No VCs land: how the crowdinvesting market works

Business angels and venture capitalists are not the only sources of funding a startup: crowdinvesting (i.e., equity crowdfunding) is another popular opportunity that’s been successfully practiced for a long time. Almost like Kickstarter, but instead of a product, you get equities.

Information on the topic is scarce, so we decided to put all the main figures and facts in one article.

Equity crowdfunding happens when people (the “crowd”) invest in a company that is not yet listed on the stock market, in exchange for shares in that company. Shareholders make a profit in case of a company’s success. And vice versa, if the company goes bankrupt, investors may lose some or all of their money.

Before the legal framework for equity crowdfunding was developed, only professional investors and foundations could invest in startups. Crowdinvesting platforms simplified the investment process by opening the door to private investors.

Crowdinvesting for businesses

  • Plenty of money. With hundreds of millions (and sometimes billions) of liquid dollars on hand, venture capitalists offer startups to raise tons of money in no time.
  • Experience. Venture capital is a steady form of capital investment, which is why venture capitalists have years of experience mentoring growth companies.
  • Networking. Venture capitalists have access to fruitful contacts.
  • Recognition. Companies that are funded by a respected firm are immediately recognized by partners, clients, and other investors.
  • Maintaining control. Typically, crowdinvesting is all about non-voting ordinary shares — that allows founders to sustain control over the company.
  • Brand ambassadors. Equity crowdfunding allows startups to attract hundreds (if not thousands) of investors, who then become customers and actively promote the brand.
  • Promotion. Equity crowdfunding marketing campaigns help to form new audiences for the brand and product.
  • Sales. Companies can increase sales by offering discounts to investors.
  • Sustainable capital. Equity crowdfunding allows companies to continually raise capital as needed.
  • No guarantees. No one can tell if a company will achieve its fundraising goal (otherwise, the campaign will be canceled).
  • Information disclosure. Since equity crowdfunding proposals are open to the public, companies must present clear financial metrics and transparent reports.
  • Expenses. Crowdfunding campaigns mean legal, accounting, platform, and marketing costs.

Markets

The USA

In May 2016, the US Securities and Exchange Commission adopted Title III of the JOBS Act, often referred to as the Regulation Crowdfunding, or Reg CF for short. According to Title III, the majority of the US population was given the opportunity to invest in startups for the first time.

“The Jumpstart Our Business Startups Act, or JOBS Act, is a law intended to encourage funding of small businesses in the United States by easing many of the country’s securities regulations. It passed with bipartisan support, and was signed into law by President Barack Obama on April 5, 2012.”

The rules state that entrepreneurs can raise up to $1.07 million over a 12-month period from anyone (including non-accredited investors). Anyone over 18 has the right to invest up to a certain limit, depending on their annual income and financial status. Companies can also invest — their limits are determined by net revenue and net assets. These investments can only be made through crowdfunding portals.

In 2020, SEC raised the maximum fundraising amount from $1.07 million to $5 million.

While crypto fever shook the world in Q4 of 2020, the US equity crowdfunding ended the year without a fanfare, breaking previous records for annual, quarterly, and monthly collected funds.

  • $214.9 million raised in 2020 (+105%) from 1,035 new companies (+ 91%), compared to 2019 ($104.7 million and 541 companies).
  • The Crowdfund Capital Advisor (CCA) dataset shows over $225 million raised for 1,148 companies in 2020 versus $137 million raised for 713 companies in 2019.
  • The total amount of funds raised under Reg CF exceeded $514 million since 2016.
  • In 2016–2018, $194 million were raised (source: CCA 2018 report), in 2019 — $104.7 million, in 2020 — $214.9 million (source: Kingscrowd).
  • Around $275,000 were raised for successful companies in 2020. This figure does not include failed campaigns. 256 campaigns couldn’t raise the funds or were closed.
  • In 2020, more than 358,000 investors financed crowdfunding campaigns under Reg CF, and that’s 75% more compared to 2019, according to the CCA Press Release.
  • 48 Reg CF companies launched in 2020 raised the maximum funds under this regulation — $1.07 million.

