Are you seeking investors to help you fund your business idea or growth? With the launch of equity crowdfunding in 2016, businesses can now raise money from ordinary investors online.
This recorded webinar will share the ins and outs of equity crowdfunding and highlight the type of businesses that can benefit from this opportunity.
You will learn:
What is equity crowdfunding?
Equity vs rewards-based crowdfunding and which is the best for your business
How to evaluate an equity crowdfunding platform
Keys to a successful crowdfunding campaign and how to attract investors
The impact of raising money via equity crowdfunding to your business
Sherwood Neiss, is a Principal at Crowdfund Capital Advisors and a Partner at Crowd Capital Ventures. He is a serial entrepreneur, investor and avid worldwide speaker discussing crowdfund investing and how to build winning companies.
The following is a reprint of an article we wrote for VentureBeat. You can find the original here.
For startups and small businesses interesting in raising money online, it can be tough to choose a crowdfunding platform — there are so many out there. And they rank differently depending on whether you’re looking at the size the platform, the total amount of capital it has raised, its overall success rate, or the average amount the platform raises per deal.
My team decided to find out who was the leader in each of these categories. We pored over two years of data. Then we reached out to the top platforms to get their feedback. Their answers were surprisingly similar: Sourcing the best deals leads to the best results. Yet at the end of the day, the data shows one platform leads in an area that may make all the difference in the eyes of the entrepreneur: average capital raised.
Regulation crowdfunding (Reg CF) began on May 16, 2016. It allows any startup or small business to raise up to $1,070,000 online from family, friends, and followers (accredited or not) provided issuers use a crowdfunding website that is registered with the Securities and Exchange Commission (SEC). Since its launch, nearly 1,000 companies have registered with the SEC on 50 platforms, and over $127 million has been committed to campaigns. But that funding hasn’t been evenly distributed across campaigns or platforms. Eight platforms have already gone belly up, 25 have done fewer than 10 deals each, and only eight platforms have raised over $1 million for their campaigns. Clearly, deals and dollars are flowing to a select few. Competition for quality deals is fierce among platforms, entrepreneurs are heading to the top players, and investors are looking for opportunities across industries and regions. So who are the leaders?
Of the nearly 1,000 companies that have registered to raise money online, 50 percent chose to register on either Start Engine or Wefunder. And according to the data, it is a tight race, with StartEngine leading. According to Ron Miller, CEO of StartEngine, the platform’s success has to do with sourcing and setting expectations. “We have more successful campaigns because we source the very best entrepreneurial talent out there. We also set appropriate expectations in terms of how much work it takes to make a campaign successful, and we provide the coaching and support at each step of the process.” This sourcing and coaching probably explains why, over the past two quarters, the company’s new deal volume has surged.
When it comes to total amount of money raised by platform, Wefunder is the leader, with over $38 million. To put this in perspective, since the market began almost one out of every three dollars committed to all campaigns went to Wefunder. According to Wefunder cofounder and CEO Nick Tommarello, the company’s strength on this front has to do with its experience with Silicon Valley entrepreneurs and investors. “Our edge against other platforms comes from our background as product-oriented tech founders who want to empower communities, not broker/dealers who want to take a slice of a transaction. When we attended Y Combinator, we were immersed in an environment where our friends went on to start billion-dollar unicorns. From 2013-2016, Wefunder then invested in these types of startups. We had to learn how to get access to high-quality “oversubscribed” deals. Our DNA applied these lessons to Reg CF deals.” And it seems to be working.
When it comes to who closes the most deals, Nextseed leads the pack with a 93 percent success rate. Twenty-eight of 30 of its deals have been funded. Nextseed CEO Youngro Lee said the platform’s high success rate has to do with focusing on a particular crowdfunding model (debt), businesses types (retail, bricks and mortar), and immediate, easy-to-understand returns. “We viewed the passage of the JOBS Act as an opportunity to democratize private financing in local communities — allowing everyday people to invest in local businesses. We thus focused our efforts on businesses and investment terms that an average investor could actually understand and appreciate. We only work on debt crowdfunding for brick and mortar businesses, and all investments have a finite maturity and monthly payment requirements. We also seek to provide comprehensive services to our issuers throughout their campaign creation process from start to finish, including marketing and PR advice, providing templates, and supporting post-closing investor communication and payment servicing.”
