This blog provides a quick overview of the various categories of investors in Australia and the options available to reach them.
Who are my investors?
There are two broad categories of investors; sophisticated investors and retail investors.
These people are defined by law in Australia but as a rule of thumb they invest more than $500,000 in any one opportunity. These can be individuals, family offices, superannuation funds including self-managed superannuation funds, institutional investors and the like. Watch the program ‘Shark Tank’ for a great representation of sophisticated investors, their approach and thinking.
Pros
- One or two of these investors can fund into the $millions.
- Often provide value outside funding such as mentoring and guidance.
- Liberal regulations regarding advertising to these investors.
Cons
- Valuation sensitive particularly with pre-revenue new starts.
- Often won’t invest in early start-up businesses.
Everyone else. Affectionately referred to as ‘mums and dads.’ These investors invest at lower amounts – in theory up to $500,000 but in reality typically under $100,000. Angel Investor is a common term used and these people in fact can be either a sophisticated or retail investor. They often contribute their time as well as money to a business. There is scope in the Australian regulations to raise money from retail investors but there are also very strict regulatory guidelines that dictate when, how and if you can market to retail investors so always seek professional guidance.
Pros
- Investors are known to you or the business so are typically familiar with it.
- Legislation provides for a reasonable amount of money that can be raised.
- Investors are generally not focused on valuation.
Cons
- Limited to a small number of investors.
- Offers must be personal offers only so advertising an offer to the public is strictly prohibited.
- Targeting a large number of retail investors will require a prospectus to be registered with ASIC which is a costly and lengthy process.
Also retail investors but worthy of its own heading. Crowd funding platforms have been established in Australia in recent years and provide a compliant framework within which to market to retail investors. These investments are typically bit size even as low as $100 and up to a maximum of $10,000. Most investments are at the low end.
Pros
- Can advertise to the public with appropriate disclaimers.
- Leverage the strength of social media and other established networks to find investors.
- Suited to funding an early round of capital requirements.
- Investors are generally not sensitive regarding valuation.
- Investors tend to be the same target types as customers who understand the product.
Cons
- Can end up with 1000s of investors to manage moving forward.
- Raising funds at high valuations can impede future capital raising projects.
The answer is not dissimilar from what it would be regarding any product or service. Investors are typically everyday people who make investments based on the value they ascribe to the investment. Much in the way most people make any purchasing decision. The principals align with general marketing practices.
The key difference is that investor hunting is not necessarily a numbers game it’s a listening game. If you are seeking sophisticated investors and have been turned down by two qualified investors stop and return to the drawing board. Chances are they have turned you down for the same reason. Listen to them.
Two key steps. Preparation and Promotion.
Preparation (& Compliance)
Capital raising is a highly regulated activity in Australia. Particularly, the amount of money you can raise and the types of investors you can raise it from triggers various parts of the law. It’s important that you receive sound advice from suitably qualified professionals. Most people have a commercial lawyer engaged to oversee the process which is highly recommended.
Nuts and bolts. You will require a sound business plan and an information memorandum. This is non-negotiable. In the process you will define the business, substantiate and qualify all your past and proposed decisions particularly around any resource requirements, determine a highly qualified funding need, prepare a compelling offer to investors to provide that funding and much more.
Promotion
How do you market your offer to investors. Three key avenues; advisors, platforms and DIY.
Option 1 Advisors
These are people who specialise in capital raising and often work with clients throughout their growth cycles and assist with ongoing funding requirements. Clients typically demonstrate strong, predictable growth potential and are led by a highly reputable broad board and management team.
Pros
- Have established relationships with investors.
- Success fees are part of their remuneration.
- May include preparation as part of their mandate.
- Matters will be well prepared.
- Skilled at all funding stages and exits such as IPOs.
Cons
- Generally require a monthly retainer and a marketing budget.
- Generally won’t work with pre-revenue new starts.
- Often require exclusivity.
Option 2 Platforms
It’s the 21st century so naturally, we have investor matching platforms. In fact we’ve had investor matching services – prelude to platforms – for decades. They build investor databases and attempt to match investors to those seeking them. Investors are generally sophisticated investors and angel investors. Online, quick and easy to join and list an investment. Typically offers various levels of services which offer value add features or more exposure to the investors.
Pros
- Compliance is generally integrated in the platform.
- Multiple investors will see your offer.
- Nominal fees from several $hundreds to low $thousands to reflect service features.
- No exclusivity. Can join multiple platforms.
- No or minimal success fees.
Cons
- Limited vetting of clients or investors so quality of either may act as deterrent for either to engage.
Option 2.1 Crowd Funding Platforms
Again, these deserve their own mini analysis. They were legislated into existence in 2017 and provid a significant new tool for capital raising in Australia. Very process driven and strong on maximising marketing activities. Can raise up to $5M but in reality most matters are sub $1M.
Pros
- Can support very low investment parcel amounts.
- Can package a product or service benefit along with the investment.
- Smart marketing systems such as pre-launch expressions of interest campaigns.
- Listing fees are generally low at several $thousands.
- Compliance is built into the platforms.
Cons
- Matters may not be well prepared.
- Limited vetting of clients or investors so quality of either may act as deterrent for either to engage.
- Charge success fees as well as listing fees.
Option 3 DIY Advertising – Sophisticated Investors.
Here, I’m not including DIY retail investors. I mentioned earlier that there is scope to make personal offers to retail investors if they are known to you or the business. I’m going to stop there and say please engage a lawyer if you intend to do this. The regulatory risk is high.
Public advertising to sophisticated investors is permitted. However, even here all ads must carry a general warning stating that it is only for this class of investors. You can place an ad anywhere that will carry an ad online or in print.
Pros
- Advertise to the public.
Cons
- Advertising can be costly and you may require an advertising budget in the $thousands.
- Highly competitive as sophisticated investors always have multiple investments to consider.
LET’S CHAT
If you’re thinking about raising capital please feel free to reach out to me. I’m always happy to hear about aspiring new business ventures and I will happily share my best practice knowledge. Theo Afkoudias
For assistance with Information Memorandum services please contact The Financial Writing Company 1300 477210.