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Published 11 December 2013 12:24, Updated 12 December 2013 08:23
Artesian’s Jeremy Colless says VentureCrowd will take a ‘responsible’ approach to equity crowdfunding.
Artesian Venture Partners is stealing a march in the equity crowdfunding space by launching a platform for sophisticated investors ahead of any change in the law.
Artesian managing partner Jeremy Colless says the new platform, called VentureCrowd, would likely open up to retail investors if the government changes the law on equity crowdfunding.
VentureCrowd complies with the existing law because it targets wealthy individuals who qualify as wholesale investors under the Corporations Act.
Colless cites figures suggesting that there are 207,000 wealthy individuals in Australia sitting on $US625 billion ($684 billion) worth of assets. He points out that if just 1 to 2 per cent of those assets were channelled into venture capital, it would mean an additional $US10 billion for the sector – more than could be invested.
“Australians have a reasonably high appetite for risks but that hasn’t been focused on technology start-ups or the start-up scene in general, it’s very much been focused on junior miners and explorers,” Colless says.
“With that sector undergoing an enormous cooling-off period there’s an enormous opportunity for a great deal of that asset to be redirected into the technology space, which is going to be, on the macro-level, a hot space for the next three to five years. We’ve already seen some very interesting IPOs in that space and I think that’s only the beginning of a large number of IPOs in the tech sector over the next 12 months.”
Colless says only a small percentage of wealthy individuals in Australia are investing in early-stage venture capital, meaning VentureCrowd would have a big potential market without any change in legislation.
The Corporate and Markets Advisory Committee is reviewing the laws on early-stage investment to determine whether to enable equity crowdfunding, a funding method that already exists in the United States, Britain, Italy and New Zealand.
Currently, capital raising outside public markets is limited to $2 million or 20 investors in any given 12-month period, with exemptions for sophisticated or wholesale investors.
Investors automatically qualify as “wholesale” if they put at least $500,000 into one opportunity or control assets of $10 million or more. They can also apply to be recognised if an accountant certifies they have annual income of over $250,000 for at least two years or net assets of more than $2.5 million.
While such wealthy individuals can already legally invest in start-ups, Colless says it is not easy. He says most venture capital firms require a minimum investment of $100,000 or even $250,000 and are generally picking companies with a proven track record rather than the very early-stage start-ups.
VentureCrowd will make investing in early-stage start-ups far more accessible because the minimum investment will be about $1000 per start-up. Colless says investors would be encouraged to invest in a portfolio to spread the risk.
“We won’t encourage investors picking single winners because we’re trying to increase the amount of money in the early-stage venture capital space but also to ensure it’s sustainable and to be sustainable, we need investors to stick around,” Colless says.
“In the early-stage space, picking winners is not an optimal strategy and building a diversified portfolio is much more likely to achieve the expected return.”
All the entrepreneurs seeking capital through VentureCrowd would be pre-vetted by Artesian partners. The partners include Blue Chilli, StartMate, Blackbird Ventures, the University of Melbourne, SydVentures, Tank Stream Labs, Vivant, TechBeach, Fishburners, iAccelerate, the University of Wollongong, the Slingshot Accelerator, AngelCube and Future Capital.
Colless would welcome the government liberalising the rules on equity crowdfunding as long as it wasn’t a free-for-all, saying that a system that allowed any investor to invest in any start-up with no controls or pre-vetting would be “irresponsible”.
“Even if a retail investor could invest in start-ups I would still encourage them to take a portfolio approach because of the risk class of the assets,” Colless says.
“I hope in time legislation changes, and that perhaps the requirements for a wholesale investor are reduced but I would say that fund managers and the government need to ensure that investors are educated, there are transparent markets and they can make relative value decisions.”
Colless says Artesian did not put in a submission to the CMAC review.
“Just changing the rules is only one part of what needs to happen to be done to increase the amount of money in venture capital. We think the most important thing is education to teach people about the opportunities and the risks and encourage them to invest in a responsible manner because that’s the only way there’ll be a sustainable eco-system in Australia.
“Otherwise you get investors picking one or two start-ups because their friends recommended them, they lose their money and they walk away saying it’s a mug’s game. It’s not a mug’s game, it’s a sophisticated and complex asset class and people need to understand it and understand the risks associated with it, the asymmetrical chances of success and the number of loses, and address it in a diversified approach.”
Depending on the outcome of the government review, VentureCrowd is likely to face competition.
For example, crowdfunding platform Pozible has launched a site called Epplio, where wannabe investors can register their interest ahead of a possible change in the law.
However, Pozible co-founder Rick Chen says he would not move into this space unless the law makes it accessible to the general public.
“It’s not really a crowd otherwise,” Chen says.