Category: Average raise per campaign – leader SeedInvest
However, when you drill down and look at what really matters — how much money the average campaign raises — the data reveals something powerful. While StartEngine and Wefunder might lead in the number of successful campaigns and Nextseed in success rate, SeedInvest leads in this category, with an average raise of $435,780 per campaign. From an entrepreneur’s point-of-view, this metric is likely the most important one. SeedInvest CEO Ryan Feit said the high average raise amount comes down to extreme vetting and the investor base. “With over 37,000 accredited investors, SeedInvest is by far the largest platform in terms of the number of high net worth investors. In addition, unlike other platforms, we have family offices, venture funds, and high net worth individuals who can write checks between $250,000 and $2 million. This sets us apart from all other platforms and ultimately results in larger raises for startups on SeedInvest. We have never been interested in simply trying to list more startups than other platforms or generate the most investment volume. Historically we have only launched 1 percent of the startups that apply to raise capital, and we invest meaningful time in those startups we select.”
The bottom line
If you are a brick and mortar entrepreneur looking to improve your odds of getting financed, consider heading to Nextseed. Chances are you’ll hit your funding target and do so in less time than applying for a bank loan. If you are looking to get your campaign in front of potential backers, head to StartEngine (or Wefunder, where you’ll pay less in success fees). Keep in mind, you’re going to have to bring the majority of your investors to the deal; they don’t just show up. But if your priority is simply to raise the most money possible, try SeedInvest (and I mean “try,” since they only accept 1 percent of applicants). Entrepreneurs on SeedInvest are raising 89 percent more than the current industry average of $244,000. If you look at the last two quarters alone, investors are pouring their capital into SeedInvest deals ($9.5 million vs $7.7 million for StartEngine and $6 million for Wefunder).
Sherwood Neiss is a partner at Crowdfund Capital Advisors. He helped lead the U.S. fight to legalize debt and equity based crowdfunding and coauthored the book Crowdfund Investing for Dummies.
The 2017 State of Regulation Crowdfunding – U.S. Securities-based Crowdfunding Under Title III of the JOBS Act[1]
Regulation Crowdfunding allows startups and SMEs to raise up to $1,070,000 per year from both retail and accredited investors by utilizing registered funding portals (or broker-dealers) to conduct exempt offerings online. This exemption requires issuers to file in a Form C and post online disclosures about a company’s operations, team, financials and other material information for investors to review. Regulation Crowdfunding started in the United States on May 16, 2016. The second calendar year for the industry ended on December 31, 2017. Because data about issuers, their financial wellbeing, and the capital that is committed is public information we can analyze the data and bring transparency to a segment of the markets (exempt private offerings) that has been fairly opaque until the JOBS Act went into effect.
The number of unique offerings increased 267%[2] from 178 in 2016 to 481 in 2017
Proceeds increased 178% from $27.6 million in 2016 to $49.2 million in 2017. Total proceeds by the end of 2017 was $76.8 million
The number of successful offerings increased 202% from 99 in 2016 to 200 in 2017
The average success rate of offerings to date is 66.7%
The total number of investors in Regulation Crowdfunding increased 158% from 28,180 in 2016 to 44,433 in 2017
Issuers that filed annual reports and reported creating jobs created on average 13.9 jobs.
Revenues for Issuers that filed annual reports increased on average 131% between the year in which they leveraged Regulation Crowdfunding and the Prior Fiscal Year.
Analysis:
The results of this data show that the market, while still in its infancy, is growing at a rapid pace.
The velocity of capital into funded offerings appears to be steady without showing signs of abnormal activity or irrational investor behavior.
The rapid increase in the number of offerings and investors proves that there is appetite for Regulation Crowdfunding from both issuers seeking capital as well as investors looking to diversify.
Given the high success rate for offerings, Regulation Crowdfunding represents a very structured yet viable alternative for access to capital for startups and SMEs.
Given the ability for firms to leverage capital raised to scale operations and create jobs, Regulation Crowdfunding should be promoted by local Chambers as well as the Small Business Administration.
Given the lack of irregularities or fraud, Regulation Crowdfunding (and the structure under which it provides for transparency), should be advocated by policy makers and government organizations.
Conclusion:
2017 represented a strong first complete calendar year for Regulation Crowdfunding. We expect the industry to exceed $100M in funded offerings during the first quarter of 2018. When considering the growth of securities-crowdfunding globally, we expect the market to reach $1B in funded offerings within the next 5 years. This can be further supported by making adjustments to the exemption that would allow for greater issuer caps.
In looking for how to consider the growth rate and size of this market over time, one can look at the UK market for data. With now 5 years of active equity crowdfunding in the UK, according to Cambridge University’s Center for Alternative Finance, in 2017, 17% of all seed stage capital in the UK came via equity crowdfunding. The CCLEAR database will continue to track these markets both domestically and globally as we begin to offer services to other regulators outside of the United States.
