From Crowdfunding to IPO: Evaluating Startup Performance in the Modern Market

An Initial Public Offering (IPO) is the gold standard for a startup exit. This is also when early-stage investors can sell their private shares and “realize” private investment gains. In this article, we want to review how crowdfunding IPOs have performed compared to the broader IPO landscape.

I. Public Market IPOs

Since 2020, all IPOs have been down substantially from listing price, and getting worse year-over-year. The world has been through major shocks in the last three years, mainly from the COVID-19 pandemic. The pandemic disrupted supply chains and caused the downfall of many companies, particularly in the automotive, manufacturing, and retail industries. Therefore, it is unsurprising that IPOs are down quite heavily from this time

II. Technology IPOs

To fully understand Tech IPO performance, we should first start at the outbreak of the COVID-19 pandemic. In March 2020, the entire stock market entered a free fall. All sectors fell sharply as the world grappled with this new disease. 

To try and curb an entire collapse of the American economy, the Federal Reserve began a stretch of severe interest rate cuts, which neared 0% in Q4 of 2020. This led to a sharp rebound in prices, with the S&P 500 returning to pre-COVID levels within months of March 2020. Low interest rates and a growing stock market set the stage for a valuation bubble, which hasn’t been seen since the dot-com bubble. Unprofitable (and even pre-revenue) startups consistently received unicorn valuations ($1B+) as investors had a higher appetite for risk than ever before, and companies could demand exuberant valuations.

It is, therefore, no surprise that 2021 and 2020 Technology IPOs are down an average of over 50% and 30%, respectively, from the listing price. Technology IPOs are generally high-growth (and often unprofitable) companies attacking a huge market and, therefore, usually priced based on upside potential. When there is a downturn in the economy OR interest rates rise, investors become risk-averse and pull money out of riskier companies. Additionally, high-growth companies are priced based on future cash flows. When interest rates rise, these future cash flows are worth less, and valuations plummet. This means that Technology IPOs are usually the first to suffer from investor pullback. And with the raging inflation and an unprecedented streak of interest rate hikes in 2023, the tech sector is still experiencing even further poor performance. 

You may also remember seeing several tech companies like SoFi, Robinhood, and Virgin Galactic going public in the last several years. These companies are backed by some of the world’s largest VCs, like Andreessen Horowitz, and are all down 80%-90% in value. Given the macroeconomic conditions, this shows that some of the most well-known big tech companies have faced significant stock market declines over the last couple of years.

III. Equity Crowdfunding (ECF) IPOs

Finally, this brings us to why you are here: equity crowdfunding IPOs. First, let’s define what the equity crowdfunding market truly is at its core. Equity Crowdfunding is a way for small, usually unprofitable (or pre-revenue) companies to raise money from retail investors to supplement their cash on hand. These are essentially nano-cap companies that will fail at a 90% clip. This should not surprise you. This is startup investing we’re talking about here. Even the most successful VC fund managers pick 60-80% losers on any given year. Anytime an equity crowdfunded company goes public, it is a big deal…to us. But you must remember that equity crowdfunding is still a tiny fraction of the overall capital markets. While it may be a big deal for those in the industry, it isn’t for the rest of the investing world. The industry isn’t big enough yet to capture the attention of major institutional players that trade millions of dollars daily. As a result, equity crowdfunding IPOs tend to see major selloffs once the IPO-pop has worn off due to early investors cashing out and without major demand for the stock from larger institutional investors.

Speaking of an IPO-pop, let’s sidebar for a second to explore this further.

IPO Pop

All IPOs, ranging from Facebook to Walmart, often have a sharp initial rise in the stock price during the first week. Investment bankers price IPOs in this way on purpose. A first day gain gives the company momentum and can allow IPO investors to cash out quickly. 

We saw this with Monogram (Ticker: MGRM), whose stock rose over 400% on day 1 of trading. This is a normal phenomenon for IPOs exacerbated by the fact that equity crowdfunding companies are essentially nano-cap stocks that are more prone to volatility and less liquid. Therefore, the MGRM stock (or any stock for that matter) quickly falling back to below its IPO-price should not be cause for alarm.

Performance of ECF IPOs

Equity CF IPOs are down 80% on average from listing prices. There are many, many reasons why CF IPOs are trading at worse declines than the Tech IPO sector more broadly.

Firstly, companies that have utilized ECF are generally much smaller than the typical IPO-company profile. Therefore, they trade more like nano-cap stocks with high levels of volatility. We are in a down market…therefore, these stocks will have higher volatility (in the negative direction nowadays) than other mature Tech companies that have IPOd. 

Yes, this also means that in a growing, expanding economy, it is likely that some of these stocks will have higher volatility in the positive direction, giving you better returns than your average tech IPO. Equity crowdfunding IPOs are basically early-stage startups raising money in the public markets. As we have discussed, IPOs fluctuate in sync with the overall economy. We are in turbulent times, both economically and geopolitically. Equity crowdfunding startups will fluctuate in the negative direction more drastically than mature, cash-flow-positive companies. 

However, once the economy begins expanding again, investors should expect outsized returns in the positive direction. In fact, if you believe in some of the companies we will discuss below, now could be as good a time as ever to invest while these assets are undervalued. A dip in the market always presents an opportunity to find value and many of these companies are actually doing quite well from a financial performance perspective. 

Bright Spots In The ECF IPO Market

It is easy to get lost in a company’s stock performance and neglect looking at true financial performance. This is especially true with ECF IPOs. Let’s dive in further. 

