Equity crowdfunding (ECF) is a grand experiment in capitalism.
It’s an attempt to rework how young companies raise money.
And more importantly for our purposes, it gives every investor the chance to invest in early-stage startups.
For U.S. investors, ECF started in 2011. In Q1 of that year, MicroVentures launched its first online deal.
In 2012, FundersClub launched its platform. AngelList and others followed soon after in 2013.
Private startup investing had finally gone online.
The problem, as most of you know, is that these platforms allow only accredited investors into their deals. That means you need more than $200,000 in income, or a net worth of $1 million.
Well, the early returns for these accredited investor deals are in. And they’re quite impressive.
Early Results Looking Great
Across every deal on FundersClub from its July 2012 launch up to June 2016, the average return is 28.7%.
And just last week, AngelList released its first set of data. It covers all deals launched on its platform in 2013.
Through the end of 2015, the 2013 class of AngelList startup deals have seen an average return of 46%. Here’s a slide from its announcement.
And another on key metrics.
These are impressive numbers. As AngelList notes in the announcement, a 46% annual return is in the upper top quartile (25%) of all venture capitalists and private equity investors.
A few notes of caution, however.
First, this early-return data is only “on paper.” Few of these companies have experienced a “liquidity event” (IPO or acquisition). They’ve simply raised money at a higher valuation than that of their previous round of funding.
In other words, things are going quite well. But the money’s not in the bank yet.
Secondly, these early returns happened during a bull market in startup investments.
Third, AngelList and FundersClub are both based in San Francisco and have strong angel investor/venture capitalist networks. The deals on these platforms almost all have lead investors with solid track records.
Disclaimers aside, these returns bode well for non-accredited ECF deals (which anyone can invest in).
For one, the portals offering these new deals also have strong networks in New York and the Bay Area. Republic.co, for example, is a spinoff of AngelList.
There’s also the fact that accredited deals are limited by law to 99 investors. Non-accredited deals, however, can have thousands. More investors means more champions of the business.
Non-Accredited Deals in Focus
As regular readers know, private deals only became available to the public within the last year.
And as a reminder, there are two tiers of equity crowdfunding deals for non-accredited investors.
- Regulation A+ (larger deals): Companies can raise up to $50 million per year. This went live in June 2015.
- Title III (smaller deals): Companies can raise up to $1 million per year. This went live in May 2016.
My co-founder Andy and I have looked at just about every single deal that’s come out under these new rules.
And we’ve found attractive deals under both Title III and Regulation A+. In fact, we recommended Virtuix and Barrow’s Intense to members of our research service.
Obviously, these companies are at very different stages.
Virtuix raised money to gear up for mass production of its Omni VR system. Its fundraise valued the company at $35 million.
Here’s a picture of what the Omni looks like. It’s an “omni-directional treadmill” built to complement VR systems.
Regulation A+ is perfect for a company like Virtuix. It needed to raise far more than just $1 million to get mass production rolling. And it’s a product consumers can get excited about.
Barrow’s Intense is at a much earlier stage and in a very different industry (craft liquor). That fundraise valued the company at just $4 million.
But as you can see, its traction was too impressive to pass up.
This is why we like to say we’re “industry agnostic.” We don’t really care which sector the startup is in. As long as it has excellent growth, big potential and a path to exit, it gets consideration.
Early returns from sites like AngelList and FundersClub show that ECF has incredible promise.
And keep in mind, critics predicted those platforms would suffer from “adverse selection.” I’ve heard more than a few people say that “only companies that can’t raise anywhere else will go online for money.”
These concerns are no longer valid. Equity crowdfunding works. For investors and startups.
Now we’re dedicated to seeing this success prove out in non-accredited deals. And we’re working hard behind the scenes to get our members access to the highest-quality deals possible.
By leveraging our strong member base, we’re able to provide some assurance to companies we like that they will get funded if they raise online.
In that small way, we’re helping this young market move forward.
Founder, Early Investing