The more I look into crowdfunding, specifically the coming of equity crowdfunding, the more I’m intrigued by the democratization of capital infusions it should soon represent for entrepreneurs.
For those who are unfamiliar with it, “crowdfunding” refers to networks of individuals who pool their money through websites to support the efforts of individuals or organizations. Crowdfunding today covers a great deal of ground: disaster relief, art projects, civic projects and more. Congress legislated “equity crowdfunding” in 2012, and the Securities and Exchange Commission is in the process of writing the rules to coincide with the JOBS Act’s full implementation this year. The result will be the ability of startup companies to sell small equity portions to large numbers of investors.
And this may in a way return us to the roots of business origination. All businesses have historically begun with entrepreneurial undertakings, with someone getting an idea about a product or service that others need, and pursing its development as a means to earn a living. In simpler times, growth came from appealing to individuals.
For example, someone might be really good at baking bread and would set up a small operation with a modest purchase of an oven, flower and other supplies. The initial capacity might accommodate 20 loaves at a time, all sold for profit. By putting some of that profit back into the business to increase capacity – another oven and more ingredients – the baker could increase production to 40 loaves at a time. And so it would go, with the business steadily growing on the capital others were contributing, individual bread purchasers essentially funding the business.
Equity crowdfunding will in many ways be the modern version of that. The baker didn’t have to shop an idea to investors to get a major cash infusion in return for a substantial portion of the business, but rather took in money directly from multiple individuals. Equity crowdfunding is a similar approach to getting an idea off the ground. Investors put a little money in and metaphorically buy a loaf, allowing entrepreneurs to do what they’ve done throughout time: establish a business and fund growth by selling a product. It democratizes investing, with capital generated by entrepreneurs offering something to everyday individuals – an entirely new access to capital from people who will have entirely new access to equity.
And that could turn out to be a very good thing for business creation. Without equity crowdfunding, the bread-maker analogy couldn’t effectively extend to an entrepreneur starting a software company or a medical device business. The amount of capital required to create the first product meant that the entrepreneur needed to be already wealthy or appeal to people who were. People with great ideas but no significant personal capital had to secure funding from others – a formidable task that can keep great ideas from becoming great solutions.
Angel investing serves an important role for entrepreneurs in the form of friends and family who help get ideas off the ground, and equity crowdfunding has the potential for reinventing the angel role. Businesses in the start-up phase that aren’t yet ready for venture capital infusions can now more capably play with angel investors, because equity crowdfunding websites will turn ordinary visitors into friends and family who, if they see value in what you offer, can supply funding in small increments, much like loaves of bread.