- Equity crowdfunding is a new investment pillar in Australia.
- A forward focus is required to assess investment potential.
- Qualitative factors are becoming more important in investment decision making.
Erez Rachamim, Head of Fundraising at Equitise paints a holistic picture of decision making for business investments and valuations. With a background predominantly in venture capital, he looks outside of how traditional investments are made, to help SMEs grow.
At Equitise, Erez manages the due diligence and onboarding processes for a broad range of businesses. This includes business development and client management as well as technical due diligence functions and project management for capital raises.
What Erez loves about Equitise is his role as an enabler, helping fuel the growth of a host of enterprises and giving entrepreneurs the chance to pursue their passions.
Crowdfunding as a new investment pillar
Crowdfunding is a new pillar of SME funding in Australia, says Erez, adding to the mix of funding mechanisms, which include government, angel investors, banks, peer-to-peer lenders, venture capitalists and now retail investors.
Until recently only the very wealthy and venture capitalists could get involved in private company investing. Crowdfunding is already a developed market particularly in the UK and US, however, it’s still in its infancy in Australia. In September 2017 the law in Australia changed to allow everyday investors the opportunity to invest in new and exciting businesses not listed on the Australian Stock Exchange.
The Act provides a regulatory framework for crowd-sourced equity funding in Australia, joining other jurisdictions that have enacted crowd-sourced equity funding legislation including the UK, the US, New Zealand and Canada.
Equitise played a prominent role in developing the Australian market and building trust in this kind of investing. Equitise was founded four years ago in Australia in order to bring retail equity crowdfunding to Australia; which means you take money from lots of people and pool it together to purchase equity in a business. At the time, you couldn’t do this in Australia, so Equitise was founded in New Zealand, and the founders then lobbied government for legislative reforms (as part of a larger industry body) to enable this form of capital raising in Australia.
As of 11 January 2018, Australian Securities and Investments (ASIC) issued a new class of financial service licence to seven intermediaries, one of which was Equitise. What that means, Erez says, is “we can, under a highly regulated framework, accept investment from every day people through the Equitise platform.”
By enabling anyone to own a share of businesses they believe in, alongside professional investors and venture capitalists, “Australian businesses can benefit from fostering innovation, and generating returns to fulfil their visions.”
Erez says with crowdfunding being new to the Australian market his role at Equitise is about assessing the risks of capital raises and building trust with every day investors. There’s a particular kind of business that benefits from this kind of funding, but he says, “you need to educate people to build integrity in the quality of the offering.”
What’s involved in valuing a business?
Erez stresses that the funding approach needs to be holistic and individual, particularly for start-ups, as every business is different. Retail equity crowdfunding aligns your customers as shareholders, building a community around the business. Depending on the sector, the kind of product offering - whether it’s business to business or business to consumer- what stage it’s at, each model and strategy will be different.
Erez says the approach also depends which investor lens you value the business through. Other considerations to assess risk are identifying the sources of funding, the founder and their persona.
The biggest thing, Rachamim says, is to “look at the potential” and “be forward focused”. For example, he says, if we valued Tesla, we’d know that in 2040 electric vehicles will have mass adoption, but they don’t right now. Technology and innovation play a huge part in the potential of a business.
“There has to be a balance between where the business is today, where they want to be in four years’ time and what the future funding milestones are of where an investor could take them."
Traditionally, Erez says, decision making about investments has focused on quantitative factors, but qualitative factors are becoming more important.
“When you make assumptions the quantitative factors are impacted by the qualitative” such as what’s happening within the market, new technology on the horizon, and how is the market likely to expand and change.
“The ability of the business valuer to interpret trends and translate them into something tangible is significant. Numbers are important but it’s how you translate that, by ascribing qualitative factors and building them into the model.”
Measures of success
Erez’s career is grounded in business, finance and mathematics, yet his path has been anything but traditional. For someone so young, 25 year-old Erez has already had notable successes across enterprises and continents.
In the UK, as part of venture capitalist firm Earlymarket, he created a commercialisation strategy for a pre-revenue business and implemented it to validate the model within three months. He then went on to conduct analysis on investment prospects for SMEs across the UK, Europe and the US. In Sydney, as part of an incubator, Rough Diamonds, Erez helped launch a business from concept through to operations and seed funding. At Medipay Financial Services in Australia he drove efficiencies in automation, financial modelling and operational processes before joining Equitise on the cusp of retail equity crowdfunding being legislated in Australia.
While tangible value is a product of success, Erez says that what motivates him is how many businesses he can help by crowdfunding. “There’s a flow on effect, as businesses contribute to the Australian economy and employ people, who are part of families and communities.”
Business Valuation and Forensic Accounting Conference
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