Crowdfunding is filling the funding void for early-stage companies
By Judd Hollas, founder and chief inventor, EquityNet
A little more than a year ago, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. The JOBS Act was intended to increase access to capital for the innovative companies that produce the majority of employment growth and are otherwise starved for investment capital. These early-stage startups do not have access to traditional bank loans, and venture capitalists disproportionally fund growth-stage, high-tech ventures, leaving otherwise potentially lucrative and promising ideas out in the cold.
New data published by the crowdfunding platform I founded, EquityNet, shows that equity crowdfunding is already aiding the vast business community that was previously underserved by the traditional private equity community (VC firms and Angel investors). Based on an analysis of more than 1,000 companies that have used the EquityNet platform, some very interesting findings include:
- Equity crowdfunding is active throughout the U.S., primarily due to the ubiquity of the Internet
- Around half of the companies using equity crowdfunding are consumer and business product/service companies, an area that previously was less than 10 percent of Angel/VC activity
- Approximately 75 percent of the companies that use equity crowdfunding are pre-revenue, or startup/early stage
- About 75 percent of the companies that used equity crowdfunding are non-tech
- Around 50 percent of companies seek less than $500,000 in capital
This study, while still only encompassing companies that used the EquityNet platform, is significant partially due to its large sample size. It shows that equity crowdfunding—even though currently limited to accredited investors—is addressing the 90 percent of the business community that was previously starved for capital, namely business and consumer product/service companies, early-stage startups, and non-tech companies. Geographical biases that persist in the brick-and-mortar VC world are significantly diminished with equity crowdfunding, and more than half of issuers seek significantly less than $1 million in investment capital, the legal obtainable limit from unaccredited investors, according to the JOBS Act.
While it may seem less noteworthy, that last point–50 percent of companies seek less than $500,000 in capital—directly combats critics’ theory that the JOBS Act’s crowdfunding provisions will be ineffective or irrelevant due to the relatively low funding limit of $1 million annually from unaccredited investors. It should be noted, however, that issuers are also allowed to raise unlimited amounts of capital from accredited investors via crowdfunding.
Our research supports the intention of the JOBS Act to spawn business formation, business success, and job creation through the democratization of capitalism, and indicates that it will likely lead to substantially positive impacts on our economy and employment growth. The data presented here corroborates industry analyst Massolution’s April crowdfunding report, which stated that rewards-based crowdfunding, most commonly used by early-stage companies to pre-sell a product to fund their development, had grown by more than 230 percent in 2012. Both the EquityNet data and Massolution’s findings confirm not only what we instinctively knew more than a year ago when the JOBS Act was passed—that the capital formation process was broken, but that alternative, disruptive funding mechanisms do work for both investors and entrepreneurs.
Simply put, our research shows that logically, the companies that are drawn to equity crowdfunding are those that were previously very much underserved by the traditional Angel and VC market. This progress will only continue once the SEC and FINRA finally release their rules governing true crowdfunding that will allow average, unaccredited investors to contribute to the development of America’s next great companies.
[Editor’s Note: See EquityNet’s complete findings and infographics at: www.equitynet.com/blog/us-equity-crowdfunding-activity-infographic]
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Judd Hollas is a pioneer in the field of crowdfunding with multiple patents granted for web-based capital marketplace systems. He is the founder and chief inventor of EquityNet and continues to lead the company’s efforts to create and introduce innovative new products and services. To date, EquityNet has facilitated more than $200 million in investment transactions for entrepreneurs. Judd has 20 years of experience as an independent technology analyst and investment manager in the private and public domains. He has personally invested in more than 30 emerging technology companies in a wide range of industry sectors, including various software sectors, semiconductors, biometrics, networking, wireless communications, and conventional and alternative energy. Prior to founding EquityNet in 2005, Hollas served as division manager for Beta-Rubicon, Inc., a consulting firm specializing in technology assessment and business due diligence services.