10 Best US Crowdinvesting Websites in 2020

Top 10 crowdfunding platforms by capital raised in 2020:

In 2020, Wefunder closed a $50 million investment round, StartEngine raised more than $10 million through its Reg A+ campaign, and Republic sold its Republic Note cryptotokens worth $16 million.

WeFunder

  • Equity raised in 2020: $70.9 million
  • Platform fees: 7.5% of the funds raised
  • Other fees: none (3.5% bank card processing fee is paid by investors)
  • Referral fee discounts: yes — 10% off the fee and initial payment reduced to 0 (this can add up to $8000 + discounts)
  • Enhanced due diligence/transaction supervision: no
  • Securities: SAFE, shares, profit share
  • Registered broker-dealer: yes
  • Secondary platform: no

StartEngine

  • Equity raised in 2020: $68.6 million
  • Platform fees: 7–12% of the funds raised. $10,000 service fee
  • Other fees: 0.5% escrow fee
  • Referral discount: yes, up to $1,000
  • Enhanced due diligence/transaction supervision: no
  • Primary securities: shares (ordinary), convertible bonds
  • Registered broker-dealer: yes
  • Secondary platform: launch in Q4, 2020

Republic

  • Equity raised in 2020: $37.7 million
  • Platform fees: 6% of the funds raised, 2% of the securities sold
  • Other fees: $1,500 for form C, ~ $1,500 for escrow, 3.5% for credit card processing
  • Referral fee discounts: yes, $1,000
  • Enhanced due diligence/transaction supervision: yes
  • Securities: Crowd SAFE
  • Registered broker-dealer: no
  • Secondary platform: no

EU and UK

Currently, every European country either has its own crowdfunding regulation (like France and Germany) or works with exceptions (like the Netherlands) or completely restricts crowdfunding to raise equity capital.

As a result, we see a highly uneven landscape among mature markets (UK, France, Germany, Netherlands) and many countries where the market is still underdeveloped. Even in mature markets, most platforms, unlike the global European fintech, are focused only on the local market.

On October 5, 2020, the European Parliament agreed on the European Crowdfunding Service Provider (ECSP) regulation, paving the way for a common set of crowdfunding rules for all member countries, which will be launched by the end of 2021. This is an important step in stimulating the growth of pan-EU platforms and providing extra confidence to investors and entrepreneurs seeking funding.

The European equity crowdfunding market will grow up to $2.3 billion in 2020. Statistics for 2020 show that transaction value in the European equity crowdfunding market has grown by 22.3% year on year, while the market value has doubled compared to 2017.

  • Average funding per campaign rocketed from $85,111 in 2017 to $115,271 in 2020.
  • More than 13,700 equity-based crowdfunding campaigns were successfully launched in 2017. By the end of 2019, the number spiked up to 17,400.
  • The number of campaigns grew by 15.1% year on year, exceeding 20,000 in 2020.
  • Over the next three years, the number of funding campaigns in the European equity crowdfunding market will exceed 26,300 — almost twice as much as in 2017.

The United Kingdom is a leading equity crowdfunding market in Europe, with a total transaction value of $834 million in 2020. With funding campaigns of $459 million, the Netherlands ranked second-largest market in Europe. Sweden came in third with $229.4 million in transactions in 2020. Finland and Germany follow next with $132.6 million and $104.5 million, respectively.

The main European platforms

Seedrs

In 2020, the UK crowdfunding platform surpassed the £1 billion ($1.28 billion) total investment mark, up from £500 million ($641.2 million) at the end of 2018.

Seedrs raised £217 million ($278.3 million) in 2020, down from £283 million ($ 363 million) in 2019, but well above £200 million ($256.5 million) in 2018.

In 2020 Two main UK crowdinvesting platforms, Crowdcube and Seedrs, have agreed on the terms of the long-rumored merger to create one of the world’s largest private equity platforms. The consolidated company was valued at $140 million, but the merger was terminated after CMA (UK anti-monopoly agency) intervention. Seedrs announced an additional funding round together with merger cancelation news, without any details on the funding amount and terms.

  • Initial equity raised in 2020: £217 million
  • Platform fees: 6% in case of a successful campaign, + £2.500 (ex VAT) upon completion
  • Other fees: 7.5% of the investors’ profit in case of success, 0.5% for the payment processing

Crowdcube

Crowdcube finished 2020 with £8.7 million revenue (about $12 million, that’s +6% over 2019). While this is well below the target set for investors in early 2020, that’s still good, given the events of the year.

