Early-stage firms, especially startups, are very risky investments. In fact, in the real world, most of them fail. It is widely understood that between 80% to 90% of startups die, so only about 20% or so of early-stage firms survive. In venture capital investing, that’s OK. Investors make a qualified decision to invest in a firm with the hope they will hit a home run. Obviously, not all of these investments are big wins, but if you invest in a portfolio of private firms, several successful businesses can more than makeup for the bombs. This can hold true for individual investors who participate in the private securities marketplace as well.
Recently, Crowdfund Capital Advisors (CCA) published some research on the percentage of failures of firms that raised capital using Reg CF [Regulation Crowdfunding]. This JOBS Act exemption allows a firm (issuer) to raise up to $5 million in an online sale of securities to anyone. CCA’s review of these firms appears to show a survival rate higher than expected in the wider world of startups. To quote the CCA founder and Principal Sherwood Neiss:
“The [US] Bureau of Labor and Statistics reports that approximately 50% of all new businesses fail within five years. Yet, our analysis of over 6,800 companies engaged in Regulation Crowdfunding tells a different story. Here, only 17.76% of funded companies have gone out of business, a stark contrast to the national average. This is a significant finding that underscores the viability and strength of Regulation Crowdfunding as a funding mechanism. Even though startups are traditionally seen as higher risk, those funded via Regulation Crowdfunding are defying expectations. The data indicates that these startups have a better chance of survival than many of their counterparts in the traditional business world,”
The data indicates that more established firms that raise money using Reg CF have a better survival rate at 89% (after three years). This makes sense. Startups fare pretty well, too, though, as their survival rate is just over 78%.
When looking at underserved communities, 90.4% of companies founded by women are still operational, topping those founded by men at 81.6%. Businesses founded by minorities have a survival rate of 87.8%, higher than the 82% for companies founded by non-minorities.
And yes, there are some nuances to the data, and three years does not quite make a decade. Over time, hopefully, these firms will be successful enough to generate a good return for their investors; in the long run, this is how investment crowdfunding will be judged. But so far, according to CCA, the data is encouraging. Hopefully, policymakers will take notice and ask how they can boost the ecosystem further. Perhaps by raising the funding cap to $20 million? Or by providing tax exemptions similar to what the Brits offer in the UK.