existed for most of the 20th century was characterised by investment banks having direct relationships with institutional investors. In taking an offer to market they would literally “build a book” of potential investors and run a private roadshow to elicit indications of interest. There was (and still is) a high degree of art to this approach as enough interest needs to be generated to fully subscribe the offer but not so much as to overprice it for key investors. In any case private investors are very much left in the cold until the securitisation is complete.

Contrast this with the facility provided by Snowball Effect, where all investors and potential investors are provided the same quality of information in real time across the globe. It’s such a simple shift and yet with this development an entire financial utility has been created providing improved access to capital for growing businesses and an alternate capital destination for private investors.

The government and FMA should be congratulated for having the presence of mind to enable this facility. Now it’s up to businesses and investors alike to demonstrate the value this can bring to the New Zealand economy.