Top Trends in Equity Crowdfunding
Big Things are Happening
Equity crowdfunding has certainly had its fair share of critics over the last 9 months but a few interesting trends have emerged that might surprise you.
When you heard the term “crowdfunding” in the past it has almost been exclusively associated with speculative payments to fund the development of tangible things. But recently the door has been opened to allow anyone to invest in the ground floor of ownership in the next hot startup.
This model has been troublesome to implement in the past due to SEC regulations. Regulation Crowdfunding (“Reg CF”) has opened new opportunities to unaccredited investors. A strong lobbying effort spearheaded by Sherwood Neiss and Crowdfund Capital Advisors led to the insertion of this regulation into the JOBS Act of 2012.
Since Reg CF only went into effect in mid-2016, equity crowdfunding is still very much an emerging market in and of itself.
Due diligence is more important than ever for both companies and investors thinking of jumping in.
Equity Crowdfunding Investments Are Roughly Doubling Each Year
In 2015, the total equity crowdfunding volume worldwide was $2.56 billion, according to the annual Massolution Crowdfunding Industry Report. That number has been roughly doubling each year since 2012. 2016 data is not yet available as of this writing, but the projection is that it will be in the neighborhood of $4 billion.
Based on these numbers, Forbes is projecting that equity crowdfunding may very well surpass standard venture capital models in volume by 2020.
That projection assumes that equity crowdfunding continues to double every year, while venture capital investment holds relatively steady at the $30 billion it’s currently at. Equity crowdfunding would also surpass angel capital (currently at $20 billion per year) by 2019 on this track. These numbers are backed up by the World Bank, which sees the crowdfunding market as a whole continuing to double annually and hit $90 billion in volume by 2020.
Early Adopters: Mostly Predictable, But With One Big Surprise
Surveying the first crop of companies to file with the Securities and Exchange Commission reveals that, a majority are mobile apps and internet services (at 33%). The next largest group is consumer hardware and devices.
What is unexpected is the significant presence of alcohol beverage producers, particularly wine and craft beer. In fact, the most successful effort to date (in terms of total capital raised) is Hopsters, a Boston-area brewpub that allows patrons to brew their own beer.
Another campaign that topped the list was Hops and Grain, a craft brewery in Austin. Hopsters raised over $1.2 million, while Hops and Grain raised $1 million.
Many Equity Crowdfunded Companies are Brand New and Have No Prior Funding
The analysis cited above also finds that businesses pursuing this funding model in the first six months were also overwhelmingly newly formed. 60% had been in business for less than a year before turning to crowdfunding, while an added 25% were no more than five years old.
Many companies appeared to be seeking crowdfunding as their initial funding source with 70% of these companies having less than $100,000 in assets when they began their campaign.
Roughly 50% Of Reg CF Crowdfunded Companies are Meeting Their Crowdfunding Goals
As of this writing, 119 of these campaigns have been completed, and 62 of these companies (or just over half) have hit their funding goals. An additional 88 are currently open, with 25 having already hit their initial funding goal.
Almost $20 million has been invested in the campaigns that have concluded successfully.
The average individual investment has been $833, and most campaigns have somewhere just north of 300 investors. The average amount raised is a little over $226,000, and on average it has taken 45 days for each successful campaign to hit their target amount.
California and Texas Overwhelmingly Lead in Investors; Serious Lack Of National Parity
Not surprisingly, California investors are heavily investing in Reg CF offerings to the tune of $7,910,472. That’s a little over double the investment total from Texas, which is second on the list. The only other states to top a million dollars are Massachusetts and New York, although Washington state is hovering close at over $991,000.
Contrast that to the rest of the country: there are only 13 other states whose residents have invested in the triple digits and 19 states that have yet to invest anything at all with the bulk of those latter states cutting right down the middle of America’s heartland in an unbroken strip.
WeFunder Leads Reg CF Investment Platforms
There are currently about two dozen major platforms for Reg CF crowdfunding.
Wefunder is well ahead of its competition with just shy of $13M raised on their portal.
They have also hosted 34.1% of the total offerings to date.
WeFunder’s domination of the space is at least partially owed to their track record of success. It also doesn’t hurt that their fees are among the lowest of all the platforms.
As far as volume goes, by comparison StartEngine is second in total offerings with 15.2%. The only other company to host over 5% of the total offerings is uFunding at 8.7%. Most of the other platforms hold 3.5% or less each of the market right now.
Of the existing platforms, only one went out of business in 2016. Ufunding Portal was forced to close up shop by the SEC for not meeting a few of the mandatory statutory requirements.
Relatively Low Financial Barrier Of Entry For Small Companies
Each company’s up-front costs to launch an equity crowdfunding campaign will vary greatly. It depends largely on how much they’re trying to raise and how much accounting and legal work they can do themselves.
Although some fees can be deferred aside, a realistic assumption is around $10,000 to $20,000 to raise $1 million. Industry leading platform WeFunder came up with an “average” cost of $2500 in a recent interview, but they were speaking only of legal and accounting costs. Fees for the use of the various crowdfunding platforms currently range from 4 to 10%.
The biggest issue for Reg CF companies thus far is marketing
The crowdfunding portals don’t come packed with much in terms of marketing benefit.
Companies are expected to convert their existing customers and followers to investors by using their mailing lists and social media presence to get the word out about their campaign.
Therein lies the issue; with many of these companies being so new, they often don’t have much in the way of a social following built up. Some companies have recognized this inherent limitation and are implementing options to address it. For example, StartEngine is offering Reg CF companies an advance of $50,000 for marketing purposes.
Reg CF is a Job Creator
One of the central purposes of Reg CF was to stimulate the growth of small businesses and by extension, the addition of jobs to the economy. So far, that aspect appears to be a success.
In total, the campaigns funded in 2016 are expected to create at least 173 jobs in the first 90 days of 2017, or about 2.2 new jobs per successfully funded company.
Common Stock is Most Frequently Offered to Investors
So if you’re buying into an equity crowdfunding campaign, what exactly are you getting? Based on the companies that have been successfully funded, common stock or a SAFE’s have been the most popular. Many offerings don’t include voting rights, but may have liquidation preferences.
There was also a significant amount of revenue share instruments offered. The typical payout range for a revenue share were generally 150% to 200% of the investment. Annual interest rates averaged 5 to 6%, and maturity dates were usually set at one to four years.
So what’s the central takeaway from all these trends?
The biggest thing to take note of is that the pundit predictions about the success of equity crowdfunding appear to be legitimate. It’s on track to not only be a viable alternative to typical venture capital models, but completely disrupting the startup funding process in just a few short years.