CaliberCos went public in the spring of 2023. This company decided to tap the public markets because of the growth capital it would provide to lean into larger growth opportunities. 

The company has already shown year-over-year growth since 2022. In the nine months of January through September, the company has shown revenue growth of 7.2% from the same period in 2022. The company is not faltering at all, yet the stock price has been following the same trajectory of most Tech IPOs these days. That is our economic environment, so there is no reason to panic whatsoever on the performance of its stock price. 

Now let’s look at Knightscope. This company IPOd in January 2022, showing remarkable year-over-year revenue growth. From January through September 2023, the company has shown 198.2% growth from the same period in 2022. Knightscope is still growing like a startup despite being publicly traded. The company is holding its own and continuing to execute in growing its top-line, while continuing to increase its margins. However, its stock price has fallen victim to the overall macro-markets. It is nothing to be shocked by and represents a great opportunity to double down your investment in the company.

The truth is that all tech IPOs have been slammed, whether you are the darling called Robinhood or the small micro-cap like Knightscope. 

And the brightest spot of the ECF IPO market is that almost all of them IPOd at significant markups to the earliest equity crowdfunding round.

The Reality Of The IPO Markets – A Side-by-Side Comparison

At the end of the day, the IPOs of the last few years simply have not fared well across the board outside of a few outliers. In case you don’t believe me, let’s do a side-by-side comparison of two IPOs and the equity crowdfunded equivalent.

Atlis Motor Vehicles vs. Rivian

Atlis Motor Vehicles (Ticker: NXU) raised six rounds of equity crowdfunding between 2018 and 2022. The company initially aimed to deliver an electric pickup truck that could charge in less than 13 minutes. However, the company was plagued with slow development times and decided to pivot away from delivering a truck and instead focus on developing and selling its battery technology.

Atlis went public in 2022 and is currently down 99.9%. 

Rivian (Ticker: RIVN) is a popular electric vehicle company focused on manufacturing off-road EVs. The company is dealing with major supply chain issues and running a very unprofitable business. However, despite this, the company is delivering vehicles (albeit with long wait times) and generating billions of dollars in revenue.

Rivians stock is down 70% from its 2022 IPO. 

These two companies began as car companies, with Atlis pivoting away (for now) from developing actual vehicles and instead focusing on technology. Both have experienced similar issues and have both taken absolute beatings since IPO. 

The issue is not that Atlis is an equity crowdfunded company. The issue is that major disruptions to the motor vehicle sector wreaked havoc on stock prices like Atlis and Rivian.

Another crucial factor in assessing investor returns is timing. If you had invested in Atlis’ first Reg CF round, you got in at a $2.9 million pre-money valuation and $0.29 share price. Compare that with the final Reg A+ raise that Atlis ran before going public, at a $1.9 billion pre-money valuation and a $27.50 share price.  Since it IPOd at $29 per share, later-stage Reg A+ investors barely broke even or lost money, while the earliest investors had the potential for huge gains. While Reg CF investors may have been locked up and unable to sell for a few months (a dynamic we’ll investigate in future articles), some early investors undoubtedly managed to lock in massive gains despite the stock now being down 99%.

CNS Pharmaceuticals vs Scopus BioPharma

CNS Pharmaceuticals (NASDAQ: CNSP) raised over $600,000 on Republic in 2018. The company touted to be developing breakthrough technologies for central nervous system cancers. The company’s flagship product, Berubicin, was in Phase I trials at the time of the Republic raise. Today, the drug is in an ongoing Phase II trial with very promising early results. 

However, the stock is still down over 99% from its listing. 

Let’s look at a similar company that did NOT raise equity crowdfunding rounds: Scopus BioPharma. The company IPOd in 2020 and is also developing targeted immunotherapies for treatment-resistant cancers. The company is also pre-revenue and turned to the public markets for funding. 

The stock price? Down 99% from IPO. 

These are two identical, pre-revenue companies. The only difference is that one raised money on the equity crowdfunding markets. Again, CNS being down 99% has nothing to do with being an ECF company.

There are countless other examples of companies with ECF equivalents that have been hammered since IPO. Therefore, claiming that equity crowdfunded companies perform poorly at IPO is unfair. 

The Final Takeaway

Whether we like it or not, equity crowdfunding is still in its infancy. There have been only 14 IPOs of companies that have raised in the online private markets. This is a very small sliver of companies that have IPO’d over the years. And many of the ECF companies should have waited longer to IPO given that the best IPOs generally occur 8-10 years into a startup’s journey. 

The bottom line is that it’s easy to just look at these IPOs’ performance nowadays and think that ECF companies are and will always be poor performers. However, as we have discussed, many factors influence the performance of ALL IPOs: Economic/Geopolitical issues, industry-specific issues, pandemics, volatility of micro-caps, and more. 

Additionally, 13 out of 14 ECF IPOs happened in 2021 or later. It has been just two years for most of these companies, and there is nowhere near enough time to determine how these companies (and in turn, stock prices) will perform over the long term. Even some of the most well-known companies, like Walmart and Google, had very small gains in the first few years after IPOs  

Stay the course. If you believe in this industry as we at KingsCrowd do, you will see the equity crowdfunding market mature, and the returns will follow. Even in the most challenging of markets with microcap companies that probably went public too early, we have seen some early signs of promise. Most importantly, this brings up one of the most important points: investing in startups is a rollercoaster of ups and downs and is a very long game that takes time.