Segmenting the Investment Crowdfunding Market

It’s tough to navigate the competitive landscape of U.S. investment crowdfunding as new platforms come online each day. Looking to capitalize on the digitization of our private capital markets, they’re positioning across geographies, industry verticals, investor classes and/or motivations, and security types. Who’s who? What markets are they positioning for? And how to partition accredited vs. non-accredited crowdfunding?

I use a categorical framework to make sense of it all. It’s far from perfect so I’d love your feedback. But first, at a very high level, let’s break out accredited vs. non-accredited crowdfunding. An oversimplification, but for the sake of brevity:

Accredited Investment Crowdfunding

  • Crowdfunding from accredited investors
  • Selected platforms operating today under various exemptions;
  • Most waiting for implementation of Title II of the JOBS Act to begin funding (consensus is Q2 2013).

Democratized Investment Crowdfunding

  • Crowdfunding from anyone;
  • Selected platforms operating today under various exemptions;
  • Most waiting for implementation of Title III of the JOBS Act to begin funding (consensus is early 2014);
  • Perhaps democratized elicits an unfair emotional comparison. I imply nothing insidious about limiting to accredited investors. Maybe “open” v. “closed” crowdfunding, but I’m not sure that’s much of an improvement. Open to suggestions on the verbiage here :)

So the first question to answer for each investment-based platform is whether it’s positioned for accredited crowdfunding, non-accredited, or both. Some platforms are launching under Title II to support accredited investors with the intent of supporting all investors post-implementation of Title III; contingent upon conducive rule-making of course. Also to note: selected platforms, operating under various exemptions, are fundraising today. However, the lions share are waiting for Title II and/or Title III to kickstart operations. Additionally, a large number of reward-based platforms intend to move into investment based as well.

Next up is defining the market the platform is attacking.  This where the framework comes into play. I segment each platform into one of three buckets: (i) startups; (ii) small businesses (local); and (iii) niche. To be sure, this is just one perspective and there’s certainly spill over. The below graphic (click to enlarge) is for representative purposes only. By no means is it all-encompassing, or rank ordered.

Equity crowdfunding market

The competitive dynamics within each bucket merit a far deeper discussion, but I’ll punt that to later posts. Here’s a blue sky overview of how I look at each segment. The examples include existing reward-based platforms that I believe may have an interest in supporting investments as well.

Startups/General
These crowdfunding platforms are generalists and are positioned to crowdfund early-stage companies. Most are omni-vertical, but often with a towards technology. Naturally, almost exclusively equity-based. This is the most saturated segment, and has attracted the preponderance of mass-media attention as well. It’s likely the most immediately scalable segment as both sides of the market, investors and businesses, will be largely geographically agnostic. By casting a very wide net, the supply side is also attractive. That being said, competition will be brutal, and there may only be room for a few major players.  Winners will benefit enormously from market effects as investors follow deal flow, and deal flow follows investors.

Big questions here The role of Angel Groups/VCs/Accelerators in this ecosystem? Existing startup networks vs. new funding platforms? An integrated vs. fragmented market — who will be the face of equity crowdfunding for startups? I’ve linked to past writings that have touched on these questions.

Examples [New Funding Platforms] 40billion, 99funding, Cielex, ConfidentCrowd, Crowdbacon, Crowdfunder, Earlyshares, Efunder, Fundinglaunchpad, Hedgeable, FundersClub, Ibankersdirect, IRAvest, PeoplesVC, Poliwogg, ReturnOnChange, RockThePost, Seedinvest, Start.ac, StartupAddict, StartupValley, SterlingFunder, Symbid, Wefunder, Incrowdcapital [Existing Startup/Angel Networks] Angellist, Efactor, Equitynet, Fundable (startups.co), Fundroom, Gust, MicroVentures, RaiseCapital, Seedups, Pitchbrite

Small Businesses/Local
Personally, this is the side of the market I’m most excited about. These platforms are positioned to crowdfund traditional small businesses, mostly with existing operations.  The social implications are enormous as it stands to connect communities, through investment, in incredibly meaningful and impactful ways. (Local Ownership Makes Communities Healthier, Wealthier and Wiser.)