Download the full report here.
[1] This report is an excerpt of a report we wrote for the Securities and Exchange Commission (SEC) that summarizes the year end cumulative results for Title III of the JOBS Act (aka Regulation Crowdfunding)
Show me the CCLEAR Regulation Crowdfunding Dashboard
[2] Given Regulation Crowdfunding started on May 16, 2016, the first calendar year of Regulation Crowdfunding only encompasses 7 ½ months. Had it been a full calendar year, this growth percent would have likely been lower.
CCLEAR Regulation Crowdfunding Database covering all Portals and Offerings
MIAMI, FLORIDA, OCTOBER 17, 2017 – Today at a Private Capital Markets forum, Crowdfund Capital Advisors (CCA) announced immediate availability of CCLEAR™, (http://www.CrowdfundCapitalAdvisors.com/data) to enable entrepreneurs, investors, policy-makers, educators, industry stakeholders and government leaders to immediately and transparently analyze all Regulation Crowdfunding offering data. The CCLEAR service can also be easily customized and implemented by securities regulators globally to monitor their private capital market activities.
“The CCLEAR solution is a revolutionary data analysis service that provides unique insights to investors and issuers. Until Title III of the JOBS Act went into effect, there had been no transparency into what is happening in the private capital markets,” said Sherwood Neiss, Principal at Crowdfund Capital Advisors. “Now with Regulation Crowdfunding there is a digital footprint of all private companies raising money online. With this unique data in the private capital markets, investors and regulators can immediately understand where capital is flowing by region, what industries benefit, where jobs are being created, what kind of economic impact is being delivered by city, state and region, where investors are from, where they are investing, the financial health of reporting companies, average valuations, average check size by portal, average raise by industry, average length of fundraising and much more.”
CCLEAR™ (standing for Collect, Clean, Aggregate and Report) is the first comprehensive securities-based crowdfunding database to collect, cleanse, aggregate and report on the underlying companies, portals and industries. CCLEAR uses a standards-based method and data structure (CCA Data Standards) for collecting over 153 static and transactional data points from Regulation Crowdfunding offerings. Crowdfunding websites can plug into CCLEAR via an API. Data is collected, cleansed and normalized then stored in cloud based servers and indexed for rapid response. The CCA Data Standards provides a taxonomy for use by public and private sectors and is promoted through marketplace collaboration.
There are 4 Dashboards available in CCLEAR. The Industry/Media Dashboard is free to registered users and visually displays summary information about the industry. The Investor Dashboard is subscription based, contains all-in-one detail on each offering with a live link to the campaign page, as well as industry analysis. The Regulator/Government Dashboard is subscription based, provides detailed information on all offerings as well as summary information about the entire industry. And the Portal Dashboard is free to Crowdfunding Platforms that plug into the database and provides industry comparisons as well as averages, trends and analysis.
CCLEAR has been in private beta for the past 6 months,” said Jason Best, Principal at Crowdfund Capital Advisors “during this time we’ve had a chance to work closely with our network of media, government leaders, platforms and investors to deliver them more than just data. CCLEAR delivers actionable information to benefit the decisions of all market participants. This type of data standardization tool will also accelerate the growth of the industry.”
Ellenoff Grossman and Schole, a law firm that advises issuers and portals, recently committed to deploying CCLEAR to all lawyers in its firm. “CCLEAR will further enable Ellenoff Grossman and Schole to speak to our clients about market evolution, where niche opportunities exist for portals and set expectations in data driven results way,” said Doug Ellenoff, Partner. “It is truly revolutionary to be able to see what is happening in a market that has had no sunlight for the past 80 years.”
Karen Kerrigan, President & CEO of the Small Business & Entrepreneurship Council said, “Access to capital is a perennial issue for America’s Small Businesses, as well as startup entrepreneurs. Now that we have a new avenue for entrepreneurs and their enterprises to seek capital from their friends, family and followers we need industry data to educate those companies on what they can realistically raise based on region of the country and industry sector. CCLEAR answers these questions for entrepreneurs and small businesses. It is a great tool that will help them succeed!”
CCLEAR Background
CCLEAR is a service created by successful entrepreneurs with Wall Street and Silicon Valley experience. Having raised millions of dollars in the private capital markets as well as crafting the Regulation Crowdfunding framework used in the JOBS Act, the team built a database and standard dataset that answers questions government regulators, policy makers, entrepreneurs and investors want to know about investing in private companies, raising capital online and spurring economic activity. CCLEAR is part of Crowdfund Capital Advisor’s commitment to deliver the latest tools to promote market credibility and efficiency. CCLEAR is available for immediately access at http://www.crowdfundcapitaladvisors.com/data.
