Exits. The stuff that crowdfunding investor dreams are made of. Or not?
A story we ran recently has prompted us to think more about this topic. It was about the acquisition of Scotty’s Brewhouse, a mini-chain of midwestern brewpubs that is one of the few crowdfunded companies (in this case through Indiana’s intrastate exemption) to have an exit event. An exit is the term of art used for an event—typically an initial public offering (IPO) or an acquisition by a larger company—that unlocks returns for early investors who put up seed capital for a venture.
Exits imply equity. They’re not relevant for debt-based offerings, as Scotty’s was, because debt investors get paid back in regular principal and interest payments, not through an ownership stake in the company. But the Scotty’s deal shows that crowdfunded ventures, including those done through state-based crowdfunding, have the potential to pay off for the crowd.
“We are only brushing the surface of the power of intrastate offerings and stories like Scotty’s help to further highlight the power of this type of local funding,” says Anthony Zeoli, a Chicago-based lawyer and crowdfunding advocate.
More Than Financial Returns
Focusing solely on exits, though, misses a central point about this new era of crowdinvesting. An IPO or listing on a stock exchange is often considered the end game, but for early investors that hang onto their shares, as well as new shareholders, that’s just the beginning. As our list below shows, an exuberant public debut can be short-lived.
And for many investors, the rewards of investing may be just as much social as financial—having a beloved brewpub or restaurant in your neighborhood that otherwise might not exist, for example. Or supporting an entrepreneurial venture that’s addressing environmental issues or social injustice in a novel way. Or filling a community need.
Crowdfunding is brand new, and as it evolves, it will push us to rethink the conventional risk-reward equation. In the meantime, you can pretty much count the traditional exits on one hand, as we’ve done below. Measured on purely financial returns, we’re still waiting for an exit we can hold up as an unalloyed success.
Crowdfunding Exits – a Timeline
March 2014 Facebook announces its acquisition of Oculus VR, maker of the Oculus Rift, for $2.4 billion. Two years earlier, Oculus famously raised $2.4M on Kickstarter. Its 9,500 backers received a pair of virtual reality goggles—but no stake in the company, which would have returned an estimated 400 times earnings of their initial contribution. This means that a $1,000 investment in Oculus would have yielded a return of $400,000.
October 2014 ReWalk Robotics, a developer of wearable, robotic exoskeletons for people who with a spinal cord injury, completed a $36M IPO on NASDAQ. ReWalk had raised a $3.3M the year before through two separate crowdfunding offerings on OurCrowd, an Israeli investment platform open only to accredited (wealthy) investors. After initially soaring, the stock is trading at around $2.00, down from its strike price of $12. OurCrowd has since seen five more companies that raised money on its platform be acquired or go public.
July 2015 E-Car Club, an electric car-sharing venture that was one of the first companies to raise money through equity crowdfunding in the United Kingdom, sells a majority stake to Europcar for an undisclosed sum. The individuals that invested sums ranging from £10 to £15,000 on Crowdcube made “multiple times” their initial investment. Since then, two other Crowdcube issuers, Camden Town Brewery and Wool and the Gang, were also acquired.
February 2016 Elio Motors, the maker of a low-cost, three-wheeled electric car that bills itself as ‘the next big thing in transportation’, lists on the OTCQX exchange, shortly after closing a $17 million Regulation A+ crowdfunding campaign on StartEngine. The campaign attracted 6,600 investors who paid $12 a share. On its first day of trading, Elio shares opened at $14 and quickly shot up to a high of $75, valuing the company at more than $1.3 billion before falling down to earth. The shares have hovered just under $8 in recent weeks as financial troubles and delays have plagued the carmaker.
March 2016 General Motors agrees to acquire Cruise Automation, a San Francisco-based developer of autonomous vehicle technology, for more than $1 billion. The company was funded by venture capitalists and was marketed privately to wealthy investors on AngelList. Though Fortune hailed it as “equity crowdfunding’s first billion dollar exit,” the AngelList offering was an online private placement, not true crowdfunding.
December 2016 Scotty’s Brewhouse, a chain of brewpubs based in Indianapolis, is acquired by private equity firm Due North Holdings. The 18-restaurant chain was the first company to use the Indiana’s intrastate crowdfunding exemption, launching a campaign on Localstake in late 2014 that ultimately raised more than $380,000 in smaller size investments from local investors. In another first, Scotty’s became the first known intrastate crowdfunded venture to have a successful exit event—though its crowd-investors didn’t see a windfall, since the offering was structured as a revenue-sharing deal, a form of debt. Still, Localstake investors received 1.5 times their investment back in less than two years, an enviable 50% return.
UPDATE: April 2017 UK-based BrewDog, a craft brewpub operator that made crowdfunding an integral part of its marketing and funding strategy from the start, sells a 23% stake to private equity firm TSG Consumer Partners. The deal valued BrewDog at $1.2 billion. Since the company was founded in 2007, it has raised money from 56,000 investors through its Equity for Punks program to fund its expansion, including a move to the U.S. Brewdog’s earliest investors, from a 2010 offering, reaped the most, earning a stunning 2,800% return. Investors in the most recent Equity for Punks offering, from 2016, made a 177% return, according to the company. Others invested in “mini-bonds,” or loans, that pay a dividend but don’t involve equity.
What does a successful crowdfunding outcome look like to you? We’d love to hear your thoughts.