I recently read some research done by Crowdfund Capital Advisors, an authority in the regulation crowdfunding space, and co-author of the original JOBS Act in 2012. This report summarizes the volume of activity that happened on the Title III crowdfunding portals regulated by FINRA in 2016. Regulation crowdfunding, which first made it legal for mom-and-pop non-accredited investors to invest in early stage startups, first went live on May 16, 2016, so the below research only reflects partial year results. And, the below does not include activities happening on non-regulated crowdfunding activities operating under the Title II and Title IV platforms, which includes bigger crowdfunding platforms like Angel List, who serve accredited investors with net worths in excess of $1MM. Nor does it include the crowd donations sites like Kickstarter and Indiegogo, where even more money is flowing.
My interpretation was, based on this small Title III sub-segment of the market, still in its infancy, which can be further extrapolated across the broader crowdfunding landscape: money is flowing, startups are growing and jobs are being created, just as originally hoped for when the JOBS Act was originally conceived. To pound that point home, on Kickstarter alone, it has helped almost 119,000 projects raise over $2.8BN since it has launched, and claims its projects created over 300,000 new jobs in 2016 alone.
CCA's Principal Woodie Neiss is a colleague of mine, and he was kind enough to let me share CCA's learnings with all of you below.
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21 regulated platforms launch; 1 dies
During the course of the 2016, we saw 21 debt and equity Title III crowdfunding platforms launched and one, Ufunding Portal, shut down by the SEC because it seemed to be missing some of the statutory requirements required of a funding portal (like a communication channel where potential investors could ask questions to entrepreneurs raising money).
42% of campaigns succeed
186 companies launched campaigns on these Title III platforms, and 79 (42%) of them succeeded in hitting their minimum funding target (MFT) — the minimum amount a company must reach in commitments in order to be funded. Investors on the Title III platforms alone committed $19 million to the 186 campaigns and transferred $17.9 million to the 79 funded campaigns, in basically half of a year. CCA is forecasting funds raised in 2017, to exceed $100 million on these Title III platforms (still a small sub-segment of the broader crowdfunding market).
This money was raised in a fraction of the time that it would have taken if these entrepreneurs had gone to VCs. It was also raised by many companies that don’t qualify for VC capital because they don’t hit the sweet spot for VC investment. And, not all these investments were for equity. Both the company and the crowd seem to understand that if there isn’t a clear exit opportunity, debt financing is the way to go.
Investors invest $833 per deal, on average
Over 21,000 individual investments were recorded for 2016, on the Title III platforms only. The average investment was $833, and the average number of investors in a funded campaign was 331. Month-to-month, the number of investors coming into regulation crowdfunding grows at a healthy pace, showing that there is a growing interest in experimenting with these alternative investments.
Average funds raised per company is about $227,000
The average Title III funded campaign raised $226,578 in an average of 45 days, much faster than traditional venture financings. The average fee paid to the platform for a funded campaign was $11,329. Three companies, Beta Bionics, Hops & Grain, and LegionM raised $1 million.
But, if you are a company seeking capital, keep in mind that raising $1 million is hard to do, and you should expect to raise closer to the average. The key to success is how big your social network is and the marketing support you put behind the campaign. There is a strong correlation between the size of your social network and marketing efforts, and how much money you raise.
Valuations are in line with VC funded companies at $5.3MM
It was good to see that when we removed some of the outliers, the average valuation for funded campaigns was in the ballpark of what VCs are paying, proving the crowd isn’t being taken advantage of. The average pre-money valuation for a funded campaign was $5.3 million.
Creating 2.2 jobs per company in first 90 days
Finally, it is apparent that Regulation Crowdfunding is a jobs engine. Together, the companies funded on Title III platforms in 2016 plan to create about 174 jobs over the next 90 days; that’s about 2.2 jobs per funding company. If the incoming administration is looking for an easy way to stimulate the economy, it would do well to promote Regulation Crowdfunding, especially since many funded campaigns are creating jobs in underserved communities and since the majority of investors in these campaigns tend to fund businesses in the communities where they live.
Thanks again, Woodie, for letting me share your research with our readers. Be sure to re-read this old post on The Birth of Crowdfunding Agencies, to learn how to successfully launch a crowdfunding campaign of your own, and take advantage of this great channel for your fund raising needs.
For future posts, please follow me on Twitter at: @georgedeeb