Crowdfunding has emerged as a popular method for companies to raise capital as an alternative to venture capital, private placements or initial public offerings. This alternative funding approach has allowed numerous startups and small enterprises to access the capital necessary for growth and expansion. Among the many questions that arise from this method of fundraising, one pertinent query is, “What has happened to all the companies that raised new equity using crowdfunding, and will their shareholders demand liquidity?”
The Crowdfunding Phenomenon
Crowdfunding has evolved into a multifaceted tool that caters to various forms of financial backing, including reward-based, donation-based, debt-based, and equity-based crowdfunding. While the first three categories involve contributors who do not seek financial returns, equity-based crowdfunding allows investors to subscribe for shares in a company, thereby becoming shareholders.
Companies that have chosen to raise equity through crowdfunding have done so for various reasons. Many have been attracted to crowdfunding’s potential to tap into a broader base of investors, often with unique insights and a deep passion for the company’s mission and therefore becoming a marketing network for the product.
The Crowdfunded Company Landscape
A comprehensive examination of companies that have raised equity through crowdfunding reveals a diverse array of enterprises across different sectors. These companies have utilized crowdfunding platforms as a means to bolster their funding base, and while some have achieved remarkable success, others have encountered significant challenges.
Shareholder Liquidity Concerns
As these crowdfunded companies continue to grow, a pertinent question arises: will their shareholders demand liquidity? In essence, shareholder liquidity refers to an investor receiving dividends or being able to convert their equity stake into cash via a sale. It is a concern that warrants attention, particularly for investors who will ultimately seek to realize a return on their investments in the near or distant future.
Factors Influencing Shareholder Liquidity Demands
The demand for liquidity among shareholders of crowdfunded companies can be influenced by various factors, including:
Company Performance: The financial health and performance of the company plays a significant role. Shareholders may be more inclined to seek liquidity if the company exceeds or fails to meet growth expectations.
External Market Conditions: Broader economic conditions, market trends, and industry-specific factors can affect investor sentiment and the desire for liquidity.
Funding Round Stages: The stage of the company’s funding rounds can also influence liquidity demands. Early-stage investors may seek liquidity sooner than those who invested in later rounds when the company is more mature.
Governance and Shareholder Agreements: The terms outlined in shareholder agreements and corporate governance structures generally dictate the conditions under which shareholders can seek liquidity. These agreements can vary widely from company to company.
The rise of crowdfunding as a means of capital infusion has reshaped the investment landscape, offering both opportunities and challenges for investors and companies alike. Companies that have successfully raised equity through crowdfunding should now be finding themselves navigating the terrain of shareholder liquidity demands. The outcome of these dynamics will depend on a myriad of factors, including company performance, external market conditions, and the terms set forth in shareholder agreements.
From a company perspective, liquidity options include trade sale or listing on some form of financial product market. The later have largely been shunned due to the expense of listing fees, compliance and audit. However, there are a number of alternative financial product markets available in NZ from NZX which serves large companies well to USX as a compliance-lite market where the minimum requirement is an audited set of accounts and event-based disclosure.
While it is still early to make sweeping generalizations about the crowdfunded companies in question, it is clear that shareholder liquidity is an issue that merits ongoing consideration and should be on director’s minds. As these companies continue to mature and evolve, shareholders and stakeholders alike must remain attuned to the ever-changing financial landscape and be prepared to adapt to the demands and opportunities it presents.