ASIC updates – Sandbox and Crowdfunding (plus #FinTech Hub)

In recent weeks, ASIC Commissioner, John Price and his team have been making presentations to the FinTech community on two key topics: the ASIC Regulatory Sandbox, and the forthcoming Equity Crowdfunding legislation.

Image by TeeKay, sourced from Wikimedia

blogged about the sandbox when it was announced last year, and at the time, the proposed safe harbour provisions for FinTech startups were seen as being key to fostering innovation within the sector. However, at the time of the presentation I attended (June 13), there was only one confirmed participant in the sandbox scheme. According to the Commissioner, the low take-up was probably due to the timing of the regulations, being so close to summer holidays.

On the other hand, the sandbox has such a limited application, that the Government is proposing to expand its scope to include the provision of products (not just distribution), the provision of credit services, and to extend the current 12-month license waiver period to two years.

The Commissioner also mentioned the consultation process on RegTech combined with a hackathon event to be held later this year, as evidence of the direction the ASIC Innovation Hub is taking. Let’s just hope they can keep up with how fast the FinTech community (especially in blockchain and crypto-currency) is evolving, since regulation usually lags innovation.

At a separate series of FinTech and startup briefings, Mr Price discussed the new equity crowdfunding provisions, due to take effect on September 29. Currently undertaking a consultation process on the detailed regulations, the legislation applies only to ordinary shares issued by companies with a maximum of $25m in assets and annual turnover, and which become public companies once the legislation comes into force.

Eligible crowd-sourced funding companies (CSF’s) can raise a maximum of $5m per annum, and investors can invest a maximum of $10,000 per company each year. CSF’s cannot invest in other businesses or securities, and cannot have simultaneous multiple offers on participating crowdfunding platforms.

The Commissioner spoke about the temporary reporting and corporate governance concessions under the scheme: eligible public companies don’t need to have Annual Public Meetings or audited accounts for a period of 5 years; and the offer documents do not have to be as detailed as a full IPO prospectus. Whether these concessions will be enough to attract issuers, or whether the limitations prove more of a deterrent, it will be interesting to see if the new legislation meets the expectations of government, ASIC, issuers and investors.

Meanwhile, things are getting interesting for anyone following the FinTech hub story, and the perennial Melbourne-Sydney startup rivalry:

First, the Victorian government has issued an RFP for a Melbourne FinTech Hub (submissions close tomorrow…). The state government has also announced its partnership with Fintech Australia and others to host the intersekt festival, following last year’s Collab / Collide event.

Second, Melbourne’s York Butter Factory has recently announced plans to expand into Sydney. While not purely a FinTech hub, this new venture will feature the Commonwealth Bank as an anchor tenant. With former ANZ CEO Mike Smith as its Chair, YBF might also be expected to make a submission to the Victorian RFP.

Third, Sydney’s Stone & Chalk has just announced it will be opening a new FinTech hub in Melbourne. Given that a number of key Melbourne-based financial institutions (such as ANZ, NAB, AustralianSuper, Findex, Genworth and Liberty Financial) are backing this new venture, could it suggest they can’t wait for the Victorian RFP process to finish?

Next week: StartupVic’s Machine Learning / AI pitch night

 

 

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….

3 Ways to Fund Your #Startup

At a recent forum organised by Startup Victoria, co-founders and advisors discussed alternative ways of funding a startup. Part of Startup Week, the event was hosted by inspire9 and sponsored by BlueChilli and Slush Down Under.

button-41706_1280Bootstrapping

Doug English from CultureAmp talked about the benefits of bootstrapping, especially for B2B startups: “You have fewer clients, but with bigger budgets, and fewer of the hassles associated with a consumer startup.”

Initially, the founders used consulting work as a means of funding themselves, but focussed on specific market segments and customer domains – in short, they got paid to learn about their clients.

Having several co-founders was also helpful in providing “cheaper access to more labour”.

However, they have learned a significant lesson from those early consulting gigs: although they were able to secure upfront lump sum payments for client development work, they are still supporting some of those initial product features and functions, without necessarily getting paid for it. Whereas, if they had aligned product development with their client road map, they would have been able to generate recurring and iterative revenue from new product features. In short, annual payments and subscription fees help with the cash flow!

There was also the opportunity cost of bootstrapping, instead of bringing in external funding. The team realised that pursuing VC funding was always going to be a long haul, so they decided against it; but they then found themselves in the position of receiving an unsolicited approach from a VC source.

Note: CultureAmp recently closed a Series A round of funding for $8.1m.

Crowdfunding

Alan Crabbe, co-founder at Pozible explained how the team had seen a trend in crowdfunding projects in music (Europe) and film (US), and saw an opportunity in the visual arts. A key strategy was to use story-telling through video to help artists pre-sell their projects. Success can be rapid – one Brisbane project was funded within 3 hours. Globally, $5bn raised has been through crowdfunding – but beware domain name squatters…

Three trends have helped crowdfunding as an alternative funding platform:

  • Social Media – to provide critical mass
  • Online Video – experiencing exponential growth
  • Payment Innovation – e.g., PayPal etc.