About CCA
Founded in 2012, Crowdfund Capital Advisors is the worldwide leader in Securities-based Crowdfunding Policy, Research, Analysis and Data Analytics. The company offers highly customized services designed to assist governments, multilateral organizations, regulators, entrepreneurs and investors in understanding how to promote economies via regulated online securities exchanges. Clients include the World Bank, Inter-American Development Bank, country governments and global financial institutions.
The U.S. Department of the Treasury released a report detailing how to streamline and reform the U.S. regulatory system for the capital markets. Treasury’s evaluation of current capital market regulations found that there are significant reforms that can be undertaken to promote growth and vibrant financial markets while maintaining strong investor protections. The report was in response to Executive Order 13772 issued by President Trump on February 3rd, which calls on Treasury to identify laws and regulations that are inconsistent with a set of Core Principles of financial regulation.
“The U.S. has experienced slow economic growth for far too long. In this report, we examined the capital markets system to identify regulations that are standing in the way of economic growth and capital formation,” said Treasury Secretary Steven T. Mnuchin. “By streamlining the regulatory system, we can make the U.S. capital markets a true source of economic growth which will harness American ingenuity and allow small businesses to grow.”
In July, 2017 CCA was interviewed for the report in a call with Karen Kerrigan, President and CEO of the Small Business and Entrepreneurship Council. All their recommendations were included in the final report. They included:
Allowing the use of Single Purpose Vehicles
Fixing an error in the final bill to now allow investors limits based on the ‘greater of’ income or net worth
Today marks a milestone for Regulation Crowdfunding. The 500th company has filed with the Securities and Exchange Commission to raise funds via online portals. The chart below show the cumulative number of offerings since the launch of Regulation Crowdfunding on May 16, 2016. Since then 51% of these companies have raised over $66M from over 65,000 investors.
A key take away from the image is the rate of growth in offerings from 2016 to 2017. 2016 ended the year with 188 total offerings. 2017 is into its 3rd quarter and has already hit 500 offerings; a 266% growth over 2016 offerings … with another quarter yet to come.
(The following is a reprint of a story we wrote for Crowdfund Insider. The original can be found here)
The first Fiscal Year of Regulation Crowdfunding has come to an end and our data continues to deliver valuable information for investors, founders and government officials. Overwhelmingly, California has taken the early lead in Regulation Crowdfunding from both an entrepreneur (aka issuer) and investor point-of-view. Currently, Texas is in second place and New York is third. If you are an entrepreneur in any of these states, you have an increased chance that potential investors in your network/community may be familiar with Regulation Crowdfunding already. States including Idaho, Connecticut, Massachusetts, Utah, Alabama, Colorado and West Virginia also have higher than average number of backers which may indicate a warming of those markets to Regulation Crowdfunding over the last 12 months.
Which States Have Built an Early Lead in Number of Campaigns?
As the image above shows, as of June 30th California leads. Of the 399 total offerings across the USA, California had 34% (134) of the total. Behind that is New York with 30 offerings and Texas with 29. The fact that California is 447% higher in the number of offerings than New York shows that there is much more awareness about Regulation Crowdfunding in California than anywhere else.
Digging a little deeper, the data shows us that almost 50% of the companies were based in greater Silicon Valley area – (an area replete with Angel Investors). This might be due to a few reasons: a) The ingrained startup culture in the region with entrepreneurs flocking to the area b) Since there are many startups in Silicon Valley they are actively competing for investor dollars and c) Because VCs are now requiring more “social proof” of a company’s business model, companies are turning to Regulation Crowdfunding as that evidence.
Texas demonstrates similar city concentration effects within the state because the clear majority of the offerings are split between Austin and Houston. (A full breakdown by City, State and Industry can be found here). Again, these are 2 cities in Texas that have significant experience in Angel investing/risk capital deployment. Austin has more experience with Angel investment in technology companies, and Houston has significant experience in deploying risk capital for early stage oil and gas ventures.
Which States Lead in Dollars Raised?