By the end of 2020, 238 campaigns were funded, up 13% from 2019. Average campaign funds raised also increased 26% to 240,000, with a total investment of over £205 million. The number of businesses that raised more than £1 million increased by 10%. More than 100,000 people have made one or more investments in fundraising campaigns via Crowdcube.

  • Initial equity raised in 2020: £205 million
  • Platform fees: 7% of the funds raised, in case of a successful campaign, and 0.75–1.25% of the total funds raised
  • Other fees: 0.47–2.9% fee for the payment processing, +1.5% (but not exceeding £250) of the funds invested

Invesdor (Finland)

  • Initial equity raised in 2020: €29 692 054
  • Average funds raised during a financing round: around €957 800
  • 11 financing rounds attracted over €1 million. Four of these rounds hit the €2 million mark
  • 31 financing rounds (18 on Invesdor.com, 13 on Finnest.com)
  • Percentage of funding rounds reaching minimum target: 88.8%
  • 6 110 investment transactions completed
  • The average investment sum — about €4,860

Unfortunately, most of the regional European platforms don’t disclose the statistics. There are no major differences between the platforms in terms of the product, so there is no point in talking about them in detail.

What about other countries?

China

In China, equity crowdfunding is not legalized. Since a public offering in China is subject to extremely strict government oversight, equity crowdfunding in China can only happen as a private offering. “Equity-based crowdfunding” in the form of a private offering there is strictly controlled by the China Securities Regulatory Commission (CSRC), China Banking Regulatory Commission (CBRC), China Insurance Regulatory Commission (CIRC), and the People’s Bank of China (source).

Australia

Crowdsourced Funding (CSF), introduced by the Australian government on September 29, 2017, has become a new way for startups and small and medium-sized companies to raise money from the public to finance their businesses.

In 2020, the largest investment was in healthcare, with eight successful campaigns raising a total of $7.14 million (or 25% of the industry). Most of these campaigns focused on the production of medicinal cannabis, three of which raised more than $1 million: (Cannatrek, $2.5 million; Montu, $2 million; and Compass Lifestyle Clinics, $1.3 million).

Food and beverage was the second-most invested industry in 2020, with eight successful campaigns raising a total of $6.45 million. All but one of these campaigns were sponsored by Birchal, and two of them raised over $1 million: (Bunsters, $2 million; Whole Kids, $1.2 million).

Sustainable development and financial services took the third place, with a total of $4.35 million and $4.36 million, respectively.

Birchal

Startups on Birchal raised $20.4 million in 2020.

  • Platform fees: 6% of funds raised in case of a successful campaign
  • Other fees: 900 AUD mandatory marketing package, 1900 AUD document verification.

Brazil

Brazil already enjoys a relatively stable donation and reward crowdfunding ecosystem (Catarse, Kickante). However, over the past year, equity-based platforms have also entered the scene to help entrepreneurs raise money for their ideas from other Brazilians.

It’s too early to jump to conclusions, but the platforms are demonstrating perspectives for success. Broota, one of the first market leaders, raised over R$4.5 million (about $1.1 million) for 11 companies, with capital raised ranging from 30,000 to over 300,000 per company. Earlier this year, StartMeUp raised over $75,000 for itself through its own platform. EqSeed recently completed its first fundraiser and gave 38 investors the opportunity to support Kokar in the IoT field with $75,000.

Equity crowdfunding is not currently subject to any specific regulation, although rules prohibit companies to raise more than R$ 2.4 million ($610,000) and require them to file registration documents with the Comissão de Valores Mobiliários (Brazilian Securities and Exchange Commission). There is no limit to how much money an individual can invest, and platforms can advertise the offer to the general public.

Authors

The article was co-written by Ivan Kuznetsov and Nadezhda Korotchenko. Ivan has been working in fintech in different positions (from project manager to CEO) for 8 years. Nadezhda was an editor, editor-in-chief and then publisher of ihodl.com for several years, and now she manages projects in a digital agency.

Sources

Product Manager in Fintech.

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