Crowdfunding success is often measured by the number of campaigns meeting their funding targets and the dollars raised. But what about the investor side of the equation?
It’s still very early, and there are no industry-wide performance metrics that measure investor returns. But there are inklings.
Some investment crowdfunding portals have lately taken to reporting their Internal Rate of Return (IRR), similar to the way venture capital funds measure their performance. Since the companies being measured are not publicly traded, their values are determined by other means, such as the change in value of a company after a subsequent capital raise.
SeedInvest, which conducts private offerings under Regulation D as well as deals that are open to all under Regulation Crowdfunding, recently reported an unrealized net IRR of 17.4%. That, the portal says, compares to a median IRR of 11.7% for the venture capital world.
WeFunder, meanwhile, has said deals from its 2013-2014 vintage (all accredited investor-only deals under Reg D) have increased in value by 53%—boosted by Zenefits, which went on to raise venture capital at a multi-billion dollar valuations, even a down round.
Returns, Without the Fanfare
Of course, IRRs can be fleeting. And until an exit event such as an IPO or an acquisition, these equity holdings are essentially illiquid—hence the “unrealized” qualifier. To date, there have been no equity exits in the Regulation Crowdfunding world.
But who needs an exit? The fact is, thousands of crowdinvestors have already seen solid returns from debt and revenue-share investments—without all the fanfare of an exit.
Many people tend to associate investment crowdfunding with venture capital-like equity investments—as the misnomer “equity crowfunding” attests. And equity deals—such as shares of stock or future equity in the form of SAFEs—tend to dominate.
But dozens of companies have raised money through interest-bearing loans or revenue-sharing agreements, where investors are paid back via a set percentage of revenues until the principle plus a predetermined premium is reached. Based on anecdotal data, at least some of the offerings are generating double-digit returns.
Debt-based offerings are an attractive option for established businesses—for example a restaurant opening a second location—as well as for those that don’t want to give up ownership. For investors, they offer the potential for faster payback and a decent return, without relying on a possible IPO or deep-pocketed suitor down the road.[…]
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