The top 4 states in total funds raised via Regulation Crowdfunding are: California ($20.3M), Texas ($6M), Massachusetts ($3.5M) and New York ($2.7M). While California may lead in the number of offerings and the overall dollars committed they do not lead when it comes to the average amount raised by campaign. If we look at data from campaigns that closed and exceeded their Minimum Funding Target, (and we require at least 5 successes in a State to add some credibility to the averages) we find that Massachusetts leads the way with $445k on average (n=6), followed Texas $312k (n=15), New York $278k (n=6) and then California $255k (n=54). The average of all successfully funded campaigns for the first fiscal year was $302k. The takeaway here: In the first year, entrepreneurs in Massachusetts and Texas raised more per campaign than the national average. A key reason stakeholders in those states should be promoting Regulation Crowdfunding as an alternative for of fundraising.
Which States Have Engaged the Most Investors?
Next, we look the size of the crowd that is investing in 2 ways: First, the total number of investors in the state. California led the way with over 21,750 people investing in Regulation Crowdfunding campaigns. Texas followed with 4,500 investors, New York with 3,900 investors, and Connecticut with over 2,500 investors. Interestingly, Massachusetts, Utah, Delaware, Colorado, Alabama, Idaho, Washington and Ohio all had over 1,000 backers.
Second, we looked at the average number of investors in a campaign, by state. Interestingly, Massachusetts leads with the highest average number of backers 595, followed by New York (518), California (368) and Texas (352).
Which States Have Investors Making the Largest Average Investments?
Finally, we answer the question where do investors write the largest checks? Texas leads with the average check size of $1,364 for campaigns that hit their Minimum Funding Target. Colorado at $1,154, Delaware follows at $962 followed by California at $847 and New York at $537.
Is this early data? Yes, this is just the first years’ worth of data. Are the number of campaigns still small at this point? Yes but they are growing every day and we have controlled the data where possible for statistical significance. Is there any indication of where this may lead? Sure. When we look at the UK data, we can see significant market growth in years 2 and 3 regarding campaign size, total number of campaigns, and average investment. We expect to see similar dynamics in the US over the next 12 months. Will we see different states building expertise in using different types of securities or becoming more successful in crowdfunding different industries? The data is beginning to show that to be true. Will the time to reach funding goals decrease over time as more people become familiar with securities-based crowdfunding? Stay tuned…we will continue to report on the data to provide early signals to the market.
Looking for Regulation #Crowdfunding Data? Email: Sherwood@theccagroup.com for more information.
As of June 30th, of the 134 companies that successfully closed and funded Regulation Crowdfunding campaigns, a small but significant group – 13% (18 companies) – have chosen to issue investor securities in the form of Revenue Share. This group of companies raised $5.4M (~$298.5k average) from an engaged an audience base of over 3,300 investors, many of which are now customers with a vested interest in the success of that business. Since these investors can benefit from an immediate ROI (as the companies repay their investors from the company’s revenues), there is incentive for investors to be marketing ambassadors for the business. Since the yield on these securities, appears to be greater than traditional investments (and the instruments have shorter terms), there is benefit for investors. Yet these potential returns do not come without risk. Not all the companies that are offering Revenue Share are producing income at the time of the sale of the securities, so it is best to do your research and give more consideration to those that are producing current revenues, which may increase the chance of repayment.
Revenue Share means that a company will pay back its investors a percent of gross revenues each month until the stated return is made. This return could be within a specific time window or until the stated return is met. Revenue Share is like debt in the sense that investors are investing money in companies, but rather than receiving interest and principal payments, investors receive their pro-rata share of the percent of gross revenue repayment.
Revenue Share is particularly beneficial for companies that experience seasonality in their cash flows. During months with higher revenues, they can repay more of their debt. On the flip side, when sales are slower, their repayment would be less. This eases a business’s cash burn concern.
When looking at the industries of the 18 companies, most them were restaurants or craft breweries/distilleries. All of which have current (or future) customers and hence cash flow. These 18 companies had over 3,300 investors who now have a vested interest in the success of these businesses and will most likely be bringing their friends, family and community to their “investment.” Outside of capital, this becomes another benefit to crowdfunding – engaging a community.
Drilling down into the data, we find 2 key variables:
Return on Investment: On average, companies offered a 1.56 multiple; meaning an issuer pledges to give a $56 return for every $100 dollars initially invested.
Investment Period: Specified maturity periods are averaging about 46 months (about 3 years and 3 quarters).
In breakdown terms, these companies with specified maturity periods average a 56% return over 3.83 years – equal to a projected 14.6% return a year. This provides a possibly attractive investment alternative for investors, given annual compound interest returns on bonds average 2% and stocks about 6% (Blanchett, WSJ).
