There's a general adage in the world of startup investing that roughly 90% of startups fail. With the downturn in funding, many investors have started experiencing this unfortunate reality, including myself. While the market is doing great, investors are more inclined to speculate on riskier investments like startups, IPOs go better, and this means it's easier to get funding. But during downturns, the opposite is true, and unprofitable tech startups living the high-life start dropping like flies.
Since I began investing, I have accumulated a portfolio of roughly sixty startups, and fortunately, many are still in business. But I have seen some otherwise promising companies fail due to market conditions, failing to get over that funding lump, macroeconomic conditions, and more. In total, I have seen two IPOs, four total exits, two bankruptcies, and one company that just took people's money and ran. Overall, not bad, and there are a few companies I am particularly optimistic about that simply need more time to mature.
While this is an unfortunate part of investing in startups, the industry is still new. Regardless of those that do IPO, when a company begins winding down, many investors end up, well, angry. Startup investing isn't nearly as intuitive, and the fact that someone can invest on a spur-of-the-moment decision and then they're locked in till riches or a 100% loss is a brutal reality. Many might become overly attached to a startup and invest way too much into the company and forget the important principles surrounding diversification.
Equity Crowdfunding Finding Product Market Fit
But an interesting shift is happening in the world of equity crowdfunding right now. Mainly, higher quality raises are flocking to the platforms. On Wefunder, companies aren't even allowed to reach the main site without reaching at least $50,000 invested, and it's rare to see a company ending with less than $100,000 raised on Wefunder. On StartEngine, the platform substantially increased the requirements to raise on the platform, including favorable points for wanting to raise $1 million or more and companies with seven figures in revenue. This resulted in a "lower acceptance rate than Harvard," as they noted in a recent update. The platform now boasts an acceptance rate of only about 1.5%.
While it's likely the dozens of other platforms will be happy to take these clients to raise, it does note an interesting shift in the world of equity crowdfunding from both an investor and portal perspective. It's no secret that no portals are really profitable right now. NetCapital (NCPL) is public on the NASDAQ and surprisingly profitable, but it's unlikely this is from their crowdfunding business alone. Other than that, Wefunder and StartEngine are both largely unprofitable, and Republic's recent wave of layoffs indicates a similar fate.
It's likely this focus on larger and more reputable is becoming the norm on equity crowdfunding sites due to the above reasons. This isn't a bad thing by any means. But it is an interesting shift taking place.
Portals likely aren't making any money on raises that launch and don't raise much money. In fact, it's likely these are hurting other raises on the platform by moving newer raises down on the platform. So it detracts from the value of launching on a platform, its not profitable, and it might even be a lower quality deal. After all, if a company needs money and can't raise any, that's probably a bad indication.
On the other side, 90% is a pretty substantial metric. While this is a pretty commonly accepted metric, being able to beat that consistently would make equity crowdfunding a substantially more viable investment method. If StartEngine and Wefunder are able to keep the deal flow on their platform high quality, coupled with investors general due diligence into startups, you're talking about investing in only 1-5% of possible startups filtered from the 1-2% of startups accepted onto these platforms. Likely meaning that equity crowdfunding can become a more intuitive investment option in the long run.