How Australian Businesses Could Raise Capital through Crowdfunding

Major Announcement

The big news in Australian business last week was that the Federal Government introduced legislation that could allow companies to use crowdfunding to raise capital. The Labor Party hasn’t yet said how it will vote on this.

Crowdfunding is when a large number of people each contribute relatively small amounts to fund a project, venture or new business. Normally the business uses the internet and often crowdfunding sites to attract these backers.

According to the ABC, the new federal bill put up by the government will cover the majority of Australian businesses that are proprietary companies. If the bill is passed, privately owned companies will be able to raise up to $3 million from crowdfunding before they have to be audited, and each investor is only able to put in up to $10,000 to limit their financial exposure. Crowdfunding is huge overseas. The Scottish brewer BrewDog raised $31 million in its last crowdfunding round in the UK. In the US, 9,000 American put in $8.7 million into businesses in crowdfunding last year. In Australia if the bill is passed, to qualify for crowdfunding, businesses will need at least two directors, make financial reports in line with accounting standards and follow the laws for third-party transaction restrictions. This is all basic stuff any accountant can help with.

The Aussie business community says allowing crowdfunding would be great news for startups and small to medium businesses, which could raise money for projects like opening a new shop or breaking into overseas markets.

Earlier this month I wrote a blog looking at options for raising capital in business. I looked at government grants, venture capital organisations and accelerator programs, but I am still old fashioned about this. Sure, I keep hearing that startup businesses are different to other businesses. Because they operate on the internet, the whole world is a potential customer, so there is scope for making huge profits. Consequently venture capitalists are keen to put in. But what is wrong with owning 100 percent of your own business? It is still possible to own ALL of your own business? This is what I want to write about this week – how to start up a business on a budget, or ‘bootstrapping’ as the American’s call it – how to turn your passion into profit on a shoestring budget.

Getting Started

First of all, you need to limit over heads if you want to own 100 percent of your own business. If you can work from home, then do it. Consider meeting clients in a public space, like a coffee shop. Also, if possible, try to keep your salaried job and run your new business in your spare time, at least until your business turns a profit. It may take a year, it may take two.

If you need an office, why not share a workspace. Try an internet search for “co-working spaces” in your town or city and you will come across a great many listings. In Brisbane there is Little Tokyo Two, which already houses lawyers, accountants, graphic artists and photographers. The daily rate is $20. In Melbourne you have places like the Cluster, Roy Place and the Macquarie Street Studio, while in Sydney there is Fishburners and Tank Stream Labs.

But do you really need your own workspace? Remember that JK Rowling wrote the Harry Potter books in a coffee shop! Public libraries are great places to work. They are heated in winter and air-conditioned in summer, meaning you can cut down on your electricity bill and if you join the library you are also entitled to free wi-fi for your laptop! Another great low-cost place to work is university libraries. Yes, these are open to members of the public, not just students. You will not be allowed to use their wi-fi and you’ll have to bring your own laptop and use your phone’s wi-fi, but uni libraries usually have quiet space and also places where some talk is allowed, so you can make discreet phone calls.

When setting up your own business, think carefully about which online or phone contracts you sign up to. Shop around and get the best deal for phone and wi-fi, and remember these days you do not have to have a landline to go into business. Lots of startup business owners and tradespeople only have mobile phones.

Whatever you do, do not run up credit card debt while setting up your own business. Credit cards charge super-high interest rates. If you have to –get a business loan, but please avoid credit card debt. Think twice about every business expense. For example avoid printing, as print cartridges cost a fortune. Try to conduct as much of your business as possible over the internet, but remember to back up all your files!

Struggling is a Good Thing

I keep reading stories about online businesses that attracted investors, and guess what! The owners of these startups raise lots of money and then blow it. These young entrepreneurs got money too easily. They came to think that money grew on trees and never learnt how to run a profitable, sustainable business. Sometimes it’s a good thing to struggle in those first few years then you learn the true value of money!

The Story of Qualtrics

Even The Harvard Business Review ran an article recently on why it is often better to struggle when starting out in business. The author, Ryan Smith, wrote, “you are forced to get good fast. As humans, we prefer to put in only as much effort as we need to, but whether we recognise it or not, we all have extra gears. Sometimes it’s not until things get really tough that we find the gears that allow us to shift into overdrive”.

Mr Ryan explained in The Harvard Business Review how he and his business partners struggled for years until they established a fantastic company that was actually worth buying into. Mr Ryan writes:

After bootstrapping for a decade, my company, Qualtrics, did raise capital: it has raised nearly a quarter-billion dollars over the past few years. Today, people congratulate us on our success in fundraising, but as entrepreneurs, that’s not what we’re most proud of. We started with the goal of building something great that would change the world and last for a long time, which is why it has never made sense to me to congratulate people on accepting funding – that is the easy part ... in the entrepreneurial community, we need to remember to hold out, to take the time to build the business into something actually worth funding.

I agree with Mr Ryan, the Federal government might soon allow Australian businesses to raise funds through crowdfunding, but it is up to us entrepreneurs to first develop a company that is worthy of funding and that can take years.