Crowd-sourced funding: solving the tyranny of distance to capital

On Jul 17, 2023

Geographic remoteness is part of our identity as Australians. Stories of founders relocating to a larger startup ecosystem are common, particularly for founders outside of Sydney and Melbourne.

Most notably, Sydney-based Canva, one of Australia’s most successful startups, was originally founded in Perth.

But five years into the development of Australia’s crowd-sourced funding (CSF) regime, I believe we’re on the cusp of a step-change in the way startups are funded, which will in turn change where they are built.

Access to talent and capital are often the key drivers of where a startup founder decides to build their company. But recent trends are making it easier for founders to build businesses from previously unlikely places.

The ‘working from home’ phenomenon, accelerated by technology and the Covid pandemic, has encouraged the belief that work can be done from anywhere, and fundamentally changed how one might consider access to talent when deciding where to build a startup.

But access to capital is a problem that endures even in Sydney and Melbourne, which have Australia’s most developed startup ecosystems. While Perth loses a founder to Melbourne, Melbourne loses a founder to Austin, and so it goes on.

There’s a critical shortage of venture capital all over Australia. It’s just that if you thought it was bad in Melbourne, imagine what it’s like in Collie or Karratha.

WA funding surges in FY23

The CSF industry recently experienced its first decline in funding volume. A drop of approximately 26% in FY23, but not as severe as the broader VC industry (70% decline) and the ASX (80% decline).

But as our recent Funded! Report shows, despite the headwinds some amazing results were achieved. Perhaps none more significant than the performance of WA-based businesses, which achieved a 30% leap in funding volume when all other states declined.

From a CSF-standpoint, we’ve observed progressively increasing funding volumes for businesses outside of Sydney and Melbourne over the last few years, which is also consistent with the experience of investment crowdfunding regimes overseas.

Global investment crowdfunding expert Professor Andrew Schwartz observed recently:

“There are certain geographic areas that are the centre of venture capital in the US. It’s Silicon Valley and to a lesser extent, New York, Boston, LA and a few other places.

“Companies that use this method [CSF] in the US hail from all states and all over the place, and overwhelmingly are not from Silicon Valley.

What if you’re a geographically remote entrepreneur starting up a company in, let’s say, Tasmania? In the olden days, six years ago, you’d have to move yourself to Sydney or Melbourne and try to find some venture capital that way.”

Two companies have reached a $5m maximum target under the CSF regime now, and they are both regional businesses! ZeroCo raised $5m in seven hours from Byron Bay in October 2021. And Cannaponics achieved $5m earlier this year from Collie, a small town in the South West region of WA.

So far, 48 of the 216 (or 22%) successful CSF offers hosted by Birchal have been for regional businesses, raising a total of $45m (or 27%) of the $170m Birchal has helped companies to raise since we launched.

The CSF results show that opportunities for regions, and areas that are underserved by professional investors are significant. This is awesome, because it can empower founders to build businesses anywhere, rather than feeling the need to relocate to the major cities and ecosystems where professional investors are.

Exciting times ahead for the WA startup ecosystem

We’re thrilled with the performance in WA this year. WA has been a highly active state for CSF with founders and investors since the beginning.

A total of $38 million has already been invested into WA businesses through CSF since the regime began ($16m in FY23 alone).

I recently spoke at a ScaleUp WA event for agri-food entrepreneurs. I also recently participated in an investor forum organised by Curtin University who have assembled a team to participate in MIT’s Regional Entrepreneurship Accelerator Program (REAP) on behalf of WA.

West Tech Festival is going from strength to strength. And three new VC funds have been established, with support from the WA Government: Purpose Ventures; Fund WA; and Quokka Capital.

Collaboration the key to building ecosystems

Looking at the UK, the world’s largest investment crowdfunding market, collaboration with professional investors (Angels, VCs etc) has been critical to its success, and is a feature of its maturity. But it took time to achieve this.

In Australia, many incumbent startup ecosystem participants have been apprehensive about CSF (to put it mildly). One of the common misconceptions of CSF is that it’s only for retail ‘mum and dad’ investors. This is a myth that has been busted many times now.

Pleasingly, now some of Australia’s most high-profile investors and funds have backed CSF companies before, during and after a CSF raise, including: SquarePeg; AirTree; Skip Capital; Euphemia; Antler; NAB Ventures; AfterWork Ventures and Artesian among others.

We’ve made a lot of progress. People are starting to realise that CSF is not mutually exclusive to professional investment, but instead a really powerful vehicle to aggregate many different types of investors, and importantly retail investors as well.

The progress we’ve made on the East Coast, where startup ecosystems are more advanced, has been hard fought. We’re thrilled to be a part of the conversation in WA at this formative stage.

For more on latest market conditions, trends and industry insights, get a copy of Funded! Report FY23.