Regulation Crowdfunding (Reg CF) celebrated its third birthday this month. When the new regulation went into effect on May 16, 2016, I greeted it more with a sense of relief than elation. I (and a lot of other people) had been waiting for Reg CF since the Jumpstart Our Business Startups (JOBS) Act was signed into law on April 5, 2012.
Reg CF offered a different and welcome kind of investment opportunity for retail investors. The funding rounds were earlier, the shares cheaper, the risks greater and the upside higher. Importantly, investors could make investments as small as $50, as opposed to the minimums of $1,000 to $2,000 (or more) asked for in A+ raises.
We made our first startup recommendation to members of our First Stage Investor startup research service in August 2016. We recommended Barrow’s Intense Ginger Liqueur, a company out of Brooklyn that made a slightly sweet ginger liqueur that we loved. The minimum investment was $200, and it came with a valuation of only $4 million.
In the 33 months that followed, we’ve recommended 41 companies. In that period, 63% of our recommendations were for CF raises; the rest were A+. Just under 60% of the total holdings in our First Stage Investor portfolio are Reg CF (remember, we began recommending A+ companies before Reg CF became legal).
Of the 24 Reg CF companies in our portfolio, 13 are consumer-oriented and 11 address enterprise needs. Here’s the breakdown by sector.
| Sector
Software: Food & Beverage: Healthcare: Hardware: Advertising: Energy: Other: |
Number of Companies
6 3 3 3 2 2 5 |
It’s not surprising that software is our biggest category. The venture capital (VC) maxim “software is eating the world” applies to crowdfunding too. Many of the food and beverage startups we’ve recommended offer healthier choices to consumers. New energy solutions are gaining traction in both the VC and crowdfunding communities, as a new generation of exciting technology is poised to make significant breakthroughs.
Reg CF deal flow is improving too. Fifteen of our holdings were generating significant revenue at the time of our recommendation, and 37% were pre-revenue.
Rapidly growing revenue is a strong indication that a startup has found product-market fit. But it’s not foolproof. Some companies – most notably those developing hardware and pharmaceuticals – simply take longer to finalize their product build. And marketing to enterprises requires a longer timeline than selling to consumers. Our pre-revenue startups are developing extremely exciting technologies in markets undergoing rapid change or rapid growth (or both).
Among the startups we’ve had in our portfolio for more than a year (it’s still too early to judge those younger than a year), we see many success stories. One company has been acquired at a premium price. Two more (an apparel company and a cancer detection startup) are planning public listings sometime in the next few months. One energy-related company is being championed by Shell. Another company will be opening its 12th “healthy and fresh” fast-food restaurant and is set to raise $35 million in its follow-up round.
Since it came into effect, Reg CF has enabled hundreds of founders to raise $207.6 million (through the end of April) without the help of VC money. And it has given thousands of everyday investors the opportunity to invest in early-stage companies with potential returns that far exceed what’s available in public stock markets.
Benchmark Capital Partners made a $13.5 million investment in Snap in 2013. When Snap IPO’d a few years later, the value of Benchmark’s stake soared to $3.2 billion, a 23,604% gain. While rare, these are the kinds of gains that only VC firms could get. Reg CF makes these early-stage opportunities available to everybody, not just the wealthy or well-connected.
Crowdfunding is still in its infant stages. While generating $200 million is pretty good, it’s still a fraction of the roughly $50 billion that VC money funds annually.
With better regulation (I’m watching the progress of Jobs Act 3.0 in the Senate after its approval in the House)… and a growing awareness that big gains from the public markets are pretty much extinct, crowdfunding is bound to gain in popularity.
If you’ve invested in Reg CF raises, you’ve put yourself in position to make exciting gains. If you’re not investing, you’re missing out. The opportunities are getting better all the time. And, importantly, you have our help every step of the way.
Good investing,
Andy Gordon
Co-Founder, Early Investing