Regulation Crowdfunding: One year In Force 

 

 

The new crowdfunding rules – Regulation Crowdfunding (Reg CF) – are celebrating 1 year anniversary of being in force on May 16th. The new rules open new opportunities for both sides. Business owners have an alternative to funding their companies from a bigger number of supporters. At the same time, all U.S. residents can finally invest in entrepreneurs they believe in.

Our team at Startwise has been exploring brand new market for nearly 2 years, researching all types of crowdfunding. As we are preparing to launch our own investment platform under the Regulation, we took a deep dive into what has been happening in the past 12 months under the new law. Turned out that there is a need for education of general public: what benefits come with the Regulation Crowdfunding and How can it be used to own advantage. We are excited to share our findings to help you understand the recent developments. While you can find the full version of the White Paper: Regulation Crowdfunding One Year below but I would like to highlight the major points.

Small companies made for 99.7% of the US businesses, they generate jobs and drive the economy. According to the recent Small Business Credit Survey, approximately 50% of small businesses didn’t receive any financing they applied for. So how much funding comes from the 1% of wealthy individuals into the small business economy?

Of the roughly 8 million of people who could be accredited investors (those legally allowed to invest in private companies), there are only 370,000 that are actively investing in startups and small businesses. Now, the Regulation Crowdfunding enables the 240 million to finally be able to invest and support the companies they believe in and the potential to get a financial return. From exclusivity of Wall Street to every street in America.

The businesses that don’t get funding from traditional sources are left out because of the higher scrutiny of the banks – it is too expensive for them to give loans to upcoming  business that don’t generate millions in revenue. At the same time, startups fall victim to the simple inequality in the ratio of entrepreneurs to venture capitalists. There are approximately 100 million startups opening each year and only 798 venture capital funds in the U.S.

So what has been the impact of the Regulation Crowdfunding so far?

According to Wefunder co-founder and CEO Nick Tommarello, crowd investing started with average investments under $250. The average daily capital commitments were trending at about $96,000 per day already in the first 3 months.

By the end of the first year in force, individual crowdfund investments grew to the average of $833 per person. Total contributions under the Regulation Crowdfunding into startups and small businesses are over the $40 million mark.

According to live insights by Crowdfund Capital Advisors, there were over 300 Regulation Crowdfunding campaigns by the companies.

The types of businesses offering securities under the new law are impressively diverse: from high tech startups to fashion and sports. Wine & Spirits ($5,514,525) and Food & Beverage ($5,288,026) are capturing the most money so far.

When looking into the data regarding the team size, you can see that the bigger the team, the bigger is the fundraising average. 79% of the successful companies were founded by teams of 2 or more. Teams of 5 founders had the highest average raise at $408,000 while individual founders raised $353,000.

As for the top crowdfunding states, there is a clear distinction of which ones stand out as early adopters of the alternative way to fund the U.S. small business economy.

States with top crowd investors are:

  • California is far upfront with $15,747,431 committed
  • Then comes Texas with $5,413,786 committed
  • Massachusetts residents committed $3,147,843
  • New York comes forth with $1,984,480 committed
  • Oregon closed the top 5 with $1,205,051 committed

The surprising fact is that over 80% of small businesses have never considered alternative funding options. If to choose the new options wisely, it can definitely offer not just business capital but also boost sales and help build loyalty relationships with people supporting the business.

For business owners willing to look beyond traditional sources of capital, crowdfunding can offer another strategy to growth. When it comes to business owners who are open to exploring the Regulation Crowdfunding route, the following states lead:

  • California is leading this rating as well with 115 companies crowdfunding capital
  • Florida is the second runner up with 26 campaigns
  • Texas had 22 businesses fundraising through Regulation Crowdfunding offerings
  • New York is close to the third place with 21 campaigns
  • The top five ends with Illinois that had 14 campaigns

We can also see some interesting trends forming around the diversity in crowdfunding.

Some experts start to see the new funding inequality forming, where women and minority business owners are doing much better in raising capital from the crowd investors, comparing to the Venture Capital funding which is said to go mainly to white male founders.

Even though over 60% of the campaigns were started by white male teams, when looking at success percentages, we can see that the campaigns run by women-only founders (87.5% success rate) and minority-only founders (46% success rate) had a higher success rate compared to men-only founders (41% success rate).

At the same time, it is important to mention that women and minorities had lower funding amounts. On average, campaigns raised:

  • $342,000 by white male founders
  • $245,000 by teams with at least one woman founder
  • $178,000  by teams with at least one minority founder
  • $227,000 by teams with at least one Indian founder
  • $173,000 by teams with at least one Asian founder
  • $130,000 by teams with at least one African-American founder

While some can see it as an unfortunate reality, it might be a result of a smarter and more detailed approach: teams with at least one woman or minority founder tend to spend a considerable amount of time preparing for the offering and educating themselves about the crowdfunding process. The interesting statistic that was uncovered as well is that women tend to invest in other women and minorities tend to invest in other minorities.

It is clear that the new rules need a wider support framework and some edits to the regulations based on the real statistics we are seeing. But for only 1 year in action, the current traction is encouraging.

(Disclaimer: I am a co-founder and COO at startwise.com, a crowdfunding platform where people can invest in revenue sharing deals with business owners. We created Startwise with the goal of providing an investment alternative to everyday American so that they can earn a different type of return while diversifying their portfolio and investing in communities that are important to them.)

Ekaterina ‘Catherine’ Yushina is COO & Co-Founder of Startwise. An immigrant, raised by entrepreneurial parents, she was never afraid to take on a complex task. Catherine’s professional experience working in Venture Capital in Silicon Valley and running a global VC conference and startup competition gives her a unique perspective on building companies and identifying opportunities. She is determined to make sure that Startwise creates positive impact on people’s’ lives as well as the economy itself. As COO, Catherine focuses on Startwise’s compliance, manages operations of the company and coordinates lead generation, partnerships and marketing. You may contact Catherine via email: catherine@startwise.com


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