More Good Companies Crowdfunding Than Ever

Hey everybody.

I just got back from the Reaching Retail conference in Miami, run by a good friend of mine in the newsletter industry, John Newtson.

His events are—for my purposes anyway—the best.

Catching up with old friends at the Reaching Retail conference in Miami.

I reconnect with peers to hear what they’re seeing in the worlds of financial newsletters, crowdfunding and marketing, and I always learn a few things, as well.

So I was particularly surprised when, on a panel I was participating in, a well-respected colleague in the newsletter space said he wouldn’t recommend crowdfunding deals to his subscribers.

He briefly mentioned the need for liquidity for these deals, which is definitely something we need to see more of in the crowd space.

Making new friends at the Reaching Retail conference in Miami.

But by the same token, many of these companies are by definition early stage, and being willing to wait years for a potential payout is part of the point.

If the companies were big enough to be ready to go public, you wouldn’t be able to get them for the low prices that you often can.

You can’t achieve bigger potential rewards without bigger risk.

So that’s not what bothered me.

What bothered me was that he proceeded to say he doesn’t recommend Reg A or CF deals to his readers because “there aren’t any good companies” using Reg A and CF to raise funds.

Now, he’s definitely not the first person to say this.

And he’s not the first person to be wrong.

I’ll admit, during the first few years of crowdfunding, well, I won’t say they were all BAD companies. There were plenty of great ideas for businesses coming to market and raising funds.

But there were certainly plenty of REALLY early companies using crowdfunding.

Many were not just pre-revenue, but weren’t even close to coming to market.

But now, on average, that just isn’t the case anymore.

So, I quickly jumped into the conversation, and talked about how, over the past few years, some very respectable companies have used Reg CF and Reg A to raise capital.

Companies like Substack.

And Angel Studios, the group behind runaway Amazon phenomenon The Chosen.

And Fundrise, the real estate investing platform.

And Chicken Soup for the Soul Entertainment.

Setting the record straight.

But, as shown by data provided by our good friends at CClear, the level of health and maturity of companies using crowdfunding has continued to improve over the past few years, to the point where the majority of them are now revenue-positive, and a very large percentage of issuers also consist of businesses that have been in business for at least three years.

Here's the proof:

Data courtesy of CClear

CClear has scraped the data for every Reg CF issuer since 2016, when the first companies began to use investment crowdfunding.

The darker bands in each bar are the share of issuers who were revenue-positive when they ran their crowd offerings.

The orange bands are the share of issuers each year who CClear categorized as startups, by which they mean businesses who have been in existence for less than 3 years.

The blue bands are the established companies, or those which have been around for 3 years or longer, which theoretically should be a safer bet, since so many businesses fail in their first year.

If we add the dark (post-revenue) bands for each color, we can see that post-revenue issuers have risen steadily from just over 37% back in 2016 to 62% this year.

And just as importantly, the portion of the issuers with sales who use crowdfunding have more than doubled over the same period, ramping from 20% to over 45% of crowd issuers!

And who is giving up that market share?

It’s the riskiest group: pre-revenue startups, who are down from 56% to 27% of the total over the same period.

Now, could someone argue that some of these companies might have other problems aside from sales or how long they’ve been in existence, that might cause someone to conclude that they might not be the best investment?

Of course.

But no one would argue that sales, and in particular, sales combined with length of existence are, in a vacuum, not desirable qualities for an investment.

And the data above shows that those very important qualities have been steadily rising for crowdfunding issuers, and that companies with sales now nicely outnumber those that have no sales.

Also, when we say “sales”, what does that mean exactly?

Probably that the company sold a few units to the CEO’s neighbors for a few grand, right?

Turns out, not so much.

CClear looked at that too.

And as of last year, crowdfunding issuers averaged annual sales just shy of $1.0 million (see table below).

Data courtesy of CClear

And again, that number has also been rising steadily, and pretty dramatically.

Since the early days of crowdfunding, average Reg CF issuer sales are up nearly five-fold.

Now obviously, we’re talking about investing in early-stage companies here.

Risk comes with the territory.

But when you stack these deals up against all of the microcap companies with tickers trading OTC or on the Pink Sheets, I think there’s a very good chance that the percentage of Reg CF issuers with sales might beat the percentage microcaps with sales.

So the next time you hear somebody say that crowd issuers are a worse deal than your average microcap…

Well…

Just ask them to show their work.

Sean Levine

InvestmentX