Talking equity crowdfunding with Birchal
21 February 2022 at 4:12 pm
“I think people view crowdfunding as a separate kind of funding. In reality, it’s a vehicle to aggregate multiple types of investors.”
If you’re someone that pays attention to Australia and New Zealand’s start-up and purpose-driven business scene, you’d be hard pushed not to have heard of Birchal. After all, this equity crowdfunding platform has helped Kester Black raise $2.1 million, ZeroCo raise $11 million and Thrive raise $1 million.
We sat down with Birchal’s co-founder and managing director, Matt Vitale, to talk about all things equity crowdfunding, the history of the movement, the future of business and why purpose-driven businesses seem to be thriving in this space.
Birchal has become such a prominent player in the crowd equity for social impact space, can we kick things off with you explaining crowdfunding as a movement to me?
Equity crowdfunding is still relatively new in Australia but, globally, it’s over 10 years old. The UK’s probably the most advanced industry for equity crowdfunding. People have different opinions on how it started over there, but I would say it started with a craft brewer called BrewDog, which was a small business back in 2009 but is now the largest independent brewery in the world.
They needed to raise capital and had this innovative idea to raise the money from the people who like drinking their beer. And so essentially what they did was shorten the distance between the company and their customers, and turned the most passionate ones into investors. They came up with this concept called Equity for Punks and raised a million pounds from about 1,000 investors. This was in 2009, before crowdfunding platforms, as we know them, existed.
Was that easy for them to do from a legal perspective?
The only way they were able to do it was to get a few exemptions from capital raising laws. With crowdfunding you’re making an offer of securities, which is traditionally a heavily regulated activity — you need to prepare prospectuses and make sure all offers are advertised appropriately — and so the guys from BrewDog were able to get some exemptions to make raising capital a fully-online offering. It was a pretty innovative thing to do at the time. The UK is far more liberal for the capital raising environment but after a few years the government decided that online crowdfunding should be regulated and so they introduced what’s called the financial promotion regime — a set of laws that allow companies to raise money online from the public.
So, when did the concept come to Australia?
The world was watching what was happening in the UK and then, in 2013, there was a discussion paper published asking whether Australia should have a crowd equity crowdfunding regime similar to the UK.
Is that when you first became interested in it?
I was a young lawyer at the time and was definitely inspired by what was happening in the UK. I was working in a law firm within financial services and capital markets, and could see that it was an innovative idea. It was around this time that I became aware of Alan Crabbe, co-founder of Pozible, who would go on to be my business partner in Birchal, although, we didn’t really connect for another three or four years when it looked like the government was finally going to put some laws before Parliament to introduce an equity crowdfunding regime in Australia. It took another five years from that point for the legislation to be passed and, during that time, Alan and I were chatting about what opportunity Pozible had in the crowdfunding space and we decided to start something new and call it Birchal. We got our financial services licence, among the first group of licensees, in 2018.
Why call it Birchal?
There’s not a lot of meaning behind the name! We decided we didn’t want to use a name that people would expect and we also decided to split from Pozible because the platforms are very different. Birchal is a regulated business, we have a financial services licence, and Pozible is not. Through these ideation sessions, we started thinking about Australian inventors and Australian innovation and, although the platform’s not named after him, it’s loosely inspired by a guy named J.A Birchall. He owned a stationery store in Launceston and is the inventor of the notepad — he used to buy reams of paper from London and had this innovative idea to glue sheets of paper together and give them a cardboard backing. It’s a little known Aussie invention!
So, fast forward to 2022, if you’re in the purpose-driven business space it’s hard not to have heard of Birchal. The platform has played such a huge role in raising equity for a number of B Corps and social-driven businesses. Was that always the intention?
Yes and no. We learned a really hard lesson pretty early on in that our first successful campaign was for a company called Park. Park is a great business, it’s a social enterprise that makes soccer balls where if you buy a ball they’ll give a second soccer ball to a child in a developing country. It’s great, and we were really excited to host the offer, but we were leading with their purpose and their mission when we were marketing the offer and not getting much traction.
