What is equity crowdfunding?
Equity crowdfunding is a type of crowdfunding that allows startups to raise capital by offering equity shares in their business to investors. This is different from traditional crowdfunding platforms like Kickstarter, which allow businesses to raise money through pre-orders or donations.
Why invest in companies via equity crowdfunding?
Investing in early-stage companies can be risky, but it can also be very rewarding. Equity crowdfunding gives investors the opportunity to get in on the ground floor of a company and potentially see a large return on their investment if the company is successful.
Top 5 equity crowdfunding platforms
SeedInvest is one of the largest and most popular equity crowdfunding platforms. They offer a wide variety of investment opportunities, including pre-IPO companies.
Although not every private company will result in lucrative returns for its investors, SeedInvest CEO pointed to a few companies that had increases in value after raising early funding on SeedInvest. According to Crowdfunding Insider these firms include:
Heliogen drew in $1.6 million from SeedInvest as part of their seed round in 2017 at a pre-money valuation of $20 million. This was done through regulated crowdfunding (Reg CF) and almost 1000 investors took part in the funding. In 2021, Heliogen went public with a valuation of $2 billion.
With an incredible 55% to 33% implied IRR, Knightscope raised capital multiple times through Reg D and Reg A+ on SeedInvest before finally taking their company public via IPO on the Nasdaq in 2022.
Over 2,700 investors showed their trust in Truststamp company by backing it in a Reg A+ offering that raised $6.5 million. In return, the company gave them an implied IRR of around 90%.
Shelf.io: In 2016, this company raised $475,000 in a Reg D offering and then went on to raise $52 million in a Series B round that provided an opportunity for SeedInvest investors to exit with an approximate IRR of 95%.
In 2016, PetDesk raised money through Reg D and was later acquired by another company in a private transaction. Those who invested made approximately 75% return on their investment.
StartEngine was founded in 2015 as a crowdfunding agency. StartEngine works with companies across many industries, including but not limited to UAVs, food products, renewable energy, collectibles, and more.
StartEngine's most notable exit was a KnightScope that went to IPO. However, a few weeks after Knightscope's IPO, it was trading at a much lower valuation than its latest round on StartEngine. It should be noted though that Knightscope's early investors on StartEngine most likely have realized great returns, it was investors in the last few funding rounds who most likely lost money.
Another notable exit was Digital Brands Group which exited through IPO.
Osurv got acquired by Tan Capital Partners.
Another company called Smoke Cartel started trading on OTC; however, it has very little liquidity so it probably should not count as a success story.
Netcapital is an equity crowdfunding platform that offers a wide variety of investment opportunities, including pre-IPO.
We could not find any companies that exited on Netcapital, however, there are a few interesting companies that closed investment rounds on Netcapital.
EnergyX for example raised a few rounds on Netcapital and then since got commitments for $450M. This is probably the largest in the history of crowdfunding. If we look at the single biggest commitment for a startup that raised crowdfunding, Netcapital likely will be a leader.
GenesisAI raised on Netcapital around $4M previously and is currently raising its Series A round on Netcapital. GenesisAI has a stellar team (Harvard Ph.D., ex-Salesforce Engineer) and has been generating revenue. Currently, they have approximately 2,000 users. GenesisAI is aiming to build a foundation for Artificial General Intelligence.
Republic is a crowdfunding platform that offers equity crowdfunding and ICO investing.
Republic has multiple companies that raised very large rounds after being funded on Republic. However, based on our research there are only two companies that exited on Republic. According to Crowdfund Insider, Trustt which raised around 100k on Republic got acquired and investors were able to generate 1.17x returns. This is not a big return, however, if we take into account the acquisition that happened around 3 months after the Republic round got closed, this is an excellent return.
Wefunder is an equity crowdfunding platform that was founded in 2011. Wefunder has funded over 100s companies and has had a few notable exits.
The most prominent and probably the biggest exit in the crowdfunding space was a company funded on Wefunder - Ginkgo Bioworks. Ginkgo went on an IPO at around $20B valuation. It currently (as of November 2022) has a market cap of around $4.5B.
Importance of risk
Returns are an important part of investing. However, another equally important one is risks. For example, generating a return of 10% when the chances of a total loss of investment were 90% is inferior to generating a return of 10% when the chances (risk) of a total loss of investment were 20%. In a subsequent article, we will provide an analysis regarding what percent of investments in each of the crowdfunding platforms resulted in exits.
Crowdfunding is a new and emerging asset class. It offers great opportunities for both investors and startups. However, it is important to understand that crowdfunding is a high-risk investment.
Before investing in any crowdfunding platform, it is important to do your own diligence and research. We believe that the most important thing an investor can do is to invest in a crowdfunding platform that he/she understands.
In our opinion, the five crowdfunding platforms that offer the best opportunity for investors are StartEngine, Republic, Netcapital, SeedInvest, and Wefunder. These platforms have funded some of the most successful companies in the crowdfunding space.
Disclaimer: This is not financial advice. Please do your own diligence before investing in any crowdfunding platform.