A new co-operative model for equity #crowdfunding

**Updated with some clarifications** Last week, I attended the launch of a new equity crowdfunding scheme, called The Innovation Co-op (THINC). It’s the latest model I have seen that is trying alternative approaches to startup and SME funding – given that equity crowdfunding still isn’t possible in Australia.* There’s been the venture bank model, straightforward sweat equity, slicing the pie, and of course, the small-scale offering approach. What they are all trying to do is connect three core assets: capital, ideas and expertise.

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THINC works on the basis that the Co-operatives National Law allows members to come together for a common benefit. This includes the financial benefit of generating economies of scale via the collective purchase of goods and services, the use of capital for the group’s common interest, and the distribution of profits to members from investment and trading activities. Co-operatives fall outside the Corporations Law (so, are not regulated by ASIC), but are subject to the State-based Consumer Affairs and/or Fair Trading authorities.

Participation in THINC involves three types of membership:

  1. Custodians – the founders of THINC, who form the initial Board of Management and represent the “expertise“, will provide commercial services to the companies that THINC invests in (see #2). As founders, they also control 50% of the equity in THINC itself. Based on a notional valuation of the cash and in-kind contributions they have made in setting up THINC, they calculate that they have provided around $1m in contributed equity.
  2. Pioneers – entrepreneurs, founders and SME owners (the “ideas“) in whose businesses THINC will take an equity stake (initially 10%, but may rise to 50%), in return for which the Pioneers receive help in the form of commercialisation strategies and other support to grow their companies. Pioneers are subject to a number of selection criteria, and are expected to use the shared managed services offered by the Custodians (at discounted rates).
  3. Champions – general members of THINC, who also provide the “capital” as investing members by buying Capital Contribution Units (CCU). Collectively, they hold the other 50% of THINC’s equity (albeit as a different class of share to the Custodians) and will also split any distributions or dividends with the Custodians (the latter can only attract a maximum 12% of any dividends, leaving the rest for distribution to Champions, for operating capital, and for maintaining cash on hand).

I should say upfront, that I have applied for membership of THINC as a Champion, but I haven’t yet decided whether or not to invest via the purchase of the CCU scheme. I am seeking clarification on the legal and financial structure, as it is quite complex, and not as straightforward as buying shares or bonds in a company, purchasing units in a managed fund, or becoming a member of a “traditional” mutual such as a credit union, building society or member-owned community bank, for example. Also, I am not qualified to say if this is a good investment, and anyone interested should seek their own professional advice.

Some advantages of this co-operative model are that, unlike other small-scale offerings limited to “sophisticated” investors (legally defined), anyone can invest, and there is no cap on the number of investors. Each CCU costs $500, and Champions may invest up to $5,000 (any more may breach the maximum individual shareholdings of a co-operative). On the other hand, regardless of how many CCUs a member owns, they only have one vote (whereas with normal equity, voting weight is in proportion to the number of shares). And while the CCUs are tradeable, they can only be sold or transferred to other members.

THINC expects to exit each investment it makes after 5 years. I understand that THINC itself may be dissolved or divested, and the final proceeds distributed to the relevant members in proportion to their CCU holdings.

Whatever else, the organisers behind THINC must be applauded for their ingenuity – innovation comes from pushing the envelope. (There is even a patent pending on the model – generating an additional revenue stream from licensing opportunities?) However, I am somewhat wary of schemes that are largely designed to get around either tax issues or legal impediments. Generally, I would say it is preferable to start with a clear set of goals and objectives, and choose the most appropriate funding vehicle or legal structure to achieve that outcome, rather than identifying a structure and fitting the business model to fit.

* Footnote: Although there’s some draft legislation going through Parliament, it hasn’t been passed by the Senate, and some commentators say that the Bill does not achieve the stated goals of what most people would regard as an equity crowdfunding model.

Next week: Design thinking is not just for hipsters….

