There is no lack of statistics about how much capital has been raised, and how those dollar amounts have increased year over year, in the new asset class called securities crowdfunding. The statistics about investor returns have been much less forthcoming, partly because securities crowdfunding is only a few years old, but also because investor returns are not as “transparent” as offerings and sales on funding platforms.
In this first of a series of weekly columns (which I’m honored to write for AIMkts), I am going to peek into the relatively obscure side of equity crowdfunding’s short history: performance from the investor’s point of view.
Billions for Startups
According to Crowdnetic’s Q1 2015 Report, in the first quarter of 2015 alone, the 17 most prominent securities offering platforms in the United States recorded capital commitments totaling about $650 million—a 35 percent increase from the previous quarter.
- Update: Capital commitments grew to $1.47 billion by Q3 2016, per Crowdnetic Research.
These figures represent the performance of offerings under Regulation D, Rule 506(c), to accredited investors only; they do not include Rule 506(b) offerings, some of which are listed on crowdfunding platforms as well. (It is likely that the numbers of 506(b) offerings, and the amount of capital raised thereby, are higher than that of 506(c) offerings. Rule 506(c) allows general solicitation, while Rule 506(b) does not.) Digging a little deeper into the Crowdnetic report:
- In the first quarter, the industries that benefited most from crowdfunding, in terms of capital commitments, were services (led by long-term care and elder care facilities), financial services and consumer products. Note that those issuers in the high-tech industry tend to make offerings under Rule 506(b), which are not tracked by Crowdnetic.
- Issuers in California, not surprisingly, cashed in more than any other state (followed by New York and Florida); and the western U.S. out-raised the other regions (followed by the South and Northeast).
- The types of securities offerings that received capital commitments were: equity (62%), convertible debt (22%), debt (9%), real estate (6%) and other (1%). The capital structure of crowdfunding offerings “remains relatively consistent with previous quarters,” says Crowdnetic.
Real-life Exits for Investors
A whole lot of money is being raised by startups via equity crowdfunding. That means accredited investors bought a whole lot of equity in startups since the first funding platforms launched just a handful of years ago. Among the most prominent of those early pioneers were MicroVentures, launched in 2011; and CircleUp, launched in 2012. (Passive bulletin boards such as EquityNet launched as early as 2005.)
Of course, the securities offering platforms may not report data about purchases or returns of individual investors. However, we do have the following aggregate and anecdotal information from MicroVentures (which focuses on technology ventures) and CircleUp (focusing on consumer products and retail).
Bill Clark, CEO of MicroVentures (based in San Francisco and Austin), told me on June 8, that out of the 120 companies funded on his platform, there have been five or six outright failures. Contrast that with seven exits—four acquisitions and three IPOs—in just four years. That’s if you include Facebook and Twitter, which raised capital on MicroVentures (and elsewhere) before their IPOs.
In fact, the first-ever acquisition of an equity-crowdfunded company was a MicroVentures-funded company, Republic Project. Based in Arizona, Republic Project is a developer of cloud-based digital content management systems for advertisers. It raised $100,000 in its 2011 primary CF round on the MicroVentures platform and another $250,000 in a secondary CF round.
- Learn More: Click here for everything you need to know about crowdfunding laws and successful equity raises.
In November 2013, Republic Project was acquired by Digital Generation, a publicly traded company. The acquisition price is still confidential. Primary-round investors would see a larger return than second-round investors, and the exact return on investment “depends on a two-year earn-out,” Clark explains.
Other startups that raised capital on MicroVentures and later provided exits for investors were Loom (sold to Dropbox), Space Monkey (sold to Vivent), Box (filed IPO), and Flurry (sold to Yahoo).
Rory Eakin, COO of CircleUp (based in San Francisco), reported in April 2015, that as the platform approaches the end of its third year online, it has helped more than 90 companies raise over $100 million. Although none has yet provided an exit for investors—consumer products typically have a longer exit horizon than tech ventures—companies funded on CircleUp through 2014 “are growing, on average, 86 percent annually [in terms of revenue] since closing funding on the CircleUp marketplace.”
Thirty percent of those companies have already gone on to raise follow-on rounds, Eakin said. “For those with priced initial and follow rounds, they have an average unrealized internal rate of return of 80 percent (i.e., no convertible debt on either end).” [Emphasis added.]
Eakin considers the revenue growth of CircleUp-funded companies as a “proxy metric for valuation expansion [which] captures the progress of companies between priced rounds.” The 86 percent revenue growth is impressive, considering Nielsen sales data on comparably sized consumer companies (with retail sales between $1 million and $10 million) showed around 5 percent growth per year between 2010 and 2014, according to Eakin. “At 86 percent, CircleUp companies achieved an annual growth rate approximately 17 times greater than that of their peer group,” he figures. For more details, see CircleUp’s April 20 report.
Flow Both Ways
It is still way too soon to measure ROI meaningfully for most investors in equity crowdfunding. Just because thousands of companies are raising billions of dollars does not mean enough investors will profit to ensure the success of securities crowdfunding as an asset class. After all, if investors do not earn decent returns in another handful of years, the industry will dry up. But based on early reports from two of the oldest equity offering platforms, ROI might just flow as freely as the capital that’s being raised.
Continue with the next article in this series, “Who Should Invest in Seed Stage Companies Under Reg A.”
– David M. Freedman has worked as a financial and legal journalist since 1978. He is a frequent contributor to Accredited Investor Markets, and a participant (as moderator and panelist) in investment-oriented Financial Poise webinars. Freedman is a coauthor (with Matthew R. Nutting) of Equity Crowdfunding for Investors: A Guide to Risks, Returns, Regulations, Funding Portals, Due Diligence, and Deal Terms (Wiley & Sons, June 2015); for details, please go here.