The pros and cons of innovation equity funding

In an attempt to make it easier for small- to medium-sized businesses (SMBs) to raise funds while ensuring adequate investor protection, the government has made changes to the crowd-sourced equity funding (CSEF) scheme, which will commence on 20 September 2017. (1) However, there are doubts about the new fundraising approach and the conditions of eligibility, as 99.7 percent of Australian businesses (2) remain excluded from the current scheme. (3)

Crowd funding via this scheme is only available to public companies, so it isn’t necessarily the right approach for all businesses in all situations, and SMBs should consider the alternative funding models available, according to RSM Australia.

Glyn Yates, director and national head, corporate finance, RSM said, “The CSEF is just one source of innovation equity funding. There is an increasing array of equity funding alternatives to debt financing available to SMBs, including angel investors, seed investors, and early-stage venture capital investors. In fact, the various funding options can make choosing very confusing and complicated. Not all sources of funding are the same, nor are they all suitable for every kind of business.”

RSM has identified the pros and cons of innovation equity funding.

The pros:

  • an equity investment does not place any burden on the ongoing cash flows of the company unlike a loan which requires capital and interest payments to be made on an ongoing basis
  • an equity investment will not attract the financial covenants associated with a third party loan
  • business owners can cut the bank out as a business partner and their personal risk is reduced as they are not required to provide personal guarantees

The cons:

  • investors own a portion of the business and may require regular consultation and a role in the decision-making process
  • shareholders require a return on investment and will expect dividends to be paid
  • finding equity funding can be complex and it can often be quicker to get a loan
  • rather than solving short-term problems, it’s a long-term investment solution.

Glyn Yates said, “The new CSEF scheme, like other equity funding models, may open the doors for small businesses and start-ups who might otherwise struggle to get affordable finance. However, it’s important for all small businesses thinking about participating in any equity funding scheme to get good advice to understand the advantages and disadvantages of innovation funding.”



(2) Corporations Amendment (Crowd-sourced Funding) Bill 2016 [Provisions]