Which Companies Crowdfund?

The US JOBS Act and Regulation Crowdfunding were intended to create a new and inclusive type of online capital market where all entrepreneurs, regardless of their physical location, gender, or anything else, can go directly to the public (the ‘crowd’) to raise capital for their early-stage start-up companies.  Has it met this goal?

To answer this question, my research assistant and I created an original data set using every Form C (the official form that all crowdfunding issuers must file with the SEC) from 2016 to 2018—roughly 1,500 filings in all.  Our results are reported in a recently published article, and here are the highlights:

• Women have traditionally received venture funding at much lower rates than men, with a recent study reporting that only 15 percent of companies that obtained venture capital had a woman on their executive team.  One goal of crowdfunding was to increase the opportunity for female-led companies to raise capital.  In our data, we found that 28 percent of crowdfunding companies have a woman on their executive team—roughly double the percentage found in the VC world.[1]  This is an encouraging sign.
• Another goal of crowdfunding was to give geographically isolated entrepreneurs an opportunity to pitch their ideas to investors without having to physically relocate to Silicon Valley or other hotbeds of venture capital and angel investing.  In our data, we found that companies from 44 different US states participated in equity crowdfunding campaigns in 2018 alone, suggesting that crowdfunding appears to be living up to its promise of overcoming geographic constraints.
• Although almost any company may use crowdfunding, the focus and intent of the JOBS Act was to help the smallest and youngest start-ups raise capital.  Our data indicate that this has largely played out as planned:
  1. Almost all crowdfunding companies were founded very recently.  Forty percent were under one year old at the time of filing their Form C and 80 percent were less than four years old.  The median age of a crowdfunding company was 1.5 years and the average age was just under three.  There were more issuers under one month old than over 10 years old.
  2. Crowdfunding companies are very small, with only a few employees.  A majority (55 percent) have three or fewer employees, and nearly all (89 percent) have 10 or fewer employees.  The average number of employees is five.
  3. Very few crowdfunding companies have positive revenue, indicating they are still in start-up mode.  Ninety percent of them reported zero or negative revenue, and even those with revenue reported an average of only $140,000 per year.

Based on these findings, it looks as if crowdfunding has started to achieve one of its primary goals, namely to create an inclusive avenue for early-stage start-up companies to connect with investors and raise capital.  That said, crowdfunding remains a very small part of the start-up capital ecosystem.  We found that fewer than 1,500 companies made a crowdfunding offering from the inception of the form in mid-2016 to the end of 2018, and those companies collectively raised only about $200 million during that time span.

Even so, crowdfunding has shown significant growth as the market has developed.  We counted 192 offerings in 2016, 514 offerings in 2017, and 764 offerings in 2018.  Furthermore, the SEC wants to see crowdfunding expand and succeed and recently proposed both temporary and permanent reforms of Regulation Crowdfunding to encourage this emerging market.  If and when these changes occur, we may see continued growth in coming years, allowing crowdfunding to become a significant supplier of capital for start-up companies from coast to coast.

Andrew A. Schwartz is a Professor of Law at the University of Colorado Law School

This post was originally published on the Columbia Law School Blue Sky Blog and is based on Professor Schwartz’s recent article, ‘Crowdfunding Issuers in the United States’ (Washington University Journal of Law and Policy), available here.

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[1] Note that this 28 percent figure represents the proportion of companies with female leadership that made crowdfunding offerings from 2016-18 rather than those who were actually funded, due to limitations in the way the data is provided by the SEC.  That said, there are good reasons to believe that an analysis of funded offerings would lead to similar results, particularly the emerging market norm of setting the minimum funding level at a very low amount (typically $10,000), which has the practical effect of allowing every company that wishes to get funded to be funded.