Crowdfunding

Debt-based Crowdfunding Is Quietly Generating Investor Returns

Locavesting Staff | May 30, 2018

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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.

investor returns crowdfunding
Investor Julie Tam says her total net annualized return has been just over 17%

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.

Crowdfunding portals are typically hesitant to talk about returns lest they be construed as making investor promises. But the facts speak for themselves: debt-based offerings have been returning capital to investors at an impressive clip.

On NextSeed, a Houston-based crowdfunding portal that focuses exclusively on debt offerings, investors have been paid close to $1.8 million to date, out of a total $9.2 million raised, according to publicly available data on its website. Those numbers include Reg CF as well as earlier offerings conducted under Texas’s intrastate crowdfunding exemption.

At Localstake, a Midwest-based portal that raises money for businesses via a variety of exemptions and deal types, more than $1 million has been returned to investors via revenue share deals to date.

Related: What’s a Successful Crowdfunding Exit, Anyway?

The returns extend to smaller intrastate crowdfunding deals as well. Green Mountain Organic Creamery, which raised money via local Vermont platform MilkMoney, has begun paying back investors. In Oregon, B Good Bars recently sent its first checks to investors.

Julie Yau Tam, an experienced investor who has invested in several deals on NextSeed, said crowdinvesting offers “lower-risk ways to make a decent, quicker return and give me perks at some of the businesses, like discount cards or gift cards.”

Tam, a real estate professional and former broadcast journalist, learned about crowdfunding a couple of years ago and decided to give it a go. She has invested mainly in businesses in Houston, where she lives with her husband. “I felt more comfortable investing in something I could go out and check out.” She also enjoys going to opening parties and patronizing the businesses she has invested in.

Two businesses she invested in—The Snoring Center and Peli Peli, a South African fine dining restaurant—have paid her back in full, in Peli Peli’s case ahead of schedule.

Peli Peli raised $358,000 in May 2016, and paid investors 17% interest in twelve monthly payments. (It returned to NextSeed in 2017 and raised an additional $1 million for a new Austin location). The Snoring Center raised $100,000 in September 2015 and paid 11.98% interest on the 18-month loan.

Another two businesses Tam invested in, Chapman & Kirby, a gastrolounge and event space, and The Sugar Refinery, a speakeasy, are making payments on a monthly basis. Both were revenue-sharing deals that offered investors a multiple around 1.7 times their investment. (In revenue-sharing deals, the ultimate rate of return depends on how quickly the loan is paid back).

To date, says Tam, her total net annualized return has been just over 17%. That seems in line with other available data on returns. According to a NextSeed blog post from a year ago, several businesses that had begun making payments at the time were generating 12% to 19% returns for investors.

Tam says she is such a believer, she recently invested directly in NextSeed as an equity investor.

Super Happy People

Debt offerings have accounted for less than a third of all Reg CF deals to date, according to industry data collected by StartEngine. But more businesses are starting to embrace it.

Klaus Moeller, a successful serial entrepreneur and CEO of Boardwalk Hospitality, raised $500,000 on WeFunder in November 2017 to open a Ben & Jerry’s franchise on Venice Beach, the popular LA boardwalk that draws 15 million visitors a year.

Boardwalk Hospitality’s Klaus Moeller

“I loved the idea that startups could go on there with a good idea and people could invest $100 or $200, and if it works out you are super proud of being part of something,” said Moeller. He was hoping to raise $100,000, more for fun than necessity, he said, and quickly blew past that target.

The store opened in April and was profitable on Day 1, according to Moeller. He has begun making payments on the three-year unsecured loan, which pays 14% interest.

The best part is the investor engagement. “We treat the investors really, really well,” he says. That includes merchandise, free ice cream and weekly personal updates from Klaus. In turn, he gets a steady stream of encouraging comments from his investors.

After sending out his first payment, the comments poured in from investors via the WeFunder portal, which manages investor communications. “So happy things are going well! Lots of great updates, and already got two interest payments and the lithograph!” wrote one investor.

He sent another update recently when the store had its first $1,000 hour. “That is Phenomenal!!! Great job everyone. Still can’t wait until I can come visit our store… I’m sending my partner into visit you soon Klaus. Huge Hugs” read a typical investor comment.

“We really have 520 super happy people, it’s the cutest thing ever,” says Moeller. “It’s such a great feeling. I think everyone should do crowdfunding.”

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