The assumed goal of any equity crowdfunding campaign is reaching the target offering minimum –it’s how we define the success of an offering. Reach that goal, and you’ve run a successful offering. Fail to reach the goal, and it’s back to the drawing board.
The question then is how does a Company get to that goal – Do they reach their goal with a large quantity of small dollar investors or a small number of large pocketed benefactors? The rules set forth by Regulation CF would appear set up to result in a scenario where these offerings are reaching their goals as a result of investment across a wide array of investors investing smaller dollar amounts.
Putting aside the extreme scenario where a single wealthy investor props up an investments with a goal of under $107,000, crowdfunding offerings require, at a minimum, at least a handful of investors. So what does the data tell us? Let’s look:
It probably makes sense to start at the top, looking at investment at the individual offering level. Using offerings launched in October 2017 through February of 2019 (removing random outliers for a total sample of 669 offerings) and data from the last data point of the offering period, we get some interesting insights to build on.
Splitting the population of firms at the Success/Failure level, we can see that successful offerings attract, on average, 150 more investors than offerings that fail, and 75 more investors than the overall average of the population.
Looking at the extremes from the successful offering population, the offering that succeeded with the smallest number of investors needed only 3, while the offering that succeeded with the largest number of investors needed 3,034. The median successful offering closed with 84 investors. So it would appear that the successful offerings are able to attract a fair number of investors. But what about the dollars these offerings are attracting?
On average, these 669 offerings attracted $786 per investor, which represents an amount that is 5.0x the offering’s minimum investment amount. Splitting again based on whether or not the investment was successful, we see a pattern emerge similar to that of total investors.
Successful offerings were able to attract $934, on average, while unsuccessful offerings garnered only $638 per investor.
These amounts represent 6.2x and 3.8x above the offering’s minimum investment amount. Therefore, unsurprisingly, successful offerings attract not only more investors, but also more investment dollars per investor. These investors also appear more willing to invest significan tly more than the offering minimum.
Moving down a step from the top-level analysis it next seems most interesting to look at how this pattern adjusts over time. Existing academic research has looked at patterns in crowdfunding investment over time (Kuppuswamy and Bayus, 2013; Hornuf and Schwienbacher, 2015), noting much of the investment comes during the first week of the offering and levels out over time.
The data here supports this notion. Splitting the population not on successful/unsuccessful offerings but rather first observation/all others, we see that from the time the offering goes live to the first data date (on average, 2 days), an offering attracts 28 investors (14 investors per day). Over the remaining life of the offering, the offering adds about 2 investors per day.
This first 2 days also attracts larger dollar investment amounts, as the average investor invests $853 in this initial period, which we then see fall to $810 per investor over the remaining life of the offering. These amounts represent 5.8x and 4.8x over the investment offering minimum. It appears that the larger dollar investment is coming in at the outset of an offering, with subsequent investors investing closer to the offering minimum as time elapses.
The last deep dive analysis took me to look not at successful/unsuccessful, first observation/all others, but rather at how the average investor / investment amount looked when the offering first reached success. This would give some insight as to whether the pattern mentioned above (the decline in average investment over time) followed a linear path, or had something else going on.
Keeping in mind that for some of these offerings, the observation where the offering first reached success was the same as the first observation, some interesting things shook out. The first insight is that, in the average 3 day period covering the time when the offering first crosses its target threshold, the number of investors increases, on average, by 36 investors – which is larger in terms of total number from the “first observation” split, but slightly less in terms of average per day (12 vs 14).
The more interesting aspect of the investment pattern is that during the observation where an offering first reaches success, the average investment amount spikes from $853 per investor from the first observation to $1,018 per investor, or an increase from 5.8x above the minimum to 7.2x above the minimum.
The takeaway here…the linear pattern we saw when comparing the first week to all other weeks does not necessarily appear to be the case. It also suggests that smaller dollar investors come in after they are assured that the offering is going to be more successful, and that the success of these offerings can potentially be attributed to the larger investments of early investors.
What are the takeaways from this admittedly “average” analysis? The first, unsurprisingly, is that successfu l offerings attract more investment dollars and more investors. Nothing earth shattering there.
It is the additional analyses that provide us a little more insight. Like prior research, I find that the first few days of an offering are critical to an offering outcome, with a large influx of investors and investment dollars coming during the first handful of days.
But the interesting insight here is that this is not a steady decline from the first week to the last, but rather the average investment dollars and investor change spikes in the days leading up to the offering crossing its target threshold.
So how can investors use this information? Keeping track of the average investment amount per investor, which is readily available on platforms such as Wefunder and StartEngine may give you a good gauge on the potential success of an offering.
If you start to see that average investment per investor or the “investment above minimum” multiple ticking up, now might be the time to invest if you want to get in early or want to take advantage of any early investment perks.
You can also use the metrics during the first week of an offering to try to project out success of an offering. Firms raising capital through crowdfunding can also take heed, and consider adjusting your minimum offering amounts or investment targets accordingly.
Wall Street has Morningstar, S&P, and Bloomberg
The equity crowdfunding market has KingsCrowd.
About: John Aland
John is an Accounting PhD candidate at the University of Michigan’s Ross School of Business. His research interests include crowdfunding, disclosure, and debt contracting. Prior to Michigan, he worked as an auditor at KPMG in Philadelphia for seven years, leaving the firm as an audit manager. John has a BS in Accountancy from the University of Notre Dame. He can be reached at email@example.com.