Equity Crowdfunding Q3 2020 Review
The Economy & Venture Capital Funding
To understand just how remarkable equity crowdfunding’s Q3 growth is (the industry set a record for the amount raised in a single quarter!), it’s important to look at the backdrop of the economy and venture capital as a whole, both of which are struggling due to COVID-19.
The economic recovery is slowing. Many indicators such as job growth and retail sales indicate that the economy is rebounding at a slower pace than in May when the economy first began to recover. Part of what is expected to fuel a full recovery is growth in investments in innovative companies that can flourish both during and after the pandemic.
According to Pitchbook’s Venture Monitor for Q3 2020, the number of first financing deals has reached a 10-year low. Although the overall number of early-stage VC investments has declined in 2020, Q3 has shown some signs of recovery, with $9.2 billion invested across 657 deals compared to $7.8 billion across 630 deals in Q2. However, at its current pace, by year’s end, early-stage deals will fall short of last year’s figures by 20% to 25%.
The Rise of Fintech
Despite these trends, Fintech registered a boom in investments in the third quarter. Global financing volume in Q3 reached $12 billion for Fintech, marking the third largest quarterly volume ever recorded for the sector.
And we’ve seen that growth on StartEngine. We generated more revenue during the first six months of 2020 than we did during all of 2019, marking a year-over-year increase of 186%! We also continued that momentum through Q3 as we just closed an $18.9M funding round and recently launched our trading platform.
At a Glance
Q3 2020 was the biggest quarter for Regulation Crowdfunding to date! Companies raised $72.9M in Q3 this year, a new record. This represents a 51.2% increase in investment compared to the $48.2M raised in Q2 and a 119% increase compared to the $33.3M raised in Q1 this year. The previous quarterly record for the most capital raised in Reg CF was Q4 2019 where companies raised $59.1M.
To date, companies have raised $410.5M via Regulation Crowdfunding.
In the 3rd quarter this year, 316 companies launched Regulation Crowdfunding offerings. Let’s take a look at the numbers.
The food and beverage industry led the way with $6.7 million raised using Reg CF portals, followed by software development and technology, with $4.9 million and $4.8 million respectively.
Of the top industries in the graph above, 5 are also included on the list of some of the top performing sectors during the Covid era. This indicates that there is more startup activity in businesses that align with those that will thrive during Covid, especially as we enter the winter months when a surge in Covid cases are expected nationwide.
The number of active funding portals fluctuated over the past three quarters. In Q1, there were 15 funding portals with committed investments. In Q2, this figure jumped to 25 followed by a decline back to 15 active portals during Q3.
However, 9 issuers were able to raise $1M or more on 3 portals (5 of which were on StartEngine) compared to Q2 where only 4 issuers raised $1M or more also on 3 portals (2 of which were on StartEngine). This indicates that the market continues to be dominated by a few players, and most of the raises at the top of the funding limit are completed on StartEngine.
In Q2, StartEngine raised more capital than any other funding portal in the market, with $17M raised, and were able to follow this up with $18.5M in Q3.* However, Wefunder followed up their $12M figure posted in Q2 with $22.4M in capital raised in Q3. The next three largest funding portals, Republic, SeedInvest and NetCapital, were responsible for raising $9.4M with $2.8M and $2.7M, respectively.
*Note: this figure does not include the total raised via Regulation A+ offerings on StartEngine, which brings the actual amount raised in Q3 on StartEngine to $45.5M.
In light of the tremendous growth in funds raised in Q3 on equity crowdfunding portals, how do they stack up to the VC industry in terms of gender diversity?
When we take a look at the total number of raises that have been launched through the end of the third quarter of 2020, all-male founding teams account for about 73% of filed offerings versus 27% for founding teams with at least one female co-founder, as shown in the figure below:
Pitchbook reports that investments offered to female-led startups declined in Q3. Firms invested a total of $434 million in Q3 in female founders—the lowest figure since the second quarter of 2017.
The third quarter total also amounts to a 48% drop in funding from Q2, when female founders received $841 million across 132 deals. In all, only 6.5% of VC deals go to companies with all female founders, and 23.1% goes to companies with at least one female founder.
However, when we look at deal value presented by Pitchbook, all-female led companies only account for 1.8% of invested funds and those with at least one female founder account for 13%—the latter of which is less than half the percentage recorded by Reg CF offerings.
To date, teams with at least one female co-founder have raised 26% of the total amount raised via Reg CF. Given teams with at least one female co-founder account for 27% of deal volume, this means that gender in the founding team does not show statistical significance in terms of the amount the company will go on to raise.
This shows that equity crowdfunding is surpassing the VC industry relative to providing female founders with access to capital.
The most prevalent security types used to raise funds via Reg CF in the latest quarter were SAFEs, debt instruments, and common stock, which comprised over 73% of all funds raised.
In Q3, 38 new equity crowdfunding offerings launched on StartEngine, and 6 companies reached $1M in funding, compared to 5 businesses in Q2. The companies that reached $1.07M in Q3 included investing app Beanstox, solar nanofilm manufacturer PI Energy, outboard engine ALFADAN—and more.
Looking to the Future
The big news at the time of this writing (November 2, 2020) is that the SEC issued a press release announcing rule amendments to Regulation Crowdfunding that will open up the entire industry and drastically increase its effectiveness. As stated in the SEC press release, the amendments are as follows:
- Raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
- Amend the investment limits for investors in Regulation Crowdfunding offerings by:
- removing investment limits for accredited investors; and
- using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors; and
- Extend for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period.
To date, 120 companies have raised $1M via Regulation Crowdfunding. How many of these companies could have raised up to $5M? With these changes, it’s possible that more mature companies will be attracted to Regulation Crowdfunding as a funding option, which would provide a greater variety of investment opportunities for investors.
As reported by Pitchbook, in Q3 over 80% of VC early stage deals were over the $1 million threshold. And well over 50% of all early stage deals amounted to over $5 million. The decline of early stage VC deals along with the increase in the Regulation Crowdfunding threshold from $1.07M to $5M presents a significant growth opportunity for equity crowdfunding.
As such, we believe the amount raised via Regulation Crowdfunding will significantly increase in the months after the amendments take effect.