These companies raised on average $298,494. It would seem this would be enough capital to achieve their anticipated outcomes as they are not high-tech, high-cash burn entities. However, only 4 of the 18 companies were showing revenue in their Annual Report, meaning only these select few could start repayments. A notable risk for investors.
56% of these companies stipulate maturity periods – meaning a defined period within which they will repay the investor capital. The others have chosen “until,” which means that they will continue to repay the investor capital until the multiple is achieved. The longer the repayment period, the lower the yield becomes for investors. Understandably, companies are hesitant to issue a definitive timeline for investors’ return on investment out of financial concern that if projected revenues do not come into fruition, then the company is still obligated to pay out.
Although too soon to tell actual revenue trends, what can be observed is the small pool companies participating in Revenue Shares show a promised return on investors’ investment well above the normal rate of return for traditional investing. In addition, over 50% prove to be confident enough to hold themselves accountable to their own measures of success as well as their investors by committing a ROI deadline for their investors. If you are an investor your take away should be, Revenue Share could be an attractive diversification strategy for your portfolio; however, it is important to consider if the company is generating revenue to minimize your risk of not getting paid back and maximize your expected return.
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Find the information above useful? You can see all the data summarized in our recent paid Webinar: The First Full Fiscal Year of Regulation Crowdfunding.
(The following is a reprint of a story we wrote for VentureBeat. The original can be found here)
Crowdfunding is the hot new topic in the startup world. Since the passage of regulations allowing companies to source funding from Main Street American investors, startups have been flocking to crowdfunding platforms to secure capital. But what makes a crowdfunding campaign successful? The most obvious answer is a large social following — a crowd of loyal fans that would invest their hard-earned cash in a seemingly great idea. We expected this to be the case, and we analyzed the social media followings of 233 campaigns to find evidence. But while our hypothesis holds some truth, social media may not be as important to crowdfunding success as we initially believed.
The data
According to the crowdfunding law, a company must have a deadline date for reaching its minimum funding target (MFT). The offering is considered closed and not open for further investments after the deadline date is reached. If a company hits its MFT on or before the deadline, it is considered funded. We analyzed all closed campaigns, whether they were funded or not. Of the 233 campaigns, 120 reached their MFT, while 113 were not funded. Our analysis looked at the Twitter, Facebook, and Instagram networks of both groups separately then together. We also considered the LinkedIn accounts of the CEOs to see if a correlation exists between the number of professional connections and the company’s ability to secure funding. A surprisingly anticlimactic trend emerged: Overall, while social media appears to play a positive role in a campaign’s funding, this is only true to a minor extent. The chart below shows the trend line between the funds a company raised and its social following. The trend line shows that while there is a positive correlation between size of social following and raised funds, it holds little significance.
Results vary by industry
This doesn’t mean social media is a waste of time. In fact, the importance of a social following appears to vary by industry, as shown in chart below with trendlines for different industries. For industries where a social following plays a pivotal role, such as wine and spirits or apparel, the trend is more dramatic than for other industries. The wine and spirits industry appears to maximize the power of a smaller social network. This may be because wine and spirits tends to have a following of loyal fans, particularly when looking at local brands that have a storefront presence. However, for industries that have a technical background and lower social reach, such as transportation and consumer goods, the trend is almost flat or even reversed. The key here is to understand whether your industry is one that attracts followers; if so, you may be able to leverage them for crowdfunding success. If your industry is one that doesn’t attract a crowd, don’t rely on your social following to fund your campaign.
The state you’re based in makes a difference
To date, California and Texas have had the most crowdfunded campaigns. With that in mind, we assessed the importance of a social media following in both states. Our data suggests that a large social network is much more important in California than Texas, as shown below. This may be due to Silicon Valley’s influence in the region. Since there is more competition for venture capital, perhaps companies are leveraging crowdfunding and their social networks to signal popularity and a reason to invest. In Texas, a social following is not a determinant of campaign success. This could be due to a more direct financial approach to crowdfunding in Texas, where investors are searching for proven financial strength instead of social exposure. The implication for startups is that you should understand who you are targeting with your campaign and focus your social media outreach on that. A deeper analysis of other states is in order, but there simply is not enough activity in other states to make a judgement.