We’re seeing lots of early diversity here as platforms approach the market from a variety of perspectives. Debt, equity, revenue-share.  Local distribution will be a major challenge and cost so business development is likely to play a prominent role in scaling. Partnerships galore: localities, non-profits, microlending institutions, SBDCs, CDFIs, big banks, community banks and anyone else with existing small business distribution. A community more invested will be a community more engaged, and involved. Crowdfunding is a tool—and every community in America has a vested interest in using it. As an investor, I’m psyched to open my portfolio one day and see local businesses I walk by on my way to work.

Big questions here Role of banks? Localities? Via white labeling, the hyper-localization of community platforms? (E.g. communityleader, missionmarkets.) Will FundingCircle, the most successful small business crowdfunding platform in the world, move into the U.S. market? (USV, a NYC-based VC, also an investor in Kickstarter, invested in its Series B.) Will any existing U.S. peer-to-peer players (lending club, prosper, perform) move into the market? How about alternative lenders or matchmaking platforms (Lendio, Biz2Credit, Multifunding, OnDeckCapital, Kabbage, etc)? And those Chicago guys? Groupon has the distribution—its spent billions building it—and its now throwing everything but the kitchen sink down it to salvage the death of its core business. American Express? Summarizing: anyone who is aligned with small businesses likely has their eye on crowdfunding. The market won’t move the needle for big fish initially but as it matures in the coming years I have no doubt we’ll see some big splashes.

Examples Bolstr, Bridgepointemarkets, Cayzo, CommunityLeader, Cloudfunded, FunderHut, Fundlocals, LuckyAnt, Localstake, MissionMarkets, P2BI, RelayFund, RebirthFinancial, Smallknot, SocStock, SoMoLend, FundingCommunity (does not include the periphery players)

Niche
As the name implies, these platforms are carving out niches, mostly defined by their targeted industry. CircleUp‘s a prime example, focusing exclusively on consumer product and retail companies. Specializing by industry gives a platform unique advantages—platforms can augment their crowdfunding ecosystems by integrating more relevant and direct resources, aimed at companies and/or investors—and I suspect we’ll see a lot more activity here.  Leveraging domain expertise to curate deal flow will be common. It makes enormous sense for investors as it stands to reduce noise in the discovery and diligence process. A downside to verticalization is initial scalability. Particularly, if a platform markets curation as a key value-add its implicitly shouldering part of the burden of due diligence. A parallel to e-commerce: think eBay (non-curated) vs. GiltMan (curated).

Outside of direct industry verticals, an exciting sub-category is Creative. (IndieGoGo and Rockethub have both indicated interest in equity crowdfunding.)  The full power of creative investment crowdfunding can only be harnessed under Title III, but it’s still relevant under Title II. (Check out Slated for accredited film financing.) Imagine going to Sundance and being able to invest in your favorite films. On the spot. Or a concert where the band lets fans invest as little as $10 for a sliver of a percentage of digital sales on its to be recorded album. Experiential investing, I’m psyched! The return-profile on these experiential investments will likely be sub par. But so is that of any casino; and I love a game of black jack every once in a while, knowing full well I’m likely to lose my $10 shirt.

Another sub-category I’m fascinated by is “affinity.” I used to break this out separately but decided to fold it in. What are people passionate about? What’s their identity—how do they define themselves? Selected platforms are being built on, and differentiated by, these questions. Take for example University alumni.  They’ll be strongly biased towards investing in deals from their University, regardless other factors. Another example is veterans. Sprigster, reward-based today, will allow investors to fund the startup costs for veterans to open franchises. Very powerful social motivations at play. And business models need not be based entirely on funding. I can think of umpteen corporations that will want to be aligned with/sponsor cause-driven funding platforms. (Chipotle is a prolific sponsor of local foods events.)

