If you want to get some practice for the time when Americans will be able to buy and sell crowdfunded stocks as easily as they can on the NASDAQ or NYSE then you may want to try out Exchangel now. Exchangel is a fantasy angel investing game filled with startup stocks. All you need to do is register for a username and you are given $500K in play money to start investing. According to Exchangel’s own FAQ, “Exchangel is play investing in tech startups! You’re given “$500K” to start, and you can buy and sell any of the companies listed just like in the public stock markets.”
There are prizes too. If you can build up a nice bit of cash in your portofolio then you can place an order for bitcoin. Every Thursday the players with the top priced 200 orders for bitcoin will receive real bitcoin.
My experience started with a desire to figure out how to get the most cash in my portfolio. Looking through the stock listing I recognized some of the startups such as Lyft and ProductHunt. Each stock has a list of sell orders and buy orders that people have placed at a certain price. Looking at Lyft I saw that someone was selling 476K shares at $250 each. If I wanted to pay that price I could enter my own buy order at $250 and get my shares immediately. But if I thought the price was too expensive, I could enter in my own buy order at maybe $220 per share (as long as I had the available cash) and hope that someone would come along willing to sell it to me at that price.
As I looked through the listings I found one that caught my eye called GrubMarket (symbol GRU). It was described as an online Farmer’s Market. So I bought 100K shares at $1.80 each. Then I immediately entered a sell order at $1.99 for all 100K shares. A few days later I received an email that my shares had sold. So I made a profit of $19,000 in play money.
Another startup caught my eye called Ketchup (KHUP). It was described as a mobile newsreader with context. So I bought 170K shares at $.80 each. Then I placed a sell order at $.88 each hoping to make a small profit. At the time, $.88 was the lowest priced sell order. However, a few days later I received an email saying that someone was now selling their own shares of KHUP at $.87 each, undercutting my price. I decided to leave my sell offer at $.88 and hope that someone bought all the $.87 priced shares making my $.88 shares the best priced shares again.
After that I bought some other stocks including Transcriptic (TRA), Checkr (CHKR), Campus Job (CAM), and Kickback (KC). So far I have taken the $500K that I started with and built a portfolio worth $617K. That is a 21.7% increase. Most of these startups will never have shares offered under the new Regulation A+ crowdfunding laws. But Exchangel is a fun way to test the waters and see the potential.
French biotech company, Antabio has completed the first successful exit for an equity crowdfunded company. Antabio first started their crowdfunding campaign on French platform WiSeed.com in October 2010. By December they had raised €300,000 from 207 individual investors. A year later an individual angel investor invested another €500,000. Then in October 2012 that same angel investor offered to buy out the other investors. Investors who had crowdfunded the company back in December 2010 made a 70% gain. So someone who had invested €1,000 was paid €1,700 for their shares.
This marks the first time a crowdfunded company has had a successful exit anywhere in the world. Antabio’s experience should pave the way for future successful investment crowdfunds.
Looking forward to 2013 when equity based crowdfunding becomes legal in the United States as a form of financing small businesses and startups, it would be beneficial to look behind at the industry in the United Kingdom where it has been legal for over a year now.
Crowdcube.com, which claims to be the very first equity based crowdfunding platform in the world, has been operating for over a year helping entrepreneurial businesses in the UK secure investment. As of February of 2012, the portal has successfully raised £2,562,000 or $4,028,540 at an exchange rate of £1/$1.57.
Over the course of a year 766 pitches were submitted, 188 were approved and published and out of those only 14 were successfully funded by crowdsourced investors. This results in Crowdcube publishing 24.5% of their pitches and a success rate of 7.45% of those published pitches. That makes the success rate 2% for all pitches submitted.
Symbid.com is another equity based crowdfunding platform that originates from the Netherlands and has helped startups successfully raise €1,100,000 or $1,359,050 at an exchange rate of €1/$1.24.
Unlike Crowdcube, Symbid.com does not have a formal validation process. The only requirement is that the entrepreneurs make an initial investment as well as fill out their complete idea page. The platform has published 113 pitches, 8 of which have been successful. (7.08% success rate)
Comparing the two platforms, one statistic seems blatantly clear. Out of all published pitches, there is a success rate of about 7%. Although that may seem a dismal amount, it validates the fact that not just anyone with an idea will get funded. Only the ideas with a workable business model and potential will.
Crowdfunding for equity has been shown to work where it is legal, and gives entrepreneurs and small businesses access to a line of capital and investors that is be a huge boon. Looking at the data, on average crowdfuding seems to provide about $250,000 to successfully validated businesses. That amount can mean the difference between success and failure for a new venture.
