US Crowdfunding in 2014

Bill Payne , Angel Investor , Frontier Angel Fund

4 May 2015

Crowdfunding is the practice of raising money for a project or venture from a large number of people utilizing an Internet website or platform.  Funding from each individual can be quite small, $10 or less, although some projects have much higher minimums.  Projects include films, musical recordings, new companies, products, inventions, personal causes and many others.

Since the JOBS Act was signed by President Obama in 2012, the subject of crowdfunding has elicited much hype and, frankly, significant misunderstanding among entrepreneurs and those investors who fund startup companies.  I have personally struggled with comprehending this marketplace, and must admit that I still can’t decide if crowdfunding is one word – or two!  So, several months ago I decided to attempt to categorize and quantify the size of the crowdfunding market in the US in 2014.  I was especially curious about how crowdfunding was beginning to impact angel investing, my personal passion.  This blog is the result of my efforts.

Crowdfunding seems to be concentrated in the following segments:

• Donation-based – philanthropic or sponsorship-based incentive

• Reward-based – non-financial reward, token gift (t-shirt, coffee cup) or product discount

• Lending-based – interest plus repayment of the original principal

• Real Estate equity and debt – accredited investor aggregation

• Equity-based – funding in exchange for a percentage of equity

– For accredited investors only

– For everyone

And after scouring international reports, company websites and other sources, I arrived at the following 2014 totals for crowdfunding in the US in each category:Firm data was only available from a few firms, such as AngelList, FundRise, Lending Club and Kickstarter.  The rest are industry estimates and guesses on my part.  But, I think the totals in billions of US dollars in the second column is relatively accurate.

I suspect the Donation crowdfunding category is much larger.   Here are just a two examples of campaigns that would probably not be included in such totals:  (a) The Clinton Bush Haiti Fund which raised $544 million from more than 2,000,000 individuals, businesses, and organizations in 2012.  A significant fraction was raised online or from use of Twitter.  (b) United Way raised over $5 billion in 2014, with 10 million donors, many of whom contributed online.  One could only guess that a broad definition of donation crowdfunding in the US could eclipse all other categories.

A small fraction of Rewards crowdfunding has become an interesting opportunity for entrepreneurs to pre-sell products and demonstrate customer interest (or market validation).  Only about 5% of Kickstarter campaigns are for technology projects, but some of those campaigns have created significant interest among potential investors.

The Lending category of crowdfunding is exploding.  Peer-to-peer lending is huge and growing rapidly.  Nesta reports that peer-to-peer lending represented about 3/4 crowdfunding in the UK in 2014 – similar market domination as in the US.  The Lending Club IPO in 2014 brought significant awareness to this category.

Real Estate crowdfunding burst on the scene in the past few years.  Very little information was available on this category.  This category was pegged by some observers at $1 billion in total size in 2014 (including both equity and debt funding).

Equity crowdfunding is the smallest category in this list at about $300 million in total for 2014.  AngelList, the largest platform in the category, reports just over $100 million invested in about 250 startup companies.  Equity crowdfunding represents about 4% of total crowdfunding as reported above.  Equity crowdfunding was reported as about 5% of all crowdfunding in the UK in 2014 and 4-6% of crowdfunding in Europe in recent years.  Equity crowdfunding in the US is limited to investment by accredited investors.  However, the public equity crowdfunding is legal in several jurisdictions in Europe (including the UK) and hasn’t seemed to move the needle (as a fraction of all of crowdfunding).

SUMMARY

Total crowdfunding in the US in 2014 appears to have been about $7.5 billion and, based on total market size published by Massolution, about 50-60% of the world market.  The Lending category is by far the largest in the US (and elsewhere), while real estate crowdfunding seems to be growing very rapidly in the US.  Rewards crowdfunding, while a significantly smaller category, is recognized by investors as a valid opportunity for entrepreneurs to demonstrate demand.

Equity crowdfunding in 2014 in the US was about 4% of total crowdfunding, similar in market share to European markets.  Total equity crowdfunding by accredited investors in the US is just over 1% of total angel investment in the US, reported as a $25 billion marketplace in the US by J. Sohl.

Equity crowdfunding is not legal for US public investors (limited to accredited investors only).  However, the US Securities and Exchange Commission is expected to release regulations on unaccredited investor crowdfunding in the US (as authorized by the JOBS Act) within the coming 12 months.  The impact of public crowdfunding on the startup ecosystem is unknown.  Market expectations of the effect of legalizing crowdfunding by the public in the US are large, however, in Europe where public crowdfunding has been legal for several years, investment by the public has been less than anticipated.

(This blog is based, in part, on a presentation made by the author at the 2015 Summit of the Angel Capital Association, April 15, 2015, in San Diego.)

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