Crowdfunding, rushing to fund small businesses

Crowdfunding is tasked with being the workhorse of sustaining small business

The Feds have bailed out Wall Street at the expense of Main Street, leaving them to grapple with the only other tangible option: equity crowdfunding. One major difference between now and the last time this happened in 2008, is the JOBS Act. Since its inception, crowdfunding has shown enduring resilience and tremendous success, positioning it to be the harbinger of jobs, productivity and opportunity.

Wall Street is divorced from reality

Don’t be fooled by the Feds, the stock market is hardly a reflection of the economy. Everyday people are drowning financially, unemployment has spiked to over 20% and small businesses are shuttering fast. It seems that Wall Street is more similar to a funhouse mirror that distorts the days, weeks and months to create a short-term version of ‘reality’ that is wildly inaccurate.

Wall Street only lists big companies, and five of those companies are now worth over $5 trillion. While the stock market has pocketed plenty of bail out money from the Federal government, this acts as window dressing. Public money has been used to bolster the appearance of prosperity through Wall Street bailouts, but the distress Main street is experiencing isn’t captured. Main street’s convulsions are hidden from the sole metric that many (incorrectly) believe to be the barometer of the health of the economy.

Considering the very definition of capitalism doesn’t include mentions of reckless manipulation by the Federal reserve — which ultimately failed in everything except creating a new bubble — it’s safe to say that Wall Street bears no resemblance to the real world or the ‘everyday person’ economy. Not terribly surprising when you remember that 84% of stock market gains go directly into the pockets of 10% of the population.

Crowdfunding actually funds diversity

Equity crowdfunding was designed for small businesses to access funding, and this alternative couldn’t have arrived at a more opportune time. With the economy continuing its freefall, Softbank has reported an $8.8 billion loss, mainly comprised of duds WeWork and Didi. How the tables have turned. For years VC’s singular focus on tech was perceived by many as a sure thing, but now it’s looking like the ‘unicorns’ who’ve failed to ever turn a profit, might actually be dead money.

It’s no secret that ethnically diverse teams outperform homogeneity by 33% in profitability and equity crowdfunding is a “proven jobs engine,” according to Sherwood Neiss of Crowdfund Capital Advisors. Over in the crowdfunding arena, women-only and minority-only teams enjoy an 87.5% and 46% respective success rate, compared to male-only teams. While 98% of venture capital money goes to white guys, crowdfunding has played a crucial role in funding the unfunded, and will continue being heavily leaned on by small businesses without PPP seeking relief from funding programs launched to help combat the coronavirus economy.

Crowdfunding is tangible social proof

Depending on which report you might read, you’ll notice that 94% to 98% of venture capital money provides no returns. Let’s not split hairs, because that’s a shitload of money being pissed away. Imagine failing at your job 94+% of the time and still being employed! LOL, dare to dream.

While VCs enjoy the luxury of being able to spectacularly and repeatedly fail, crowdfunding has no such option. Held to an arguably higher standard, equity crowdfunding has jumped through regulatory hoops of fire and emerged victorious. There have been zero reports of fraud, the cap has a proposed increase from $1.07M to $5M and anticipated to come into effect in 2020 and certain regulations have been relaxed in order to help small businesses access funding during the Covid-19 pandemic from community driven equity crowdfunding programs like #KeepTheLightOn.

Now that crowdfunding has caught the eye of the Feds, others will follow. VCs are out of their depth with online funding portals and they’ve been hanging onto their checkbooks at a time when small businesses need money the most. But, there’s no doubt they’ll take notice of the activity in the crowdfunding ecosystem.

When a small business or startup is able to successfully crowdfund, this signals to banks, venture capitalists and angels that the company is onto something. Money talks, and a startup showing solid financial traction in a certain market is powerful. It signifies that the founder has been embraced by their community and they’re onto something successful. Plus, with the pandemic wreaking havoc on small businesses across the nation, people are beginning to grasp the indispensable role local establishments play in their daily life and they want to show support. Local investors support what they like and use; they aren’t simply seeking out the formulaic 3X return on investment necessary to cover losses that VCs require.

To infinity and beyond

These short years since equity crowdfunding’s inception to combat the 2008 recession have proven to be more fruitful for marginalized groups than the entire VC industry. Diversity fuels innovation and these founders with fresh ideas finally have access to folding money through equity crowdfunding, and now that the SEC has proposed lifting the maximum cap to $5 million, it’s off to the races.

Equity crowdfunding has shown tremendous growth to date, steadily gained traction and is now hitting its stride at a time when the American people need help more than ever. And for investors, crowdfunding is an attractive, stable alternative from the volatile public markets.

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