Alan had a number of tips for anyone contemplating crowdfunding their startup project:

  1. Use social media comments, likes and other feedback to validate your idea
  2. Taking a more hands-on approach means they have a success rate of around 60%
  3. Find your audience first – typically among the FFF (“family, friends and fools”) and your other networks

As for equity-based crowdfunding, he observed that nothing happens quickly in Australia, but predicted it might be a reality within 6-9 months’ time.

Note: a couple of local platforms that resemble equity-based crowdfunding are already in operation: VentureCrowd and ASSOB – but as with anything of this nature, read the small print, and make sure the model is right for your business or startup idea.

R&D tax breaks

The final speaker was Sean Moynihan from PwC who talked about some of the R&D tax incentives available from the government. A major hurdle for many startups is that these tax breaks are generally only available to companies that have notional R&D deductions of at least $20,000.

Other programs such as the Export Market Development Grant are being phased out, and even incentives for product design must be able to demonstrate research activity and expenses. Since these initiatives can largely be described as “matching” programs, they can be summarised as “no taxable revenue, no grant available”.

PwC have launched their own service to assist companies navigate the R&D claim process.

Although an estimated $1.8bn will be made available in R&D grants this year, less than 10% will go to startups.

Note: the closing date for grant applications for the year ended June 30, 2014 is April 30.

Conclusions

Although there is a noticeable change in VC attitudes, most early-stage funding finds its way to B2C startups, because B2B is just “too hard”. However, even angel investors want to see an established client base, a revenue stream, and a well-defined team of founders.

With lower tech and product development costs in mobile apps and software tools, bootstrapping is a more realistic option for many startups, and the received wisdom appears to be to hold out for as long as you can before bringing in external funding.

Crowdfunding is gaining traction for specific projects or more tangible products (including some apps) – but legal and other restrictions means it’s not really a viable option for raising equity. (Maybe P2P lending for businesses will offer alternatives to a bank overdraft, a personal loan or even secured lending?)

Next week: Taxing the Intangibles – coming soon to a screen near you!

 

From student hacker to start-up mogul – an audience with Jonathan Teo

“The man with the Midas touch…”

Jonathan Teo, tech VC with a Midas touch, has been back in Australia recently, and found time to stop by Lean Startup Melbourne for a Q&A with Michelle Bourke in front of an audience of 350 members of the local startup scene.

With a track record that includes Twitter, Instagram and Snapchat in his portfolio of start-up investments, Teo is obviously someone who deserves to be taken seriously, but the candour and humility with which he talked about his experience made for a very down-to-earth evening with such a high-profile investor.

As usual, the event was hosted by Inspire9, with generous support from Kussowski Brothers, Startup Victoria, Products Are Hard, BlueChilli, Investors’ Organisation, Startup Weekend and National Australia Bank.

Teo’s backstory has been told elsewhere (childhood in Singapore, college in Sydney, post-grad at Stanford, Google engineer, venture capitalist…) but the combination of having a great mentor, working in the (then) emerging technology of cloud computing, and some “right time, right place” good fortune has provided him with a powerful platform from which to join the upper echelons of silicon valley VCs.

“The Secrets of My Success”

Naturally, people wanted to know the key to his investing success. Rather than referring to some “special sauce”, Teo pointed to some simple principles:

  • Relationships – strong relationships are essential, both within the founding team, and across the right networks and insiders
  • Self awareness – many founders don’t see their own capability gaps, and therefore can overlook inherent weaknesses in their business
  • Key metrics – know what run-rates the business needs to achieve to meet its performance goals (cash burn rate, retention levels, acquisition costs, daily and consecutive customer usage)

In particular, Teo stressed that new distribution models form the lens for assessing new investment opportunities.

“Show me the money!”

During a discussion about bringing in investors, Teo was pretty sanguine – what works for some start-ups, won’t work for others. If you can self-fund, then do so; if you do need to tap external funding, start with friends and family (who will generally be more patient than professional investors); and if you have to bring in VC’s, make sure you know the trade-offs. He also suggested that crowdfunding is great for consumer plays, but ultimately valuations are determined by demand.

“New Thang”

When asked where “the next big thing” was going to come from, Teo was understandably coy (or simply discreet), and politely suggested it could emerge from somewhere in the audience. What he did offer were some thoughts on emerging trends that will influence future start-ups:

  • Fewer mass-market consumer products – according to Teo, “only China can support a purely domestic consumer play”
  • Less focus on patents, more emphasis on survival – not that IP isn’t important, just that the cost and effort of securing patents mustn’t outweigh the need to generate revenue in the early stages
  • Content niches – unique content is key to attracting advertisers and subscribers, and when combined with rich user data makes for compelling communication and network apps
  • The human touch – products that bring a more human digital experience will gain traction

Finally, Teo predicted the growth of disposable hardware – not sure I agree with this one, but I understand what he is getting at. Personally, I’d be more interested in recyclable hardware, and greater user-serviceable and customisable components.

Declaration: Thanks to the hosts and sponsors, I along with everyone else enjoyed the bounteous gift of free pizza laid on by the organisers.