Angel Investors Still Awaiting the Impact from Equity Crowdfunding
After reading that angels would be the No. 1 losers due to the explosive growth of crowdfunding, angels like me have been keeping a wary eye on equity crowdfunding. Some reports in the press have suggested that crowdfunding could actually replace angels as a capital source.
So far, the warnings have turned into a big yawn. But here are the concerns for angel investors, along with my perspective on the situation today:
Has crowdfunding negatively affected total angel investment in the United States?
The short answer is no. According to Jeff Sohl, director of the Center for Venture Research at the University of New Hampshire, total angel investment in the US has grown steadily since 2010 when the JOBS Act was passed, from $20 billion annually to an estimated $25 billion in 2014. Yet as crowdfunding grows, total angel investing might be undermined.
How much capital is flowing to entrepreneurs through online platforms in the United States?
Total equity crowdfunding by accredited investors in the U.S. was about $300 million in 2014. That’s only about 1 percent of the $25 billion total angel investment in the U.S. last year. All types of crowdfunding in the U.S. last year amounted to roughly $7.5 billion.
How much of that was equity crowdfunding?
My data, consolidated from a variety of sources over the past six months, shows that equity crowdfunding accounted for only 5 percent of this $7.5 billion. The remainder falls into the other categories of crowdfunding, which are donation-based, reward-based, real estate, and peer-to-peer lending.
Currently, equity crowdfunding in the United States is only legal for high net-worth individuals who qualify as “accredited investors,” under existing securities laws. The Securities and Exchange Commission is expected to finalize new rules for public equity crowdfunding in the next year or so. But it is not yet clear whether these new rules will change the way entrepreneurs raise capital. In Europe, where public equity crowdfunding has been legal since 2010, equity crowdfunding makes up only about 5 percent of total crowdfunding (according to Massolution and Nesta).
So far, public equity crowdfunding just hasn’t made much of a difference—at least in Europe.
Since there are several flavors of crowdfunding, pundits seem confused about the fraction of crowdfunding flowing into startup ventures. There is no question that crowdfunding is exploding. According to Massolution, worldwide crowdfunding reached $16.2 billion in 2014, more than double the $6.1 billion raised through global crowdfunding in the previous year.
But, let’s dig a little deeper. As mentioned above, crowdfunding comes in several flavors, including:
—Donation-based: philanthropic or sponsorship-based incentive
—Reward-based: non-financial reward, token gift or early product
—P2P Lending: interest plus repayment of the original principal
—Real Estate-based: debt and equity investments in real estate projects
—Equity-based: funding in exchange for a percentage of equity
By scouring crowdfunding websites, published articles, and public documents, I estimate that total crowdfunding in the U.S. is about $7.5 billion (see table below), or nearly half the $16.2 billion in crowdfunding dollars raised around the world last year. Publicaly disclosed data is shown below in parenthesis for those companies that chose to report data. Only a small number of platforms have released funding data, but the ones that disclose tend to be the larger crowdfunding sites in each category.
Estimated U.S. Crowdfunding in 2014
|Crowdfunding Category||2014 Total||Examples of Platforms|
|Donation-based||$0.4 Billion||RocketHub.com, GoFundMe.com ($0.15B)|
|Rewards-based||$0.8 Billion||Kickstarter ($0.5B), Indiegogo ($0.1B)|
|Peer-to-Peer Lending||$5.0 Billion||LendingClub ($4.4B), Prosper (est $0.4B)|
|Real Estate||$1.0 Billion||FundRise ($0.2B), Prodigy Network|
|Equity||$0.3 Billion||AngelList ($0.1B), CircleUp|
How much of this crowdfunding flows into the startup economy? Donation crowdfunding wouldn’t count; those dollars flow into not-for-profits. I wouldn’t expect to see much P2P lending in the startup sector either; investors usually don’t loan money to entrepreneurs. Real Estate is a separate asset class. So entrepreneurs typically only use rewards and equity crowdfunding to start their enterprises.
About one-quarter of Kickstarter funds flow into technical projects, but not as equity. Sources of rewards crowdfunding are exchanged for a token gift (a T-shirt), a prototype product, or perhaps a discount on a future product purchase. Rewards crowdfunding can provide excellent market validation for the products of startup companies.
But only equity crowdfunding gives investors an ownership stake in startup ventures. AngelList, estimated at one-third of the US market, facilitated the funding of about 250 companies in 2014, while Sohl’s data shows that angels funded over 50,000 companies in each of the past several years.
Finally, how do most angel investors view equity crowdfunding?
—Most angels I know would consider investing in startups using an accredited investor crowdfunding platform, providing that the syndicator is a credible lead investor and can provide robust due diligence to them prior to investing.
—Most angels would be hesitant to invest with (or even after) unaccredited investors, just as they would be reluctant to invest alongside any unsophisticated investors. The risk of investing in startups is always huge. No need to pile on additional risk via the pool of investors in any venture.
In other words, I would say that reports on the demise of angel investing by crowdfunding have been greatly exaggerated. The angel investment community in the United States remains healthy, and as of 2015, we’re relatively unaffected by the commotion over crowdfunding.
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