Show me the money! (or: Startup Anxiety…)

Last week’s Lean Startup Melbourne event was entitled Doubts to Dollars – dealing with early stage uncertainty in startups and drew a crowd of close to 400 people, making this regular forum as THE networking venue for the local startup scene.

Of course, the evening’s festivities would not have been possible without the generous support of our hosts, inspire9, and sponsors BlueChilli, Startup Victoria, the Startup Foundation and the Kussowski Brothers. To kick-off proceedings, Daniel Mumby from the Startup Foundation pitched at older would-be entrepreneurs (“those with responsibilities like families, jobs, mortgages…”) in support of his organisation’s new accelerator program, which kicks off this month, under the banner of “Think and Break Free”. Next, a team of successful entrepreneurs was assembled, to discuss key startup topics, including:

  • Idea
  • Team
  • Finance
  • Product/Market Fit

On the panel were:

  • Sydney Low, co-founder of former Australian ISP, Freeonline back at the dawn of the century. (Check out his YouTube channel for some marketing archeology from the early days of web surfing, when internet access was dial-up, iPhones were a twinkle in Steve Jobs’ eye, and “social media” meant the gossip column in your tabloid newspaper.)
  • Samantha Cobb, who is founding CEO at biotech AdAlta, and who has a background in IP commercialisation.
  • Justin Dry, co-founder at wine startup Vinomofo, and one of the people behind Qwoff, an online community for wine enthusiasts.

The initial discussion covered some of the basics to consider before launching your own startup venture, such as product testing, market analysis, listening to customers, getting honest with yourself, and protecting your IP. There was also a surfing analogy – about timing/positioning yourself to catch and ride the wave, rather than trying to paddle out to the breaker….There were also some very personal observations (including painful lessons) such as how to deal with failure (“keep pivoting, fail fast”), maintaining staff motivation when deals don’t complete, the importance of building prototypes (“even if it’s just a PowerPoint slide”), and the value of having confidants (on the board, and among key investors). However, the evening’s recurring theme, dear to many past, present and future startup founders and entrepreneurs, was all about the money – not just where it comes from in the early days of any startup (angel investors, venture capital and private equity); but how easily it can disappear.

The panel of speakers emphasised the importance of cashflow (i.e., “making payroll”), and knowing how fast or how far your money may need to go in early stage growth and the initial product development stages:

First, assuming you are not fully self-funding, you need to convince an investor of your idea. Both the team and the investors need to believe in the founders.

Second, really challenge your market/product fit – be open to telling people what you are doing so you can get validation. (Note to local startups: the Australian culture, whether it’s the tall-poppy syndrome, or a lack of trust, means people tend to hide new ideas…)

Third, work out what your cash burn rate might need to be. Stick to the capex budget as much as possible, manage the milestones (“next step of value”), and be prepared to double the costs/double the development time. Maybe spend more on marketing than on the product development – better to have an MVP that is bringing in revenue, than waiting for the perfect product that never ships….

Finally, a member of the audience wondered about the best route to establishing a startup: “should I learn to code, work for another startup, or get a job at a big firm?”. The succinct advice from the panel: “just do it.” While it may be tempting to do side projects to keep the money coming in, they may prevent you from making progress (or they become the startup). As one participant put it when describing his own new startup venture: “there is no Plan B; it’s Plan A or bust!”

POSTCRIPT TO JANUARY’S LEAN STARTUP MELBOURNE: In an earlier blog on Lean Startup Melbourne, I discussed some of the obstacles facing local startups in getting funding, and the challenge of engaging institutional investors in the startup community. Two recent developments suggest that debate on this topic is starting to gain some traction:

1) Catherine Livingston, incoming President of the Business Council of Australia, spoke on ABC Radio National about the need to connect institutional funds with domestic assets and investment opportunities that tend to get overlooked by local investors (at about 6′ 15″ into the interview).

2) Westpac bank has called for industry and regulator collaboration to provide better access to financial data on startups, and SMEs in general, in support of developing risk-based funding options for new businesses.