We came across one of the most telling findings when we compared the top 20 campaigns, all of which raised above $500,000, to those that raised precisely zero. The top 20 campaigns had a clear advantage in social media following. On every platform, the top 20 campaigns far exceeded the non-starters in number of followers. It seems almost as if the campaigns that raised no money were intentionally avoiding social media. The chart below displays the total social following for the top 20 and the nonfunded campaigns and suggests that social media plays an essential role on each side of the spectrum. If you want to raise $1,070,000, the most that is permitted by law, you should focus some resources on building a fan base. Beyond these three networks is the LinkedIn following for the CEOs of each startup. As expected the LinkedIn following for the top 20 far exceeded that of the bottom campaigns. On average, the nonfunded campaign CEOs had 32 connections on LinkedIn, while the top 20 CEO’s had 414 connections. This discrepancy suggests that a CEO’s professional network plays a vital role in the start-ups success on crowdfunding platforms.
Facebook takes priority
Our data included information for four major social media platforms: Facebook, Twitter, Instagram, and LinkedIn, in order of importance. Each social platform has its own benefits, but the one that stands out in crowdfunding is Facebook. It is almost as if Facebook is the center of a successful campaign. So at a minimum, make sure you have a Facebook presence.
All things considered, the data suggests that the more money a company hopes to raise, the more it should focus on developing a social platform. But results vary by type of industry as well as the type of investor a company hopes to attract. However, companies hoping to raise less than $100,000 may not need to invest as much time on social media and could just use crowdfunding as a tool to speed up funding from pre-existing relationships. Nonetheless, some sort of following is essential, as the campaigns that raised no money demonstrate.
Sherwood Neiss is a partner at Crowdfund Capital Advisors. He helped lead the U.S. fight to legalize debt and equity based crowdfunding and coauthored the book Crowdfund Investing for Dummies.
Tyler Monaccio is an analyst at Crowdfund Capital Advisors and is currently working on an MBA with a focus on finance and global affairs.
(The following is a reprint of the story we wrote for Venture Beat. It can be found here).
Let’s be honest. After jumping through hoops to get your crowdfunding campaign live, your video is many times an afterthought. We recently analyzed over 200 campaigns to gauge how important videos are in crowdfunding.
A quick bit of background: Crowdfunding campaigns are open on average 93 days. Issuers must meet their funding target to receive invested capital; otherwise, it goes back to the investors, and the campaign is considered closed and failed.
We analyzed 243 closed campaigns. Of those, 51 percent (123) got funded. These campaigns are raising more capital than their failed counterparts — a lot more. On average, they raise 16.5 times more per campaign than a failed one, capture an impressive $277,000, and monumentally overshadow the average $16,000 a failed campaign raises. Given the SEC does not allow failed campaigns to keep their funds, it is imperative for issuers to ensure all their campaign efforts are fine tuned.
Our analysis focused on the campaign video as a highly visible, yet commonly misunderstood fundraising driver. We dissecting each video’s essential components through a weighted quality-rating system based on a 10-point scale. A perfect 10 video exceptionally demonstrated the following elements:
Ability to engage the audience’s attention
An idea that compels an investor to invest
Strong emotional pull
Solid product or service testimonials
Meaningful and professional speaker engagement
Video production quality, including the music
Solution effectiveness to a market problem
Investment opportunity and market potential
Team introductions and confidence in their execution ability
Funding needs and plans
Campaign videos scoring in the range of 0 to 3 points are considered poor, 4 to 6 points average, 7 to 8 points good, and 9 to 10 points excellent.
Videos rated poor typically do not engage the audience or compel an investor to invest because of missing key information about the product or because the product or service present more questions than answers. These videos also lack professional production quality.
Average videos have most the essential components listed in our weighted rating system but are somewhat lacking in professional production quality, audience engagement, business opportunity details, and funding needs.
Good videos are professionally done and provide solid audience engagement with a compelling business opportunity. They address most components in our weighted-rating system but leave out one or two key details — most commonly an explanation of a business’s funding needs and plans.
Excellent videos are professionally done, emotionally engaging, and provide a compelling business opportunity. They tick all the boxes in our weighted-rating system, leaving the investor informed, confident, and excited about the investment opportunity.
In addition to categorizing videos by quality, we also tagged campaigns by the type of audience they target: 1) “Explainers” are essentially commercials tailored for the consumer audience, leaving out key investor information (i.e. the investment opportunity, market potential, team introductions, experience, and funding needs), and 2) “Pitches” are videos with a message tailored for the investor, including everything an explainer does plus what they typically leave out.
For a video categorized as an explainer to score well, it needed to strongly engage the audience through its production quality, emotional pull, testimonials, and creative business solution, since it lacks more concrete business information.
