Mass digital connectivity has significantly disrupted the business investment market. Online crowdfunding enables company owners to trade equity for funds to invest in growth. Who would have thought in 2000 that it would be possible for business owners to raise seven-figure sums from people they didn’t know, or even have as a customer? The vital stepping stone was the sometimes massive sums raised on reward crowdfunding platforms. Except early backers are unable to invest in the companies themselves, only acquire their often innovative products.
- Kickstarter is the world’s largest reward crowdfunding platform. It was launched on April 28 2009 in New York as an alternative way to raise funding for performance arts projects and productions. Its model was to encouraging low value donations from a large group of people rather than a lot of money from a few individuals.
It quickly expanded to cover many other hobby, craft and product categories, and has raised almost $3.05bn through hosting 124,935 successful projects (the figures are updated daily by Kickstarter).
It has an “all or nothing” policy meaning projects that fail to reach their target don’t receive any funding and the backers who made pledges don’t pay anything. Successful projects pay a 5% commission plus up to 3% transaction charges.
- Indiegogo actually launched first in January 2008 in San Francisco, again as an alternative way to raise funds for arts projects. Indiegogo also quickly grew to host projects in many different categories.
A significant difference is that Indiegogo allows projects to receive the money that’s pledged even if they fail to reach target. When this happens their regular 5% commission rises to 9%, plus there are always transaction fees of approximately 3% on every project.
Since 1 January 2014, Indiegogo has hosted slightly more projects than Kickstarter: 231,900 vs 218,896 (as measured by crowdfundingcenter.com on May 17 2017). However, Kickstarter has hosted significantly more that reached their target – 68,984 vs 26,272.
Based on these figures Kickstarter has an average success rate of 31.5% and Indiegogo achieves 11.3%.
These two broad scale platforms dominate the US reward crowdfunding market and to have a point of difference the next largest platforms focus on specialist business sectors.
- PledgeMusic is third placed behind these two giants, as measured by website traffic. It launched in August 2009, aiming to do for the music industry what Indiegogo and Kickstarter were doing at the time for other arts genres. It is used by all types of people from hopeful wannabes to established performers with an existing fanbase.
It operates like Kickstarter on an “all or nothing” basis for people raising money to complete a project like record an album, and on a “keep what you raise” basis when people use it as a sales channel for any finished content that can be downloaded. It charges a flat and all-inclusive 15% commission on “sales” and fundraising projects that hit or exceed target. This looks expensive though they claim a success rate of over 90% for the average 100 projects they carry per month.
The platform operates globally by accepting payments through credit cards and Paypal.
- Seed&Spark is an industry specific crowdfunding platform for the tv and film industry and is based in Los Angeles. It launched in December 2012 and within an overall aim to build an independent film community it provides filmmakers with a reward-based crowdfunding facility. They claim a 75% success rate.
Projects must reach a minimum 80% of target to keep the money pledged by backers. Then upon completion of a film, any project that also gathered over 500 backers is automatically eligible for distribution through Seed&Spark and their partners including all major cable and digital platforms such as iTunes, Comcast, Verizon, Netflix, and Hulu.
Seed&Spark charges a 5% fee on successful projects, though offers project backers the opportunity to add this to their pledge. Many choose to do this and on average the crowdfunding projects themselves pay just 1.9% of funds raised to the platform.
- Barnraiser is a platform for artisan food producers, small farmers and exponents of sustainable, healthier living. It encourages its community of over 30,000 like-minded people to crowdsource advice and contacts from each other, and also provides a rewards crowdfunding facility they claim has a 65% success rate.
It launched in 2014 and 187 projects have been successful. The largest amount raised was $93,190.
Successful projects are charged a 5% fee based on the amount raised plus payment processing fees of 3-5%. If funding isn’t successful there are no fees.
Title III of the JOBS Act which came in to effect in May 2016 extended online equity crowdfunding opportunities to Americans earning under $200,000 per year, though included limits on the amounts that could be invested. New platforms were launched to provide a full online equity crowdfunding facility to this wider market, whereas the previous ones serving higher net worth individuals (“accredited investors”) required transactions to be made offline.
The Wefunder platform tracks progress of this new retail equity crowdfunding sector based on mandatory Form CU filings on the SEC’s EDGAR database. Since May 16 2016 to May 23 2017, just over $35.8m has been raised through Regulation Crowdfunding offerings.
- Wefunder is the early market leader and it launched in 2012. The minimum investment size is $100, and Wefunder has created internal Investor Clubs in order that part-time investors in its network can access the wisdom and leadership of more experienced and professional investors and combine their investments with them on equal terms.
Wefunder members have provided 55% of all online equity crowdfunding investments through Regulation Crowdfunding in the first 12 months of online equity investment trading being open to non-accredited investors.
- Investments made through StartEngine, which is based in LA and launched in June 2015, represent nearly 22% of the Regulation Crowdfunding total raised so far, according to SEC figures. StartEngine also raised $17m from 6,600 investors under Regulation A+ for its client Elio Motors.
- In 2016 Indiegogo ventured into equity crowdfunding in partnership with Microventures to launch a platform called First Democracy VC. To date it has accounted for 9% of the sector’s total $35.5m.
- We have included NextSeed as it is included in the crowdfunding stats created by Wefunder, above, though it offers investors opportunities to provide funding on a loan basis with guaranteed levels of interest, not equity. It is based in Houston and its investor network has invested $2.8m in debt crowdfunding, which Wefunder shows above as 8% so far of the combined Regulation Crowdfunding. NextSeed’s network of investors can put up as little as $100 and NextSeed’s projects have ranged from as low as $25,000, typically for personal leisure/entertainment/service providers such as bars, restaurants and hairdressers. This form of accessing an investment budget can leave company owners with full equity in their business.
- Three other players in this sector tie for fifth place as they have each raised in the region of $1m for clients from equity investors:
- Republic (offers Reg CF only and investments can begin at just $10);
- SeedInvest (which mainly focuses on non-Reg CF raises of over $1m);
- FlashFunders (where Reg CF investments can start at $50 and they also handle Reg D raises over $1m and Reg A+ raises up to $50m).
We’d like to hear if you have you any experience of directly investing online through any of these equity crowdfunding platforms, do you have any comments or insights you’d like to share?
Update in October 2017
As of 20 September 2017 US equity crowdfunding platform SeedInvest partnered up with the UK’s Crowdcube which claims 48% UK market share in this sector: https://www.crowdcube.com/explore/2017/09/20/crowdcube-partners-with-americas-top-equity-crowdfunder
Update in February 2018
Access to a report giving details of the number of US startups and scaleup using crowdfunding through Regulation A+ and Regulation CF with the amounts raised is here.