Silicon Valley: Love it or hate it, equity crowdfunding is here. Embrace it.
TLDR: In 2012, Congress passed Regulation Crowdfunding. It took the SEC four years to write the rules. Today, it finally happens. We now all can invest as little as $100 in the things we care about. For the first time in 80 years, businesses can publicly raise from their neighbors, customers, or local communities instead of just wealthy angels, bankers, or venture capitalists. This is the start of a revival of capitalism for the rest of America outside of SF. To see what this looks like, check out 20 startups and small businesses raising funding on Wefunder.
Dear Silicon Valley:
Outside our liberal tech oasis, the rest of America is hurting.
Living in San Francisco, it’s easy to think entrepreneurship is flourishing as never before. Unfortunately, it’s not true. The share of those under 30 that own a business has fallen from 10.6% to 3.6% over the last 25 years.
The American Dream is dying for a broad swath of our country. Capitalism has not worked well for millennials coming of age after 2008, and what progress there has been has increasingly favored the creative and technical elite in major tech hubs. Everyone else is left behind, and we ignore them at our peril. There is already a rage in our politics not seen since the 1930's.
Equity Crowdfunding Can Help
In 2012, Congress passed Regulation Crowdfunding. It finally rolls out today, after a four year rule-making process by the SEC. Everyone — no matter how wealthy — now has the right to invest as little as $100 in the things they care about. Over 20 companies are now raising on Wefunder today.
Allowing the public the right to invest in startups is controversial. The law, while workable, is not perfect and needs to be improved. I’ve already written about the technical issues from the perspective of investors and founders, and we’re optimistic Congress will pass the Fix Crowdfunding Act.
But rather than get in the weeds, let’s talk big picture. Why is allowing anyone the right to invest important? How can it revitalize capitalism?
Markets Beat Gatekeepers
As the CEO of Wefunder, my long-term goal is to build a new type of stock market (“a NASDAQ for riskier ventures”) that lets us invest in a wider range of early stage and riskier businesses, more efficiently than banks or VC’s.
We believe people should be able to invest small amounts of money in risky stuff, while expecting to lose it all. People — in aggregate — are not stupid, and the wisdom of the crowd will lead to better investment decisions, more businesses started, and more wealth created for us all to share. It’s sort of like Vegas, only with a social purpose and a legal limit on how much of your income you’re allowed to gamble.We believe a well-designed marketplace beats gatekeepers; that the “wisdom of the crowd” is inherent to capitalism, and top-down decision-making by an “elite” leads to a misallocation of capital. We believe the people who care should decide what gets funded in our society.
Plus, what happens when ownership in fast growing private companies is shared more equitably across a broad spectrum, not siphoned off by the rich and well-connected? Capitalists earn most of the wealth in our country, and everyone should be able to be a capitalist, not just the wealthy.
Regulation Crowdfunding is the first step towards this vision.
Who does Regulation Crowdfunding help now?
Let’s start with who it won’t help. The ‘hot startups’ at YC demo day that VC’s are chasing after probably won’t use this. There are ways to use Regulation Crowdfunding without impacting follow-on financing, but we expect ‘hot’ founders to take the millions being thrown at them and go back to building their business. As they should. It’s simpler that way.
But ‘hot’ doesn’t always mean good. It also typically takes a lot of time for a great startup to become ‘hot’ (think of AirBNB’s struggles for the first two years before they went to Y Combinator). Most startups — even the very best — are not automatically anointed by the kingmakers. Some startups will decide to crowdfund before their success is obvious, especially if their customers feel the value before the professional investors in suits do.
More obviously, there’s a broad swath of companies that don’t fit the venture capital model, but still deserve funding. For instance, venture capital does a poor job at investing in the hard things, in longer-term moonshots. Venture capital also was not meant for businesses that can’t reach $100 million in 5 or so years. Banks are supposed to. Unfortunately, since 2008, banks have retreated from taking any sort of risk. There’s a huge financing gap for profitable, growing businesses not serviced by VC’s or banks.
Amtrak Across America
I wanted to see this gap firsthand.
I live in San Francisco, but I’ve always been hyper-aware that I live in a bubble disconnected from the problems faced by the rest of America. So I took my entire company — all eight of us at Wefunder — on a two week trip across the country on the Amtrak so we could all feel these problems.
We stopped by 12 cities and met hundreds of founders. In every city we visited — like Whitefish, Montana — people were making cool stuff and had dreams of starting their business. It was inspiring to see how people can do so much with so little. Founders were struggling to get their businesses off the ground with less money than I spend on my office in SF each month.
Sprinkling a little bit of SF fairy dust on the rest of the country
It’s easy for Silicon Valley to dismiss equity crowdfunding as a “bad idea”. But it lacks empathy for the issues that the rest of the country faces. Besides the fall in entrepreneurship, some other dreary stats: 62% of Americans have less then $1000 in their bank account and can’t afford to move. Over 50 million Americans live in areas where the unemployment rate is above 50%.
Our goal at Wefunder is to help the rest of the country get a little bit of that fairy dust that founders in SF & NYC take for granted.
We believe Congress, the SEC, and FINRA wrote the appropriate regulations to safeguard investors. The burdens on businesses could be lower, but it’s a workable start.
We now all have the right to take a small part of our income and use it to invest in entrepreneurs trying to follow the American Dream. Maybe we’ll earn a return. But that’s not really the point. An explosion of capital allocated from the “wisdom of the crowd” directly to startups and small businesses will lead to a renaissance of entrepreneurship. That’s certainly a good thing for America.