Equity Crowdfunding at Year One. What's the Impact?
A total of 534 out of 3,361 companies successfully hit their equity crowdfunding target in year one, thank you Title II of the JOBS Act. According to Crowdnetic, $217.7 million equity capital was raised, which averages $407,685 per company. Despite the 2,824 that did not get funded, I see the one-year anniversary of the JOBS Act Title II provisions as a success. Perhaps this is because of my rose colored entrepreneurial glasses, but $217.7 million capital raised is an indicator that publicly soliciting funds from accredited investors has created access to a new funding stream.
What Sectors Are Leading the Way?
The Services and Technology Sectors continue to lead in the amount of recorded capital commitments at $107.4 million and $77.9 million respectively. They are followed by consumer goods, financial products and healthcare. According to Luan Cox, co-founder and CEO of Crowdnetic, investments made through crowdfunding platforms have grown each quarter and will continue to grow exponentially as more specialized platforms come to market. Crowdfunder, Founders Fund, CircleUp and Angel List are among the equity crowdfunding sites that function like Title II conduits to connect entrepreneurs and investors with the open source market.
Equity Crowdfunding Results And Trends
Chance Barnett, Founder and CEO of Crowdfunder shared with me what the equity crowdfunding landscape looks like at Crowdfunder. Crowdfunder has seen 31 companies endure funding rounds within the first 9 months of operation. Crowdfunder's average deal size is $1.6 million, most of them in the Seed and Series A rounds, and the range raised is generally $500,000 to $3 million.
Chance Barnett, also explained that equity crowdfunding is using online engagement as a tool for marketing and constructing a more compelling pitch that delivers a better product or service. Now that one year has passed since Title II implementation, he is noticing that people are no longer thinking about funding as separate from crowdfunding, but that crowdfunding online is becoming an integral part of the overall process of securing funding.
Where is Equity Crowdfunding Taking Place?
Equity crowdfunding is taken place in all 50 states, the District of Columbia and Puerto Rico. This represents a significant democratization of capital sources and is opening the door for investors living in the flyover states that have much less access to deal flow than the coastal states do.
With Silicon Valley at the helm, California continues to lead the way in both the number of companies and the capital raised. Rounding out the top five states in equity crowdfunding are: New York, Florida, Texas, and Illinois.
As reported by Crowdfunder, there are an estimated 9 million accredited investors in the US, while the vast majority have not yet signed onto an equity funding platform, they are distributed throughout the country. People can now sign on, verify their accreditation, and see deals that others are investing in. Accredited investors can even tag along with well known VC's for as little as $1,000, something that Chance says was unheard of even 3 years ago and not even possible until Title II of the JOBS Act.
Rewards-Based Crowdfunding and Equity Crowdfunding Are Finding Capital
People have invested hundreds of millions since reward-based crowdfunding sights launched. Kickstarter and Indiegogo are example of rewards-based crowdfunding platforms that contribute capital to business growth. While not an equity crowdfunding site, Indiegogo is having a major impact for profit firms. I spoke with Indiegogo's Co-Founder, Danae Ringelmann to gain a better understanding of how entrepreneurs are able to scale a business through reward-based crowdfunding in a way that appears similar to equity crowdfunding.
For example, Indiegogo hosted a crowd-participation campaign by Stone Brewing Co., a craft brewer that is pre-selling bespoke beer long before it comes to market. The company has become an adept seller of its beers, they will collaborate with other well-known and admired craft brewers like Surly, Jolly Pumpkin, and BodeBrown and promises to offer funders no-holds-barred amazing beers. Indiegogo supporters of Stone Brewing purchased their craft-beer selection with at least a year to go before it will be available, the beers will be brewed once the company's brewery in Berlin, Germany is operational - late 2015 or early 2016.
And that's not all. While pre-selling the beers was the primary focus, the merchandising is in full swing with Stone Brewing T-Shirts, beer glasses and special stickers that are only distributed to buyers of the products well in advance. This certainly is a clever way to pay for production before you start the brewing process. It may not be equity funding, but Stone is securing capital without paying out equity.
With my affinity for science and technology, Danae brought to my attention the impact early adopters have had on Indigogo's JIBO campaign, the "First Family Robot." The friendly looking counter-top robot was developed by Dr. Cynthia Breazeal and her partners at the MIT innovation lab.
Dr. Breazeal took her JIBO campaign to Indiegogo to find funding to get her prototype to market. What she got in return was $2.1 million, two times the target amount, and much more. The campaign established a whole raft of invaluable marketing information, including demographics, location and contact addresses for the early adopters. And the product won't even be in the market until late 2015, at the earliest. She also mitigated her production risk by raising capital and finding out what buyers want from their robots.
You can believe how surprised the JIBO team was when they found out that their largest class of buyers are males who want robots to cook their meals. Wow, that's a challenge for a countertop robot!
These examples may not be equity crowdfunding in the traditional sense, but they are becoming part of the access to capital that is essential for entrepreneurs to get their product to market. We are beginning to see the blurring of the lines of how entrepreneurs are taking advantage of new opportunities to launch and grow their businesses.
Yet, we haven't even tapped into the unaccredited market, those 180 million adults that may have small amounts of capital to be invested into the market. We are waiting for the JOBS Act Title III rules to be released by the Securities and Exchange Commission. There is a chance Title III may cause a funding tsunami to hit the market.