Pioneering New Markets Ain’t Cheap. Crowdinvesting Platforms Fill Their War Chests.

Investors are piling into investment-based crowdfunding platforms globally. OurCrowd (equity-based / startups) announced its monster $25M Series B last quarter, right on the tail of CircleUp (equity / “everything but tech”) and RealtyMogul‘s (equity + debt / real estate) $14M and $9M rounds, respectively. (Each led by Canaan Partners, also an investor in LendingClub.) And less we forget Angellist‘s $24M raise in late 2013.

I’ve received quite a few inquiries around who else is getting financed—and where—so I pulled together a list of publicly announced financings by investment-based crowdfunding platforms globally. A few caveats:

  1. I’m certain to have missed some announced financings, particularly outside the U.S. where my reach isn’t as strong.
  2. Not all companies publicly announce their financings.
  3. Correlating traction with funding can be dangerous. Exercise caution here as some platforms, Gust and Fundable for example, have self-financed to-date.
  4. My focus is on business crowdfunding so I’ve excluded peer-to-peer lending platforms.

Caveats in hand, you can check out the data below.

I’ll punt on a more detailed analysis for now. But I will say this: pioneering these markets requires insane access to capital. Platforms don’t have the luxury of taking an existing product, improving it, and selling it to an educated consumer. Rather, they’re selling a new service to uneducated consumers. Furthermore, not just one type of consumer, but two: issuers & investors.

I’d venture to guess ~80% of issuers are uneducated (first time raising capital), along with 50 – 90% of investors (first time investing in the private markets), depending on the marketplace structure. What this means is that platforms can’t just acquire & convert new customers. They have to (i) educate; (ii) acquire; (iii) educate again; and then (iv) convert. *

Acquiring customers, especially investors, therefore, becomes quite expensive. (Acquisition costs is a topic for a future post :) Amazon encountered similar challenges scaling an uneducated market. It accrued more than $1 Billion in losses (about that insane access to capital!) between 1995 and 2002 as it educated consumers on a fundamentally new & different shopping experience—”How do I know the product will arrive?” “Credit card information online?” “How do I know how it fits?” “What about returns?”—and built the infrastructure to deliver it.

Thankfully, infrastructure is cheaper and consumers are more digitally comfortable. But there’s something else we must consider. Another variable. Something I rarely hear people talk about, but which I think is the greatest challenge this market will face as it scales.

If you look across the universe of Billion dollar internet companies, including Amazon, nearly all of them reflect the same pattern: take an existing human behavior, move it online, and make it more efficient.

  • Amazon buying stuff;
  • eBay selling used stuff (garage sales);
  • Paypal paying for things;
  • Match dating;
  • Facebook socializing with friends;
  • LinkedIn professional networking.

Amazon didn’t have to convince people to buy books, they just had to convince them to buy them online.

The same can’t be said for investment crowdfunding. (Noted exception: platforms consciously targeting only existing private investors.) Outside of .1% of the population, investing directly in private companies is not an existing human behavior. And herein lies, in my opinion, the greatest challenge (and opportunity) of all. Specifically for platforms serving retail investors, or with the aspiration of doing so. They must introduce, condition and culturally imprint an entirely new human behavior.

Man am I excited about this challenge :-). It’s what excites me the most, and, if even in the smallest of ways, I hope to help solve it. How we inspire people to behave in a new way? How do we take investing—something most people today associate with pain, confusion and frustration—and create a new experience so amazing, so compelling, that it becomes a cultural norm. So that 20 years from it won’t be uncommon for friends to meet for drinks at a bar they co-own. Or see a film they’ve helped finance. Or drive by a solar farm they lent to. A day when the investments we make reflect the things we enjoy, the people we know, the places we live, and the changes we believe in.

* Debt-based platforms are unique as the educational hurdle is significantly lower. While a new FundingCircle lender may be lending to a private business for the very first time, his/her experience will be much simpler, and more familiar, than private equity (liquidity, a market-set price, empirically-based return expectations, etc.). 

About Jonathan Sandlund

Founder, TheCrowdCafe

  • No question about it Jonathan, you always nail it, and your observations are right on track.

    In my opinion the reasons peer-to-peer lending is doing so well:

    1- Anyone, even non-accredited investors, can lend and they can lend any amount anytime

    2- A company can get a loan with less regulation than selling equity

  • Mark Easley

    Hi Jonathan, thanks for the interesting post and database. I think you hit on an important observation that debt based platforms and offerings are very different and starting to diverge from equity. I hope you can explore that some more in a future post. Keep up the good work.

  • Amine Tayara

    Jonathan, your statement “A day when the investments we make reflect the things we enjoy, the people we know, the places we live, and the changes we believe in.” hits the nail on the head. That is what crowdfunding is all about.

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