Big questions here who will be the CircleUp for restaurants/bars? For gaming? On that note, whose the first to partner with Mattel or Hasbro ;-)? For industry abc through xyz? How does curation, and the burden of diligence, affect the dynamics of a platform?  Will verticalized niche platforms be forced to partner into investor distribution to remain economical, i.e. via a Secondmarket? In affinity/social niches, what will the role of social motivations be?

Examples Craftfund, Medstartr, Petridish, CircleUp, SolarMosaic, Healthy Crowdfunder [Creative] Rockethub, IndieGogo,  Unglue.it, Publslush, Authr, SeedandSpark, Slated, Picatic, Gigfunder, Togather [Real Estate] Crowdmason, Fundrise, Collaperty, RealtyMogul, Fquare, iFunding.co, SmallstreetUSA, Prodigy Network [Apps] Appbackr, Appslit, SellanApp [Affinities] AlumniFunder, Ufunded, Crowdismo, RepayVets, Sprigster, Upstart, Pave, ImpactCrowd, FaithLauncher

A work in progress
This framework is certainly still evolving. Its largest flaw is that it doesn’t account for the growth-stage of companies, i.e. early vs. emerging. Big differences here, and one could argue crowdfunding for emerging growth companies merits its own category given its unique attributes. I’m seeing significant interest/movement from existing broker dealers targeting emerging growth companies. Also, as mentioned, there’s spillover. Earlyshares is targeting startups, small businesses, and struck a partnership that positions them for film financing as well.

All in all, I hope this is helpful in mentally segmenting and making sense of the myriad investment crowdfunding platforms competing in the market. As always, would love to hear your feedback. And if you found this helpful, I really appreciate shares!

About Jonathan Sandlund

Founder, TheCrowdCafe

  • Great start. Healthy Crowdfunder falls under niche health, accredited investors only until rules for non-accredited are in place, early revenue stage and growth stage companies, development stage businesses are acceptable under right management.

  • Jonathan, great synopsis of types of players in the emerging crowdfunding industry. We’re trying to sort through and segment between crowdfunding portals (RockThePost, SeedInvest, EquityNet, Early Shares) and crowdfunding infrastructure providers (more Platform-as-a-Service) (Community Leader, CrowdForce, invested.in) Would love to hear your thoughts on that as well.

    • Thanks, Bo. You raise a great point. I’m actually pretty bearish on most of the PaaS providers. It’s a saturated space, and the technology is becoming more and more commoditized by the day.

      Additionally, I think some of the major platforms will eventually white label or license out their own platforms. And it won’t just be the technology, but the processes, learnings and compliance. We’ve seen this in the U.K. with CrowdCube who has a robust partnership program in place, and in the Netherlands with Symbid. (Crowdcube may very well move into the U.S. market.)

  • Jonathan, I think you should add another category: “Own network/community” (have to find a good name for it). These are platforms that are started by organizations that have a community already. For example NGOs that want to add crowdfunding as a fundraising tool for their own projects or local governments that start their own crowdfunding platform. These platforms are not focussed on a niche, but only on a small group or people in their own community. Sometimes of these platforms have just a few projects a year, and some of them have 1000s of projects, just like a “normal” crowdfunding platform

    As the largest crowdfunding infrastructure provider from Europe (WEBclusive), we see a very fast increasing demand from NGOs and organizations with an established community that want to offer their own community these crowdfunding solutions.

    • Ronald,

      Very interesting insight! Thanks for sharing. Are you seeing any NGOs integrate impact metrics into their platforms (i.e. fundraisers list impact goals just like a company would list revenue goals)?

      Is supporting security crowdfunding on your roadmap?

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  • HerwigK

    In 3 months you should see if you can update this. It would be great to look back at all this and see the incredible growth.

    In my research I have found more than 50 equity focused, U.S. based websites already.

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