Investment crowdfunding, under the Reg CF exemption, is experiencing a “roller coaster ride,” according to the most recent quarterly update provided by Crowdfund Capital Advisors (CCA).
According to the report, Q1 2023 saw the lowest capital committed since Q4 2020 – so several years ago and before the world was full COVID. CCA states that funds raised sank 15.4% year over year when compared to Q1 2022 and down 7.1% versus Q4 2022.
Regarding the number of deals or issuers, this data point was flat, being up slightly by 0.3% versus the same quarter in 2022 and down versus Q4 of 2022.
CCA states that 91 issuers ran a follow-on round during the quarter, a decline of 9.1% over the prior year but up 16.9% over the prior quarter.
The number of investments increased by 32.6% versus Q4 2022 but sank by 26% in comparison to Q1 2022.
The average check size grew by 16.5% over the prior year to $1,688 but fell 29.8% over the prior quarter.
Median valuations hit an all-time high of $14 million, driven by giga-high inflation, perhaps? Pre-revenue firms were valued at $13.2 million, with post-revenue firms at $14 million, down from $15.1 million in Q3 2022.
The number of funded deals stood at 290.
CCA believes that online capital formation stands to benefit as VCs have been turning their backs on funding early-stage ventures as they wait for the dust to settle so this is an opportunity for investment crowdfunding to shine in a challenging market.
Sherwood Neiss, co-founder of CCA, says the capital markets for venture have all but dried up for startups
“VC might be taking calls, but they are either holding on to their cash or using it to keep their portfolio companies afloat. We’ve heard from more than one VC that they expect this trend to continue into Q4. We believe this is good news for the Investment Crowdfunding industry. Startups still need cash, and if VCs aren’t stepping up to the plate, they may be able to turn online for capital. We believe that it is possible for many startups to access capital via Investment Crowdfunding since they will not be reliant on any one or a handful of investors to fund a deal but rather a large group of retail and accredited investors.”
Neiss described the current market conditions as a test for the industry to see if it is truly a substitute for venture capital and if the industry will stand up and carry the ball forward.
As Reg CF is capped at just $5 million (increased in 2021 from the rather anemic $1.07 million) issuers looking for more than five million may be suffering the most but then, there is Reg A+ and, of course, Reg D 506c to help
CCA believes it is time to increase the funding cap under Reg CF to $20 million making the securities exemption more viable, and attracting more mature firms (while reducing risk for investors).
In the aggregate, much will be determined by what the Federal Reserve does – will they keep raising rates or will there be a pause? And what type of policy emerges from Congress. Will the federal government keep spending more money, or will it do more to incentivize private money to support innovative young firms and entrepreneurs? Let’s hope it is the latter.
