Reminder investing in growth companies comes with more risk

Renaissance Brewing has gone into voluntary administration, citing cash flow problems.
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Renaissance Brewing has gone into voluntary administration, citing cash flow problems.

Renaissance Brewing's financial troubles are being held up as a reminder to investors that equity crowdfunding is a high-risk option.

The company was the first to receive equity crowdfunding when it raised $700,000 from investors in 2014.

Equity crowdfunding was designed to make it easier for small businesses to raise money from the public, by allowing them to raise up to $2m from retail investors without filing a formal prospectus.

It has since been used by dozens of firms to raise tens of millions of dollars of capital.

READ MORE: Renaissance Brewing, first NZ company to get equity crowdfunding, goes into administration

Renaissance is in voluntary administration but is still trading. In a note to investors, administrator Shephard Dunphy said the firm had struggled to generate sufficient margins on sales and that, coupled with reduced turnover, had placed a "significant strain on cash flow".

It is not yet clear what the outlook is for investors.

Cowan Finch, head of private capital at Snowball Effect, the platform that hosted Renaissance's crowdfunding efforts, said it was a reminder of the risks associated with early and growth-stage businesses.

"We believe most investors are aware of the risks involved in early stage investing and tend to invest accordingly - meaning they only invest a small amount of money relative to their savings or other investments and generally only invest money they can afford to lose," he said.

He said, in Renaissance's crowdfunding offer, there were only two investors who invested more than $10,000 and only ten investors who invested more than $5000, from a total of 286 investors.

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"Snowball Effect highlights these risks throughout the investment process and each company making an offer on our platform also outlines the risks specific to its business," he said.

"However, we are continually looking at ways to improve investor awareness of the risks, including seeking feedback from past investors."

He said all investment in early and growth-stage companies was speculative and carried a high degree of risk.

"It's not the method of investment that makes it more or less risky. It just so happens that companies taking the crowdfunding route end up with a much more public failure if they are unsuccessful."

The Financial Markets Authority warns that crowdfunding investors will not get all the information they normally would when they bought shares, investment in any new or rapidly growing company was "very speculative" and that it did not check the companies raising the money.

"Companies using crowdfunding websites to raise money will often be start-up's or growing businesses. This means there is less of a track record to help you decide whether they are likely to succeed. Some of these companies may not," it said.

"You'll be asked to read a warning statement that tells you equity crowdfunding is risky. You'll be told you may lose your entire investment and must be in a position to bear this risk without undue hardship. Think carefully about how much you can afford to lose before you invest."

 

 

 

 - Stuff

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