The Future of Fundraising: An Extension of the Social Contract
When you walk down main street anywhere in America – whether you’re in Sioux Falls, South Dakota or New York City, you’re sure to notice myriad local businesses on both sides of the street. Restaurants, bars, dry cleaners, barbershops, your accountant or lawyer who has just hung his or her shingle. In fact, most businesses are small businesses – almost 90% of established businesses in this country have fewer than 10 employees. However, of these roughly 22.5 million businesses, we just take for granted that they exist. We – on average – have no idea how they raised the money they needed to start their enterprise. We’ve never been privy to their financial struggles, to the capital raises they’ve endeavored or to the countless millions who couldn’t access the resources they needed to pursue their dreams. Indeed, America’s local businesses have become the forgotten asset class, even though they comprise more than half of the economy and 60% of new jobs in this country.
In 2009, in the midst of the worst financial crisis this country has endured since the Great Depression, with the banking system crumbling around them, America’s small businesses were particularly starved of the capital they so desperately needed to survive. Our congressmen and women convened in desperation, put their partisan differences aside and almost unanimously voted in the JOBS Act. The JOBS Act, as eponymously named, is intended to actually create jobs and get capital flowing to the lifeblood of America’s economy – and in my humble opinion, is the beginning of a revolution that will forever change the landscape for small business capital formation in America.
The vision is simple. From the inception of an idea all the way through an initial public offering (“IPO”), entrepreneurs should be able to advertise their fundraise and empower their customers, community and interested investors to participate. By accessing capital from customers, local businesses are able to evangelize their investors and send them off to spread the word about how great their product or service is. Thus, hundreds of marketers and brand ambassadors are included in the deal for free, helping that business grow and succeed. Investing locally actually reinvigorates local economies. Data suggests that every job in a locally owned business generates two to four times as much economic-development benefit as a job in a chain store equivalent, as local businesses spend more money on local labor, use local services, advertise locally and enjoy local profits. Those profits then remain in that local community and recirculate, rather than being sent off to headquarters somewhere.
Equity crowdfunding is very new in America, and American entrepreneurs and investors need a significant amount of education to learn what this new opportunity is and how it works. But in the UK, it’s been live for about five years. According to a recent Financial Times article, deals involving institutional investors on platform Crowdcube have quadrupled in the last two years. One of the reasons is that later stage companies – deemed growth stage companies (rather than just early stage, or seed stage companies) are starting to utilize equity crowdfunding. One of the most successful companies, Scottish brewer BrewDog has raised almost $50 million dollars via equity crowdfunding. This, I believe, will also be the way the US equity crowdfunding market evolves.
It’s a natural extension of the social contract that such great philosophers as Locke, Hobbes, and Rousseau theorized. By bonding company, customers and investors in a way that was never before possible, we forge an implicit agreement that on the one hand, management corporate governance will be kept in check, and on the other hand, investors and customers will not passively watch the performance of their underlying investments, they will actively spread the word and promote their growth.