Crowdfunding: What is it and how to I get started?

© Copyright Fat Hen Ventures Ltd. ABN 91 167 713 984

focusing on the $350k to $5m space

A crowd backed venture capital company

Accessing new sources of capitalto fund start-up’s, business growth and succession plans

The presentation This presentation looks at emerging trends in accessing capital for Australian companies as well as investor access.•Traditional funding landscape for businesses•Emerging investment platforms •How to get ready •Overseas perspectives •How can I tap into the junior capital market in an organised way?

Today’s session is focused on businesses looking for capital + investors looking to invest into private companies.

There are detailed notes available to support these summary slides and can be sent to you or downloaded upon request

Fat Hen Ventures Ltd has been established as a crowd backed venture capital public unlisted company operating principally in funding up to $5m for unlisted companies.

Traditional funding sources for businesses

Most businesses start small, often not in a corporate structure and rely on funding from family, friends and banks to grow.

Businesses often outgrow funding capacity from such sources and the bank whilst a cheap source of finance is restricted mostly to hard asset security lending and PG’s secured on personal non-business property.

There comes a point where businesses, most likely by this stage, in a Pty Ltd company form, need to access funding and mainly equity capital – private equity / venture capital.

Such funding requirement may be for capex to handle a recently won contract OR a start up business where banks are unable to fund OR a succession plan (MBO) where the management team cannot fund the buy-out OR a business acquisition etc. Where do you go for this funding?

Who do you go to for private equity / VC funding?

Angels, VC’s….. BUT the VC market in the <$5m capital range has all but dried up ….. Some companies are forced to do a back door listing on ASX simply to access $3m or so BUT they are not really ASX ready + compliance costs are high relative to MC

Later Stage firmsBigger pools for >>>SME’s need capital Seed/Start-Up Stage

Ris

k

Founder, friends & family

Equity Markets

$200K $2M $20M $200M+Avg. Raising

Retu

rn

30X

10x

5x

2x

$50K $100K $1M $5M $100M$500K $10M $50M

Accelerators

Where are the VC’s?

$Private Equity

Commercial Banks

VC

Angel Investors

Very few structured funding places for $1m to $5m, yet there is plenty of demand

Mind the Gap

Why don’t private equity firms cover this SME Funding requirement?

Because the Australian Superannuation industry now has over $2 trillion in assets

Allocation of funds to the private equity / venture capital (VC) firms has halved over the past 4 years from 0.96% to last year’s low of 0.48% (ref: AVACL report 31/3/15).

AVCAL’s research shows that the average PE-backed business in Australia has an annual turnover of $195 million! PE/VC’s have become bankers in reality, sitting alongside a bank debt with a mezzanine debt facility into well established, low risk, profitable companies.

Have the lights gone out on backing private businesses? From early stage to business expansion and succession planning….

Australians punt millions on horse races yet won’t back our own people and home grown ventures. It is concerning to think that on one day of the year Australians bet more on the Melbourne Cup ($200m in total or $9 per capita) than the entire Australian venture capital industry invests in start-ups in a year (A$100 million or A$4.55 per capita).

we need to change this mindset!! Invest in people NOT horses and poker machines.

What can we do to help our SME sector - how can we back emerging technology companies and create

jobs??Other countries have responded to this funding gap in a number of ways:Changed corporations law re numbers of s/hIntroduced equity crowd funding legislationPeer to peer lending platformsEnhanced liquidity in private companiesGreater access to adviceIncubators and acceleratorsSIV’s and PIV’s focus on business inv not bondsMore tax effective inv structures ESVCLP’s / VCLP’sBuild a mind set of “retail angels” and “risk”

The practice of funding a project

or a venture by raising many small amounts of capital

from a large amount of people. Typically via the

internet.

Crowdfunding

Rewards based (Indeogogo and

Kickstarter)How it works,

Example, Pebble Smartwatch case.

Objective to raise $100K on offer a Smart watch

that connect to your phone @ $99 instead of

the eventual retail price of $150. Raised $10M from

69,000 individuals.

Debt based Crowd funding

Zopa(SocietyOne)

Peer to peer lending (P2P)

Pooled approach better return to

lenders than term deposits

Donation based

(Gofundme)How it works.

Altruistic, No expectation of financial return.Equity based

Crowdfundingwww.crowdfunder.com

USAwww.ourcrowd.com HQ

Israelwww.crowdcube.com UK

based www.fathen.vc

AustraliaCapital raising for

exchange of capital.JOBS Act Title IV passedStill rigorous discussions

globally around accredited versus non-accredited

investors and “protecting” by limiting amounts of

capital subscribed

As a business looking for funding what do I need to know ??

Current restrictions on fund raising – ie 20/12 / $2m pa / S708 exemptions / 50 non-employee limit on private companies (contrast to 2,000 in US and no upper limit in UK)When the crowd funding legislation comes in for Australia, it is likely to incorporate:•Exempt public companies – some cost respite…possibly

•a cap of $2 million on CSEF in any 12-month period (excluding funds raised under existing exemptions from the need to provide a prospectus to certain wholesale investors), •for investors: investment caps of $2,500 per investor per 12-month period for any particular CSEF issuer and •$10,000 per investor per 12-month period •Read the CAMAC Report 21 5 2014!!!

What else may help SME’s and the depth of VC in Australia?

Significant Investment Visa (SIV) and the new Premium Investor Visa (PIV)Significant Investor Visaat least $5 million in complying investments to include:• At least $500,000 in eligible Australian venture capital or growth private equity fund(s) investing in start-up and small private companies.

