Equity Crowdfunding Q4 2020 Review
By the end of Q4, companies have raised a total of $500M via Regulation Crowdfunding to date! At the end of 2019, the total amount of funds raised via Reg CF was $281M, and 2020’s growth represents a 78% increase for the industry.
Q4 2020 also set a new record for the amount raised in a single quarter! Companies raised $82.6M in Q4 2020, a substantial increase over figures reported in Q3 ($58.9M) and Q2 ($48.2M).
To put the phenomenal performance equity crowdfunding has achieved in 2020 into perspective, it’s important to look at the bigger picture. According to Business Insider, when looking at economic recovery indicators, such as the 4% growth in gross domestic product (GDP) and slight increase in retail sales, the economy continued to recover in Q4. If you compare Q4 2019 to Q4 2020 however, GDP declined by 2.5%, which shows that we’re not quite back to pre-pandemic levels.
Many governments imposed stricter lockdown measures to curb the virus’ spread in Q4, and as a result, the U.S. lost 140,000 jobs during December, expected hiring activity slowed, and in turn, consumer spending declined.
Venture Capital Funding
Yet despite those economic trends, Pitchbook’s Venture Monitor for Q4 2020 reports that VC funds performed well. High-growth startups received record investments, exit value reached its second highest level ever, and there were a number record fund raises during the year.
However, this data is skewed by mega-deals, which set annual records for deal count and deal value, as well as late-stage deals, which comprised 28.8% of the deal count yet represented 66.7% of total deal value in 2020. In fact, seed-stage deals and deals with companies that have never raised prior VC funding fell sharply last year.
Fintech’s Year in Review
While VC seed deals fell sharply, fintech registered an increase in overall deal activity of 11% during Q4 2020. Contrary to VC activity, early and mid-stage deals accounted for about 90% of the increase. When looking at all of 2020, global fintech investment declined slightly, however, considerable growth was realized in the North American and European fintech sectors, with Asia accounting for the decline.
As part of that fintech growth, StartEngine itself has achieved significant growth in total funds raised during 2020. During 2020, companies raised more than $67.3M with StartEngine via Regulation Crowdfunding, more than doubling the amount StartEngine had raised via Reg CF from 2016-2019. And in total—looking at both Regulation A+ and Regulation CF—companies on StartEngine raised a total of $147M in 2020.
Looking at equity crowdfunding and Regulation Crowdfunding specifically, as we mentioned above, Q4 2020 surpassed every other quarter to date in regard to funds raised. Companies raised $82.6M in Q4 2020!
During the 4rd quarter of 2020, 365 companies launched Reg CF offerings compared to 316 companies launched in Q3. Both the number of deals launched using Reg CF and the total amounts raised have increased significantly during 2020.
For the second quarter in a row, the food and beverage industry led the way, accounting for 15.5% of total funding in Q4, or $12.7M. Technology companies raised $7.4M, and media and entertainment companies raised $6.7M.
5 of the top industries in the graph above (Banking & Investment, Media & Entertainment, Beverages, Real Estate and Transportation) are also included on a list of the most profitable industries in the US overall.
This overlap implies that many companies that raise money using Regulation Crowdfunding operate in the most profitable, high-performing industries.
The number of active funding portals fluctuated in 2020. 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 and finally settling at 22 by the end of Q4.
However, while there were 22 funding portals that saw investor activity in Q4, only 6 of those portals helped companies raise over $1M in that time.
A total of 17 companies were able to raise over $1M in Q4 alone, and over 80% of funds raised in Q4 came from just three funding portals: Wefunder, StartEngine, and Republic.
The most prevalent security types used to raise funds via Reg CF in the latest quarter were common stock, debt instruments, and SAFEs (Simple Agreement for Future Equity), which comprised over 82.2% of all funds raised. This is compared to 81.2% recorded at the end of 2019. In other words, not much has changed in the last year in terms of what securities companies are using to raise capital under Reg CF.
It should be noted that the SEC cautions against SAFE notes, and StartEngine has its own aversion to the security. However, the structure created by the famous accelerator, Y Combinator continues to be a popular security to use when raising funds via Regulation Crowdfunding.
Attracting Companies With More Maturity
By the end of 2020, there have been a total of 3,217 Reg CF offerings to date. During Q4, 287 new offerings were launched.
Interestingly, the maturity of the businesses leveraging Reg CF is changing. The companies seeking funding via Reg CF in Q4 2019 had average total assets of about $341K compared to $559K in Q4 2020. When looking at revenue, companies averaged about $308K in Q4 2019, which jumped to $768K in 2020. This data suggests larger, more established companies are opting to seek out investment dollars via Reg CF versus using older, traditional methods of startup financing.
If you look at which regions dominate Regulation Crowdfunding, you may be surprised to see that Los Angeles County has raised the most capital to date, followed by New York, San Francisco, San Diego and Austin. These counties also grew the fastest during the year.
|Funds Raised to Date||Annual Growth Rate|
|Los Angeles County||$53.7M||76.6%|
|New York County||$30.5M||68.5%|
|San Francisco County||$28.6M||85.7%|
|San Diego County||$21.5M||56.9%|
|Travis County (Austin, TX)||$19.3M||85.5%|
Based on the data, Southern California is outperforming the rest of the country in terms of total funds raised, accounting for 3 of the top 5 counties in Reg CF. This may be unsurprising due to San Francisco already being a hotbed of startups venture capital and LA having a robust technology scene as well.
What’s more surprising is the amount of Reg CF activity in Austin, TX. Austin is becoming recognized as an upcoming startup scene, recently attracting Tesla and the Boring Company, both of whom are building facilities in the city.
In Q4, 38 new equity crowdfunding offerings launched on StartEngine, and 5 companies reached $1M in funding, compared to 6 in Q3 and 5 in Q2. The companies that reached over $1M in Q4 included the hypersonic technology company HyperSciences, social network Fanbase, wireless power company WiGL—and more.
Looking to the Future
A large contributor to equity crowdfunding’s growth in 2020 is COVID-19. The pandemic put pressure on many businesses to raise more funding in order to survive. Yet as access to capital became more competitive, the number of jobs lost due to COVID-19 during the first two quarters of 2020 helped pave the way towards a 26.7% year-over-year increase in new business formations from Q4 2019 to Q4 2020.
With more companies seeking funding, and venture capital in seed deals drying up, more businesses than ever before turned to equity crowdfunding, and investors came to funding portals to meet them.
So what does the future look like?
With vaccinations taking place across the country, it’s just a matter of time before the economy returns to some semblance of normalcy. However, some industries have been forever changed as people have become accustomed to working remotely, receiving products and services on demand, and having more influence over companies and brands.
For the interim, VCs are focusing on larger, more established deals, and this leaves room for substantial growth in the fintech industry, and specifically, equity crowdfunding, as it focuses on earlier-stage deals and everyday investors.
One factor that will have a considerable effect on the growth of equity crowdfunding is the SEC rule changes that are scheduled to take effect by mid-March 2021. These changes will allow companies to raise more (Reg CF’s annual maximum funding goal will increase from $1.07M to $5M), and allow investors to invest more.
As shown by the situation that occurred involving Robinhood and GameStop, the power of the retail investor is growing. The general public is showing a growing appetite for investment, and StartEngine, one of the largest companies in equity crowdfunding, is at the center of this shift.