Oodles.com founder Steve Sherlock has set himself the goal of raising a multimillion dollar Series A funding round by early 2010. He is documenting his trials and tribulations and seeking feedback from readers on AnthillOnline.com. This is the eighth post in his series.
Week 8: The Clayton Stock market
When I embarked on my current search for new funding, I thought I was familiar with most of the likely sources: friends (relatives and fools), angels, angels with teeth – Venture Capital (VC), strategic investors (the Holy Grail), an IPO or Lotto.
But it turned out that there was one I wasn’t aware of: The Australian Small Scale Offerings Board (ASSOB), or as I like to call it, the Claytons Stock Market (you know, the stock market you have when you’re not having a stock market).
An alternative listing on ASSOB?
ASSOB is essentially a mini stock market that allows companies to raise up to $2 million (in total) by making personal offers (i.e. not via prospectus or advertised) to a maximum of 20 Australian-based retail investors. An additional $3 million can be raised from so-called sophisticated investors* and overseas investors.
I learned about the organisation late last year when I attended a meeting of the Brisbane Executive Club at which ASSOB CEO Paul Niederer gave a presentation. I subsequently contacted Niederer, who put me in contact with Simon Ward from Melbourne-based Tauro Capital, an accredited ASSOB member.
I met Simon last week and he provided more detail on the ASSOB ‘listing’ process.
One of the more attractive elements is the relatively (and I mean relatively) low costs involved. ASX listing fees for an IPO can range from $25k to more than $200k, and that’s before you pay to have your accounts audited and success fees to various corporate advisors, including underwriters and lawyers. According to the ASX, for an IPO of less than $10 million, total fees can typically amount to an average 10 percent of the amount raised.
By comparison, ASSOB charges an application fee of just $990 and a listing fee of $4,000. Accounts don’t need to be audited, which also saves money. But an applicant must engage an accredited ASSOB member to sponsor it — that’s where a company such as Tauro Capital would come in — and the sponsor will charge a retainer and a success fee (budget on around $30k retainer and a five percent success fee). You still have to pay for legal advice.
A sponsor’s primary responsibility is to help navigate you through the pre-listing process, including the creation of an offer document (including an IM), production of a promotional video and compliance with the Corporations Act.
After speaking to Simon, it seems the tough part is convincing a sponsor to actually take you on. A company like Tauro isn’t going to commit its time and resources unless there’s a good chance for success, which means it employs a fairly rigorous vetting process. This appears to work, as he claimed over 80 percent of companies listing on ASSOB did get funded.
The ASSOB platform itself has an inbuilt incentive for early birds, with shares being offered in three rounds at staggered values. For example, shares could cost seven cents in round one, 10 cents in round two and 12 cents in rounds in round three.
Once the final round is completed, shares can be bought and sold in a secondary market, similar to the ASX (founders often can’t trade shares during a 12 months escrow period).
Simon said (had to get that one in!) that in preparing the offer documents, applicants were required to use Tauro’s own suppliers of graphics, PR and legal advice. He claimed his company did not get a kickback from these suppliers — it was purely about maintaining quality. That sounded reasonable to me, but you’d have to think that the absence of competition would do little to help keep costs down.
From a PR perspective, working with ASSOB does not provide the same leverage as an IPO, but it’s still a listing so there are PR opportunities.
The pitching process is pretty much done by the offer document and video, which can be accessed by up to 10,000 potential investors. I was given a few offer documents to have a look at, and they are very professional, although at around 40 pages long there is a lot of information to digest (i.e. I mostly looked at the pictures).
After meeting with Simon I can see how ASSOB would make sense for some entrepreneurs.
The process takes care of a lot of issues, such as putting together an IM and finding quality investors, which means the capital raising process can be less distracting than trying to do it all yourself. Plus, most companies that participate are not revenue positive — that would be a problem for the ASX** — which means ASSOB seems to provide a genuine alternative to very early stage startups.
The Holy Grail
From Oodles’ perspective, however, I don’t think the model is a particularly good fit at the moment because we want to target a specific type of investor — ideally strategically-aligned travel companies who would bring a lot more than just cash to the deal.
Having said that, Oodles’ development could still be at too early a stage for strategic investors, and if that proves to be the case then I may consider the ASSOB model. In other words I’m keeping an open mind.
If you have any questions on ASSOB, post them below now. Simon and his colleague Chris have promised to monitor the discussion and answer any specific queries.
*A sophisticated investor is defined as an investor who has for two years running earned at least $250k gross per annum and has a minimum $2.5 million in Net Tangible Assets (NTA).
** According to the ASX (http://www.asx.com.au/professionals/pdf/asx_ipo_brochure.pdf), companies undertaking an IPO must be profitable – in fact that have to show an aggregated profit after tax of at least $1m over three years plus $400,000 over the last 12 months. If that’s not the case then they need at least $2m in net tangible assets (including amounts raised under the IPO or a market capitalisation of at least $10million post-IPO.