Minister Robb said the previous SIV framework had set the bar too low, with investment largely directed into passive investments such as government bonds and residential real estate schemes – areas that already attract large capital flows.

• At least $1.5 million in an eligible managed fund(s) or Listed Investment Companies (LICs) that invest in emerging companies listed on the Australian Securities Exchange (ASX); and • A ‘balancing investment’ of up to $3 million in managed fund(s) or LICs that invest in a combination of eligible assets that include other ASX listed companies, eligible corporate bonds or notes, annuities and real property (subject to a 10% limit on residential real estate).

What else is noteworthy?

P2P lending such as Society One in Australia – biggest is Zopa.com who has lent GBP926m

JOBS Act Title IV – does this solve the non-accredited crowd rush?

Progressing a liquidity solution for private companies as they grow under ECF

Our “1000 club” – mobilising small amounts from large number of retail angels

Matching boards (ASSOB) etc and WI per class order ASIC Class Order 02/273 - future?

It still gets back to doing your homework!

If you want to raise capital you need to think about:

Are you investor ready?What is your risk profile

How much do we really need and will we need more?

Who do we want as a shareholder?

How do you match expectations?•Risk•Length of investment•Return expectations – div versus cap growth •Reporting •Liquidity•exit

 

Check out the 7 myths of investing in the detailed notes

If you want to invest into a private company you need to think about:

Where do I find such opportunities? Which platform/s?

Who is doing or done DD? I may only be investing $5k??

Reporting protocols

Any secondary market?

Rights attaching to shares (pre-emption etc)

Understand the risks – dependency on key person / key customer / competitor threats

Inside the Hen HouseFat Hen’s mission is to facilitate organized Equity Crowdfunding in Australia by reaching out to a large audience of “retail angels” to back ventures using traditional VC style disciplines and advisory overlays in the $350k to $5m funding space.

We are also moving to a providing a “stepping stone” platform and building liquidity into unlisted companies.

Fat Hen is an unlisted public company and incorporates special class shares to enable investors (both retail & wholesale) to spread their risk across the portfolio by investing in “nest egg” shares OR staple their investment to a specific investment via a “one egg” share.

We are looking to bring together 1,000 interested people into “the Club” that would enable us to mobilize meaningful amounts of capital for projects of interest to the Club – ie 1,000 people at $1,000 each = $1m – back ten projects @ $1,000 and build your own portfolio and nest egg!

Thank you from the Chief Chook

Jeff Broun FCA, CEOFat Hen Ventures LtdEmail: jeff@fathen.vcMobile: 041 993 4623

Attracting Private Equity Capital

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Unclear strategy

Common issues facing SMEs

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Outcomes

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My background

Banksia Capital provides equity finance for private SMEs—“To fund business expansion, acquisitions, or will purchase from existing

owners their equity (all or partial)”

Formed in Perth 2008 by partners with 50+ years private equity experience—Team members responsible for $100M+ invested into 10 WA businesses

valued at over $250M since 2003

Banksia addresses a funding gap in WA—Set up to provide $3M to $15M in equity—Targeting private, profitable business between $5M and $50M (enterprise

value)—Typically revenues >$5M and employees >20

Deep experience in building value in WA SMEs—Established tools and networks to add value and mitigate risks—Well practiced in programs to address succession and realise business

value

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What we do

Investments by Banksia Team

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Current Investments

Previous Investments

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Approach

NOT about buying assets cheap with leverage

We select good businesses & market leaders (or potential to be)—Evidenced by earnings and cashflow that are growing and demonstrably sustainable

Back good management with aligned incentives—May require Banksia team and/or network to strengthen team & capabilities

Develop and implement strategic growth options —Focus on impact on exit value, plus risk and time to implement—May be “prototyped” as blue sky for next owner vs organic growth during our

ownership

Be clear and creative on exit options—Understand why multiple trade players will want to own the business and work to

improve attractiveness of the business to them—More basically “tidy up” corporately to be exit ready (can be a 2-3 year process)

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What we look for

Likes Dislikes

Organic growth (5 % + pa in revenues) × Customer concentrations (l/term relationship or contracts can offset this negative)

M&A opportunities, particularly if that builds WA market share & leadership

× One-off or lumpy revenue relationships (eg rarely attracted to contracting businesses)

Businesses with pricing power and where customer relationship not just about the price (e.g. brand, OH&S driven, meeting regulatory or compliance needs, key locations, exclusive agencies or IP, or unique assets)

× Dependence upon personal relationships to “retain” business (addressable though through Banksia achieving shareholder alignment with the “keyman”)

Niche service, rental or distribution models

Recurring customer/revenue models

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Case Study – Cool Clear Water

Situation

WA provider of point-of-use installed water filters with 30-40% of WA market

Disparate shareholding base with different goals and time horizons

2 significant competitors and a new CEO trying to set strategic objectives

Value Creation Strategies Implemented

$7 million to buy out some founders and support a “bolt on” acquisition strategy

Developed clear go-forward strategy for the business and exit framework

Management team upgraded with founder in a non-executive role — ESOP scheme put in place to keep key people aligned and in the business

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Value Creation Strategies Implemented (cont.)

Scrapped costly ($ and time) be-spoke IT system development in favour of off the shelf solution — Allowed for simpler, streamlined integrations of 8 bolt-on acquisitions

Audited accounts and detailed tax planning implemented

Formal exit process run (achieved 33% increase over initial ‘best’ offer)

The business achieved a 3X+ increase in size and 5X+ increase in profits

Banksia subsequently led the sale of the business to a UK based trade player for $60M+

Case Study – Cool Clear Water

Q & A Panel Discussion