Sam, who is the founder of that business, was global creative director at Apple for many years — hired by Steve Jobs. He has had an unbelievable career but he was reluctant to put himself forward. He wanted the business to stand on its own and be excited by the purpose and the mission.
But people invest in people, right?
Correct. And also Birchal is offering investment opportunities so they need to stack up over and above the purpose and the impact the company’s trying to achieve. Once we shifted the strategy to look at the credentials of the founder, and describe all of the things that he had done, we started to get a really good response.
That was a really important lesson for us. We now say to founders that what we do is raise investment, so what’s on Birchal will always be framed as investment opportunities. If people want to donate to a cause there are other ways that they can do that.
We’ve been able to build an audience of people that are still expecting offers to stack up as an investment, but they’re also really excited about getting involved in businesses that are pursuing a higher purpose.
When we started we didn’t really have much distribution or much traction but I think we found our niche through our approach to helping founders. These were people that had been somewhat disenfranchised by the old way of raising investment, which is relationship-driven and can be complicated and hard for people to penetrate in the old world.
And just by us doing good work, and through people having good experiences, they would go and tell others about us or people would ask them how they found the process of raising investment. And the business really built from there, which is great because referral and reverse inquiry have been the strongest source of business. I think that’s what every business should strive for. We don’t do much marketing, instead, we let our work speak for itself and that’s a really nice place to be.
And what happens if a founder wants to go for investment and you’re not happy with their business or what they’re trying to achieve?
We don’t have any hard and fast rules but we do, from time to time, get companies that come to us that make us feel a bit uncomfortable. And what we do then is pretty lo-tech — we have an all-hands meeting with the team and just ask people how they feel about working with these people and whether we can add value.
And does the team ever say ‘no’?
There’s been a few times where, as a result of an open and honest discussion, we’ve agreed not to host the offer. It’s really interesting to go through this process from time to time because there are some pretty strongly held views in the team.
Does Birchal feel like a values-led business?
I would say that we do operate as one, yes, and we believe that every person in our business needs to be heard.
As you watch founders submit their EOIs can you see whether it’s purpose-led businesses that are raising more equity?
I think it’s hard to answer because the majority of the businesses we host offers for are purpose-driven. The way I’d describe it is this – the companies raising capital in this way are making themselves accountable to their audience, in contrast to a company that will raise from a handful of investors that tend to be just focused on profit and return.
The early-stage companies that are raising money from the public are forming a social contract with their investors. They’re saying “this” is why we exist and “this” is what we’re going after. They’re baking in their corporate responsibility and their accountability to their shareholders from the outset, which is really exciting. It’s the future of business.
Do you think that businesses can play a huge role in impacting certain social issues?
I do, and I think that what has transpired after the global financial disasters of the last decade is that in this regime of crowd equity there is a really nice, natural tension that exists between the companies, the founders and the investors that are backing them. And I think that’s because more often than not the first people that back them or invest in the offer, are their most passionate, like-minded customers.
Is that why purpose-led businesses are going down this route rather than going for, say, traditional VC funding?
I wouldn’t say that it’s mutually exclusive, necessarily. I think this is a misapprehension that many people make about what we do, they view crowdfunding as a separate kind of funding. In reality, it’s a vehicle to aggregate multiple types of investors and there are a lot of efficiencies and additional benefits for both sides by going this route. The companies have to produce a regulated disclosure document that complies with the retail disclosure regime and so our job is the intermediary. It’s a quasi-regulatory role that gives investors comfort that there are rules and safeguards around investing in this way.
We’ve seen professional investors investing this way, which is consistent with what we’ve seen overseas. Almost half of all the money that’s invested through crowdfunding platforms comes from professional investors, and that’s probably something people haven’t really appreciated. Square Peg, as an example, invested $6 million into ZeroCo, alongside the $5 million from retail investors.
Birchal recently published its annual industry yearbook. You can read it here.