Improving cash flow with crowdfunding in New Zealand

Crowdfunding in New Zealand took off in April 2014 following the introduction of the licensing regime for crowdfunding service providers into law. While most businesses are still grappling with the economic effects of the pandemic, with government help almost dry, it is not a surprise if businesses are looking for alternative sources of funding to improve cash flow.

Banks are traditionally the sources of funding for businesses, but some banks are reluctant to advance loans especially to smaller businesses or start-up entrepreneurs. Crowdfunding steps in and gives businesses the much-needed lifeline especially in this time of need. In 2014, 21 companies raised NZ$12 million through equity crowdfunding. Three years later, companies raised NZ$13.4 million. The number of crowdfunding offers in New Zealand steadily grew since then.

Types of crowdfunding

What is crowdfunding?

It is one way to raise money for a business, an organization or an individual from as many sources as possible, hence the word “crowd” in the term.

There are four different types of crowdfunding:

1. Donation. The donor gives money to an organization. Charities often use donation where they encourage donors to give a sum of money for a certain cause, often to help people in need. In business, start-up entrepreneurs use the donation as crowdfunding by preselling a product or a service in exchange for a certain sum of money, while still retaining control over the business.
2. Sponsoring or reward-based crowdfunding. Investors also refer this type of crowdfunding as “seed funding” as the purpose is for the offeror to grow a seed into a hopefully profitable endeavor. Start-up creatives, who are often not illegible for traditional bank loans, use the seed funding to get money to jumpstart their business. As in a donation, the entrepreneur retains control of the business.
3. Equity-based crowdfunding. In this type of crowdfunding, an unlisted company offering private equity in exchange for money. Over the years, equity-based crowdfunding has evolved from venture capital to angel investing. While the target investors were typically wealthy individuals, recent democratization of investing has attracted even middle-class investors. Unlike donation and seed funding, shareholders in equity-based crowdfunding may get to have certain control over the business.
4. Debt-based crowdfunding. This type of financing attracts all sizes of businesses as this is almost akin to a traditional bank loan. Included in this type of crowdfunding are mini-bonds, peer-to-peer (P2P) lending and invoice financing. A downside to this type of financing is, when you fail to pay, you can be subjected to recovery procedures from debt collection agencies in NZ.

Popular crowdfunding platforms include Kickstarter, Indiegogo, CrowdFunder, and RocketHub. Donation-based crowdfunding platforms aimed at fundraising for charitable causes include GoFundMe, GiveForward, and FirstGiving.

Legal framework of crowdfunding in New Zealand

The Financial Markets Conduct Act 2013 (FMC Act) governs equity crowdfunding in New Zealand. The Financial Markets Authority (FMA) regulates licensing of crowdfunding providers. As these campaigns are prone to fraud, the agency also monitors general fair dealing, including the requirement of an orderly and transparent procedures. The FMA likewise limits crowdfunding offers to raising NZ$12 in any 12 months per platform.

Advantages of crowdfunding in New Zealand

The crowdfunding market of New Zealand is relatively small compared with those of other countries. However, since the start of the new crowdfunding regime in 2014, the market has shown no sign of slowing down.

Here are five advantages of crowdfunding:

1. It’s a fast and easy way to raise money, with no upfront fees.
2. The offeror can reach out to non-conventional investors.
3. It’s an alternative way to test market reaction to a product or service.
4. The campaign can serve as a form of valuable marketing.
5. It can convert investors into loyal customers.

Disadvantages of crowdfunding in New Zealand

Crowdfunding also comes with its own downside, one of which is it is prone to being by fraudsters. Hence the reason why there is a regulatory agency monitoring anti-fraud of all crowdfunding offers.

Here are five disadvantages of crowdfunding:

1. Crowdfunding platforms select the projects they will approve.
2. The offeror needs to build up interest on the project.
3. Platforms set a funding target. If not reached, the platform compels the offeror to return the amount to investors.
4. Projects are out in public, which can be the subject to patent infringement or copyright theft.
5. Getting rewards wrong means giving way too much to investors.

On the part of investors, one downside of crowdfunding is the lack of disclosure requirements from the offeror. Unlike initial public offerings, platforms do not require offerors to disclose as many financial information.

Improving cash flow with crowdfunding in New Zealand

While the New Zealand government programs are still ongoing for struggling businesses and public health concerns still seem likely to prolong an economic stagnation, businesses are now looking at other possible sources of funding.

How do you make an effective offer that will bring in cash for your business?

Tell a good and authentic story

Everybody loves a good story and people tend to support those whose stories are genuine and heartfelt. You will gain your possible supporters when you tell your story because they can relate to it. They will not only see the product or the service that your are offering but also the impact you aim to have in your community.

Often, your first patrons in a crowdfunding are your family and friends. You would be hoping they would spread the news around. What better way to attract more supporters than a good story retold over and over?

Reach out to your closest circle, then to the public

We can always rely on our family and friends to support our endeavours. This is no different when it comes to crowdfunding. According to Startup Nation, the public will want to support a crowdfunding offer when it has already been funded by 40 to 80 per cent.

Having an offer that is partially funded gives it credibility, which attracts more “strangers” to support the campaign. Once you have the initial 40 per cent funded, you can now go to social media and try to get more support for your venture.

Update your story multiple times

Crowdfunding is not only raising cash but also marketing your product or service. First-time crowdfunders often make the mistake of not regularly updating their offer with their progress. As the goal of crowdfunding is to involve the community, community-building is important. Your community needs to know what’s happening with the campaign or your venture.

Best practices in crowdfunding are:

1. posting regular updates, such as key milestones
2. announcement of end date
3. thanking supporters

Explore possibilities to improve cash flow

Raising funds to improve cash flow is the primary reason for crowdfunding campaigns. But there are also many other reasons why crowdfunding is a good strategy to jumpstart your venture.

Community-building, a natural outcome of a campaign, can help the offeror maintain the venture’s steam in the market. The offeror can also call on the support of the same community later for the launch of another venture. Cultivating the relationship with the community that was built as a result of the crowdfunding will benefit the offeror long after the campaign has ended.