- Out of 6,375 companies that have executed Reg CF and Reg A+ campaigns since 2016, KingsCrowd has tracked a total of 77 investment exits (1.2%) and 186 failures (2.9%)
- Exits to date: IPO (21), M&A (49), repurchase/return of capital (7)
- Failures to date: Asset Sale (15), Bankruptcy (8), Shut Down (160), Paused Operations (3)
- Note: the actual failure and success rates are both slightly higher than reported. KingsCrowd only tracks exits and failures that are publicly announced, that are shared with us, or that we are able to determine from a company’s website and social media. Our complete database of exits and failures can be viewed here.
- Both exits and failures occurred a median of 28 months after their first investment crowdfunding raise and a median of 16 months after their last investment crowdfunding raise.
- 21 issuers (0.3%) appeared to have shut down and returned no capital to investors within just 120 days of their last raise’s close date. Investors should be on the lookout for “raises of last resort”.
- 2022 and 2023 saw a spike in startup investment failures – mostly distressed asset sales and shut down businesses – as interest rates rose sharply. Companies saw downturns in their business and/or were not able to raise subsequent capital and had to shut down.
- There have been a small number of crowdfunding IPOs to date: 21 IPOs, or 0.3% of all past issuers. However, very few crowdfunded stocks have performed well post-IPO in the climbing interest rate environment and without significant investor demand.
- While 186 failures to date in investment crowdfunding may seem alarming to new investors, that is actually quite encouraging for several reasons:
- That’s only a 2.9% failure rate among all companies that have raised capital via Reg CF and Reg A+ (and some Reg D). That’s far below the average failure rate of 60% for Pre-Seed/Series A startups.
- Considering Reg CF only launched in May 2016, the average Reg CF company is still relatively young (median 2.3 years since closing their offering, and 5.4 years since founding). And startups tend to fail in the early years, while positive exits generally take longer (8-12 years on average for angel investments with over 10X returns).
- The count of shut down businesses include companies that raised both equity and debt – and debt companies don’t typically have an “exit”. So the relative number of positive outcomes for equity-backed companies is higher than the numbers indicate.
- The takeaway: it’s still in the very early days of Reg CF and Reg A+. Many of the best-performing companies on paper are continuing to grow. Traditional angel investments that return 10X or more take 8-12 years on average to exit, so we’re still likely several years away from more significant positive exits.
How do crowdfunding exits and failures to date compare to angel investing?
Putting all the events into just two buckets for exits and failures, we can observe that there generally have been more negative outcomes (186 failures) than positive outcomes (77 exits) since 2018.
In the following chart, we define exits and failures as the following:
- Exits: IPO, M&A, repurchase/buyback, or return of capital
- Failures: Asset Sale, bankruptcy, or shut down business
Detractors of the industry would be quick to look at that data and exclaim “Aha! Just as we predicted, regulated investment crowdfunding is a trap to get retail investors to part with their hard-earned money by investing in companies that won’t provide positive investment returns! Told you so!”
I’d say: not so fast.
Let’s consider a few of the following situations and counter-arguments:
- Compared to Pre-seed/Series A deals that experience a failure rate of 60%, having a failure rate of only 2.9% is astonishingly low.
- When it comes to investor portfolio returns, overall returns will be governed by the magnitudes of the exits (thanks to the power law), not the quantity of exits vs. failures. That is, a single 10X return in a portfolio can make up for 10 failures.
- The median age of all closed investment crowdfunding raises is only 2.3 years. This means that half of all investment crowdfunding deals occurred in the last 2.3 years. And citing one of my favorite charts (see below) from an angel investor study conducted in 2017 by Robert Wiltbank, it is readily apparent that most startup investment failures tend to occur early, while really large winners – i.e. 10X+ returns – will take an average of 8-12 years to realize. Thus, we’d expect to see more failures earlier in the industry’s lifecycle.
- Lastly, the fact that the last two years (2022-2023) saw some of the quickest shifts in rising interest rates and investor sentiment, I’m somewhat surprised we haven’t actually seen more failures than we have. It’s not unreasonable to expect that as the economy continues to normalize and investor sentiment turns around again, that we may see a decrease in failures and more positive exits.
In a study by Robert Wiltbank titled “Tracking Angel Returns“, he looked at angel investing data across 245 exits and failures. Some of the key takeaways:
- The overall mean return multiple was 2.5X over 4.5 years, a 22% IRR (see our article here to dive into potential returns we might expect from equity crowdfunding)
- 10% of the exits generated 85% of all cash (see point 2 above)
- The failure rate was 70% of all investments (giving more credibility to why 2.9% so far is an extremely low failure rate for investment crowdfunding)
- While the average holding period (e.g. time to exit or failure) was 4.5 years, the following chart shows that the failures (7 out of 10 investments) occurred in 3.5-4.6 years on average, but the really large exits – i.e. 10X or greater – took 8-12 years on average.
Outcome Distribution Prior to Aggregation. From “Tracking Angel Returns” by R. Wiltbank, 2017, Angel Resource Institute, p. 18, https://angelresourceinstitute.org/reports/tracking-angel-returns-2017-update.pdf
To me, this says that we should expect many more failures (and smaller “wins”) in the early years. While many of the larger investment exits will take much longer on average.
For an industry (Reg CF) that literally didn’t start until 2016 and has had 50% of all deals just close within the past 2.3 years, this tells me that we haven’t even started to see some of the massively successful exits that one might expect if it follows a similar trend to angel investing.
In summary, the negative investment crowdfunding outcomes have actually been much less than would be predicted by traditional angel investing and venture capital investing statistics (2.9% vs. 60-70% failure rates, respectively). And there are still a few years to go to see how the industry and investments mature before we might expect to start seeing some massively successful exits for investment crowdfunded companies. For those reasons, we continue to be optimistic and excited for the potential future of investment crowdfunding.
