I’m just back from the Angel Capital Association (ACA) Summit
in San Diego, where much of the talk among the 600-plus attendees was about how crowdfunding is changing the relationship between entrepreneurs and traditional equity investors. The general consensus is that crowdfunding options will continue to expand at a rapid rate, especially as changing federal regulations open up the playing field to new investors.
Whether this is a good thing depends on whom you ask—many see crowdfunding as an essential way to democratize participation of funding early-stage companies and accelerate the pace of startups; others worry that new investors are unsophisticated and not prepared to lose money in high-risk ventures. But everyone agrees that equity crowdfunding is here to stay, and it’s up to entrepreneurs and angels to educate themselves.
That’s where CED comes in, as we are committed to engaging with and helping to educate the growing pool of investors who are able to support the entrepreneurial economy. Let’s start with some definitions and trends:
Not all crowdfunding is equity crowdfunding.
In fact, of all the types of online platforms that allow individuals to direct dollars to private companies, equity crowdfunding is—for now—a relatively small, but growing player. Numbers are hard to come by, but the ACA estimates that roughly $7 billion in transactions took place on North American crowdfunding platforms in 2014. Equity crowdfunding, in which investors get an ownership stake in the company, accounted for about $300 million of that total. By contrast, platforms that allow individuals to lend directly to each other, like LendingClub and Prosper, are currently the heavyweight champions, with $5 billion worth of activity. Donation- and rewards-based sites like Kickstarter and Indiegogo, also brought in more dollars for startups than equity platforms.
Many platforms and a trend toward specialization.
It’s early days for the industry, and the market is still sorting itself out. The Tabb Group, a financial markets consulting firm, estimates that 1,000 different crowdfunding platforms of all types opened worldwide in 2014, and predicts that only a few are likely to become successful businesses.
In the U.S., AngelList is the leading platform for online equity offerings and amount raised, especially for technology companies. Others, like CircleUp (consumer goods), AGFunder (agriculture), and RealCrowd (commercial real estate) are targeting specific industries and adding sector experts for due diligence and syndication. As these platforms will be judged by their ability to fund deals that turn into fast-growing businesses, they increasingly are adopting best practices, often in partnership with traditional equity investors, to reduce risk and produce winners.
And the early winners are…
A few big deals can skew the results, and some companies fundraise on multiple platforms, which can lead to confusion about how much money was raised overall. But industry trend-watcher Crowdnetic finds that companies with tangible assets—oil and gas production and real estate—have secured the most money in capital commitments on equity platforms, partly because these are easy for investors to understand.
Professional services and technology account for the largest number of deals, but they tend to be smaller. Biotechnology companies are in the middle. The vast majority of these companies raise between $10-100,000 in the aggregate through crowdfunding; most of what they raise is still happening offline.
More participation ahead.
North Carolina is considering legislation to open up equity investing for in-state deals to all individuals, not just the accredited, or wealthy, investors who are allowed to participate today. By the middle of this year, investors of all stripes may be allowed to take part in funding initial public offerings of up to $50 million, and the federal government may soon publish guidelines to open up true “crowdfunding for all,” possibly starting in 2016. Striking the balance between allowing new investors to participate in a potentially rewarding asset class, while also building in the appropriate investor protections, no doubt will continue to be a lively topic of debate.
The bottom line.
Three years ago, it was illegal to use the Internet to connect investors with private placements. Since 2013, the total amount of equity raised through crowdfunding is approaching half a billion dollars. This is the “new normal,” and entrepreneurs and investors alike need to learn what it means for them.