Moving from the analytical to an opinion, it seems that regardless of the screening process, the crowd at large is able to intelligibly determine which ideas are worthy of success, and which onesare not quite ready. From the entrepreneur’s standpoint, this process serves as a validation phase. If the idea has merit, the masses will make it known by investing and starting the business. If there is not enough of an investment, the entrepreneur knows that the value proposition needs work before it becomes a workable business.
Kickstarter recently launched a new live stats page with some interesting data. I analyzed the data with the hope of finding some trends that might bleed into equity crowdfunding. First I’ll discuss some interesting findings from the Kickstarter data before illustrating a potential connection to equity crowdfunding.
From the data available I felt there were two important questions to be answered. First, which categories get the highest percent of their projects fully funded? All projects on Kickstarter have an average of about 44% fully funded success rate. Figure 1 shows that dance, theater, and music all get more than 50% of their projects funded. While, technology and fashion are lagging with success rates below 30%.
This leads me to my next question. Dance, theater and music have the most likelihood of being fully funded, but how much capital do they actually raise? In Figure 2, you’ll notice that these three raise the highest percent of their money in the $1,000 to $9,999 range when compared to the rest of the categories. On the other hand, design, technology and games have most of their money raised in higher funding ranges. Interestingly, as seen in figure 1, these three also have some of the lowest success rates on Kickstarter. So it seems that these categories are either boom or bust.
The reason for these outcomes could be because dance, theater and music project owners are looking for a smaller amount of money for their projects so they get funded easier. Furthermore, design, technology and games project owners could be looking for high amounts of money for their projects. Thus creating a boom or bust scenario.
My last chart (Figure 3) shows the correlation of success rate verses the percent of projects over $20K by category. I chose $20K because I felt it separated well the low budget projects from the high level projects. Again this design, games and technology have the strongest correlation.
We believe the two questions answered above for Kickstarter data: “which categories get the highest percent of their projects funded?” and “which categories raise the most money when funded?” are going to be very important questions for the crowdfunding for equity industry. Crowdlanding will be executing this analysis for the crowdfunding for equity industry and making it available. In this industry, everyone wants to pick the winner because it is in our best interest to do so. We want to pick both the winner of the crowdfunding experiment and the company that will return the most on our investment.
Venture capitalists are increasingly wary of the new Crowdfunding for equity industry unleased by the JOBS(Jumpstart Our Business Startups) and rightfully so. Crowdfuning takes the power away from a single or small group of individuals and shifts it towards a large number of peers, totally changing the investment capital landscape.
Rather than having the terms of capital financing being determined by venture capitalist, startups can now dictate how much control is given up and determine the creative direction of the venture. Until now, most VC’s have had very little competition in this area and have had a major say in how the startup idea is executed along with which ones would even be given an opportunity.
Crowdfunding over four forms: equity based, donation based, lending-based and reward-based, has raised over $1.5 billion internationally in 2011, the majority of which has come from the equity-based investments. The prediction is that number will double by the end of this year. Once the SEC formalizes its rules for the United States by December 2012 the growth is bound to skyrocket.
Most venture capitalists scoff at the mere mention of crowdfunding and do not see it impacting their firms in the least. If the growing trend of crowdfunding investing continues at it’s current pace, venture capitalists may end up loosing their foothold in the startup industry unless they adapt and change the status quo. Equity Crowdfunding is less than a fad and there are major changes on the horizon in the United States starting in 2013.
- On April 5th, 2012, President Obama signed the JOBS act into law which aims at easing securities regulations to help encourage the financing of small business ventures in the United States.
- Currently legal in the UK
- Legal in all 50 states after SEC regulations are finalized
- To help small business and startups quickly raise the capital they need
- Encourage and foster entrepreneurial growth
- SEC regulations are due to be out on or before December 30th, 2012
- Starting July 5th, 2012, businesses can raise up to $1,000,000 through equity crowdfunding but only through accredited investors (over $100,000 annual income) and with absolutely no solicitation
- Starting in early 2013, companies can start raising capital from all investor tiers through solicitation, in exchange for equity stakes.
- Individual entrepreneurs and small businesses can raise capital
- Individual Investors comprising of ordinary individuals will receive an equity portion most likely in the form of shares in exchange for the capital
- Entities raising capital can raise $1,000,000 over a 12 month period through a growing number of online portals such as PeoplesVC, CrowdCube, EarlyShares, etc.
- Investment guidelines so far are:
- Individuals earning up to $40,000 a year and a net worth of less than $100,000 will be able to invest up to $2000 annually
- Investors who earn between $40,000 and $100,000 and a net worth of less than $100,000 can invest up to 5% of their annual income.
- Above $100,000, Individuals can invest up to 10% of their income and are considered to be accredited