In 2016, Equity Crowdfunding became a new startup investment term. May 2016 bore witness to the third update on the Jumpstart Our Business Startups (JOBS) Act of 2012, with the act enabling Equity Crowdfunding as a much welcome assistance for entrepreneurs and startups seeking investors. In turn, this also enabled people to become small-scale investors – allowing them to participate in the crowdfunding market for potential returns.
Crowdfunding connects entrepreneurs and startups with prospective investors through internet platforms such as Kickstarter, Indiegogo, Fundable and others. Previously, most of the funding delivered via crowdfunding was made possible through investments in the form of advanced payments – with the payments allowing for a “reward.” The reward is usually the opportunity to be one of the first to obtain the product before broader market distribution.
Anyone can contribute to a Reward Crowdfunding campaign because there are no special requirements. Since individual donations are often small, the idea is for founders and startups to persuade as many people as possible to pitch in and provide funding. Money raised through rewards-based crowdfunding doesn’t have to be paid back, but in return for donations, businesses provide rewards.
But since May 2016, Equity Crowdfunding has become an option. This was made possible by Section 4(a)(6) of the Securities Act of 1933, which was implemented in May 2016. Termed as Regulation Crowdfunding, or Reg CF, the act aims to extend the funding model by giving backers a portion of the business or through interest paid on loans instead.
Here is an overview on what happened during the first four quarters of the implementation of Equity Crowdfunding (aka Regulation Crowdfunding):
$40M in crowdfunding: As of May 2017, the $40M mark was reached for the total contributions granted over all startups and entrepreneurs, with an average of $833 worth of investment per investor.
Investment Breakdown: From an article on Crowdfund Insider, the more-than-$40M sum of investments came from diverse businesses, with Wines & Spirits getting the highest total at $5,514,525, followed by Food & Beverages, at $5,288,026. In terms of company size, data shows that bigger company sizes allow for higher funding potential, with 79% of the successful companies comprised of two or more founding members. Companies with more than 5 founders also have the highest average funding at $408,000, while individual founders are at $353,000.
In terms of investors by state, early adopters of this the new crowdfunding are as follows, ranked from highest to lowest:
- California – $15,747,431
- Texas – $5,413,786
- Massachusetts – $3,147,843
- New York – $1,984,480
- Oregon – $1,205,051
In terms of participating companies, California is also at the lead, with the ranking as follows:
- California – 115 companies
- Florida – 26 companies
- Texas – 22 companies
- New York – 21 companies
- Illinois – 14 companies
29 Funding Platforms: Funding intermediaries must be done through an online platform, be registered with the Securities and Exchange Commission (SEC), and become a member of Financial Industry Regulatory Authority (FINRA). As of June 6, there are 29 registered platforms on the FINRA website.
265 Companies, and growing: More than 265 companies have filed for regulation crowdfunding, with 165, or 62%, of them comprised of all-white male founding members. The remaining 100 had at least one member of the minority, or a female founder.
Women and Minorities in the Crowdfunding Scene: A trend shows that women-only and minority-only founder teams had better chances at securing funding, as compared to their male-only counterpart. Women-only founder teams had an 87.5% success rate, minority-only founder teams had a 46% success rate, while male-only founder teams had a 41% success rate.
This could possibly be attributed to women and minorities being more prepared and detailed in their approaches, to keep up with the rest of the competition. Additionally, statistics revealed that women tend to invest in other women. The same case holds for minorities. Despite these higher success rates, male-only startups still had higher funding averages.
If you are a founder or startup considering raising capital via crowdfunding, it is well worthwhile to explore both Reward Crowdfunding and Equity Crowdfunding. Create a list of the pros and cons of each and then decide which route is best for you. Want to learn more ways to fund your startup? Contact me today and let’s talk!