Welcome back to the KingsCrowd series on defensibility by product type. A few weeks ago we dove into what defensibility means for private investors. We also looked at how much investors valued defensibility in software companies. As a refresher, defensibility can come in a variety of forms. Patents, for example, protect certain intellectual or physical property rights. Other forms of defensibility include existing in a market with high barriers to entry — perhaps accompanied by legal or regulatory hurdles — or requiring massive amounts of data.
This week we isolated Hardware/CPG (consumer product goods) companies, accounting for 96 total raises. As with the overall Merlin company scores, KingsCrowd’s defensibility subscores range from 1.0 to 5.0 in increments of 0.1. As a proxy for success rate, we looked at the amount of funding companies in each category acquired at the close of the raise. This data is reflective of all confirmed closed Regulation Crowdfunding (Reg CF) equity raises tracked by KingsCrowd.
It appears that when compared to software companies, hardware companies’ defensibility sub-scores correlate more closely with amount raised. The two highest raises in the data at $3.9 million and $4.9 million had defensibility subscores above 4.0. Additionally, the three rounds with the lowest amounts raised all belonged to the defensibility subcategory rating group below 2.0. Only one hardware/CPG company had a defensibility subscore between 3.0 and 4.0.
The 2.0 to 3.0 defensibility rating group had a wide spread when it came to amount raised, ranging from $12,000 to $1.5 million. This category accounted for 23 raises total. More than 55 total companies fell into the defensibility subcategory below 2.0. Despite being the category with the most companies in total, funding for hardware/CPG companies with defensibility scores below 2.0 had a lean spread. This is in direct contrast to software companies that rated below a 2.0, which had the largest spread of all the software groupings.
Overall, this may indicate that defensibility matters more to private investors when the company in question is providing a hardware or CPG product. Perhaps investors weigh metrics like market size more heavily when it comes to software but want to see physical assets protected by defensibility stamps like patents. Stay tuned for the coming weeks when we dive into the final two product types: pharmaceuticals and services.
Note: all data used for the Chart of the Week comes from the KingsCrowd database and represents a snapshot of the crowdfunding market.
Wall Street has Morningstar, S&P, and Bloomberg
The equity crowdfunding market has KingsCrowd.
About: Olivia Strobl
Olivia comes to KingsCrowd with a background in venture capital and technology. She spent time at Glasswing Ventures, an AI-focused venture fund in Boston, before joining the KingsCrowd team. There she helped develop machine learning algorithms for the opportunity qualification of preseed and seed-stage startup companies. Prior to her time at Glasswing, Olivia worked in a lab studying the neural correlates of attention. She holds a degree in Neuroscience from Wellesley College.