Our findings led us to four recommendations:
1. Investing in quality reaps maximum returns.
The majority of campaigns funded (82 percent) have a video of average quality or better. Having at least an average quality video is becoming more of a prerequisite for an increased chance of meeting the funding target, but this doesn’t ensure above average funding. In fact, successful campaigns raised an average of $277,000. If you look at the chart below, you will see that those with an average quality video only raised $222,000 — 20 percent below average, while those with good quality videos raise 16.5 percent more than the average. Not surprisingly, campaigns with excellent video quality do even better, raising 32 percent above average.
Intero Ristorante is an example of an excellent campaign video that helped the company raise double its funding target. The founders engage investors with a compelling story, background, and business mission through a professional quality video.
A word of caution: Even though campaigns with no video have a smaller success rate, when they do succeed, they raise more money than campaigns with average quality videos. If you are looking to just make your minimal funding target, then your campaign has a good chance of falling into that 82 percent of average quality videos that are funded, but investing in quality clearly yields maximum returns.
2. Pitch videos get funded more and raise more funds.
Our data shows it pays to inform your investor audience. We divided campaigns into those with no video, those that used an explainer, and those that used a pitch. Those using pitch videos show a much higher funding success rate (75 percent) than those with explainer videos, which were funded 18 percent less. And those with no video at all were funded 67 percent less than pitch campaigns. Campaigns with pitch videos are also raised more money — $294,000 on average — which is 6 percent more than the average funded campaign, 7 percent more than those with explainer videos, and 25 percent more than funded campaigns with no video at all. So, at a minimum, when putting your video script together it’s a good idea to answer some of the questions an investor might have about your company, team, or market rather than just explain how your product works.
3. Length doesn’t guarantee funding success.
Does video length matter? Well, yes and no. We analyzed video lengths by categorizing them into short (0 to 1.5 minute), medium (1.5-3 minute), lengthy (3-5 minute), and very lengthy (over 5 minutes). We found that short, medium, and lengthy videos all have a funding success rate above the average 51 average ( 69 percent, 71 percent, and 62 percent, respectively), which further signals that having a video is better than no video, regardless of its length.
Medium to lengthy videos, ranging anywhere from 1.5 min to 5 min long, raise the most capital in total and raise more than the average campaign by 4 percent and 16 percent respectively. Interestingly, the majority of pitch videos fall into these two categories, thus honing in the point that it’s worth taking the time to appropriately inform potential investors.
Campaigns with very lengthy videos appear to be an anomaly. They raise more than 2 times the average funded campaign ($601,000 on average) but are only funded half the time (they make up less than 5 percent of all funded campaigns). They also vary wildly in the amount of capital raised — anywhere from $64,000 to $1 million. Since a very lengthy video doesn’t guarantee six-figure funding, and it’s possible to have funding success with any reasonable length of video, length should be viewed in terms of how well you have informed and engaged your investor audience with the critical video quality components.
4. Positioning your campaign amongst quality brings greater returns.
Only 43 percent (104) of the campaigns we looked at had videos. Of this group, we rated 54 percent as being of good or excellent quality. We found the quality unevenly dispersed throughout the various equity crowdfunding portals. Of the 56 total campaigns rated as having good or excellent quality video, 45 percent ran on Wefunder, with Microventure and Start Engine coming a far second, hosting 16 percent of campaigns with top quality videos. Since we know that higher quality videos bring higher returns, it makes sense for issuers to position themselves within a portal that curates a higher level of quality campaigns. Looking at the chart below, you will also notice that Microventures and StartEngine have a higher percent of excellent videos. (And Microventures’ average funded campaign is $295,547 vs. Wefunder’s $284,631, although Seedinvest wins that race with the average funded campaign of $413,698).
Is a campaign video worth the investment?
Investing in a video specifically tailored for your equity crowdfunding campaign shows dedication and commitment to your potential investors. It also visually displays for them what you can accomplish and, subconsciously, what you can execute with capital. What the data shows is that if you are looking to raise a minimum of $50,000, investing in a decent video will most likely ensure your funding target is met. But if you are looking to raise at least $277,000, investing in an excellent quality video will maximize your returns.
A final point of consideration is your actual return on investment. Given that competition is strong among videographers and that a professionally executed video can be done for as little as $5,000, the potential returns on a good campaign video versus a poor one are significantly greater — almost 6x more.
Sherwood Neiss is a partner at Crowdfund Capital Advisors. He helped lead the U.S. fight to legalize debt and equity based crowdfunding and coauthored the book Crowdfund Investing for Dummies.
Stephanie Willard is an analyst at Crowdfund Capital Advisors and is currently working on an MBA with a focus on finance and global affairs. She is passionate about finance as a vehicle for equitable economic development.
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