A Lifeline for Small Business

If you haven’t noticed, U.S. startups are still lacking good funding options.

After the 2008 crash, traditional (bank) lending to startups and small businesses slowed to a trickle. It hasn’t recovered much since.

So despite low rates, many small enterprises today can’t get a loan from the bank.

Alternative financing businesses such as Kabbage.com have picked up much of the slack. But rates on Kabbage’s six- to 12-month loans range from 32% to 108% (APR).

Business credit cards are another popular (and expensive) funding method for startups and small businesses.

These are the closest things equity crowdfunding has to competition.

IPOs are no good anymore for early-stage companies. It’s too expensive, as I showed last week.

Venture capital is great if you can get it. But very few startups do. VC is highly concentrated in just a few cities and almost always requires a personal connection to the firm. It doesn’t scale well.

Not to mention that until now, only “accredited” investors (with $200K-plus annual income or $1 million-plus net worth) could even invest in startups and private small businesses.

Equity Crowdfunding Emerges

We’re in the early days of what I think will become a multibillion-dollar business within a few years.

In fact, within a decade I believe equity crowdfunding will be the preferred funding method for nearly all early-stage companies.

Why?

Simply because other funding options don’t stack up well against ECF. Here’s a list of advantages for entrepreneurs as I see them.

  • Flexibility: Companies can offer equity (shares), debt or a combination of the two.
  • Low cost of capital: It’s approximately 10% now and will fall over time.
  • The crowd: Thousands of investors become champions of the business.
  • Speed: In the U.K., funding rounds often fill up in days (while we’re playing catch-up in the States).

And ECF will only improve over time. The House has already passed the Fix Crowdfunding Act, which should raise the limit for Title III (smaller) deals from $1 million to $5 million. Here’s the relevant section:

    This bill amends the Securities Act of 1933 (Act) to increase from $1 million to $5 million the aggregate amount of securities sold to all investors by an issuer that qualify for the crowdfunding exemption from certain prohibitions relating to interstate commerce and the mails.

The bill will also simplify the ECF process and make onboarding thousands of investors much easier for startups.

These are important steps. But it’s important to realize they too are just part of an ongoing trend toward the total “democratization of capital.” The end of this crooked system where only 4% of U.S. (accredited) investors get to invest in the fastest-growing companies in the world.

The Fix Crowdfunding Act passed in the House with a vote of 394-4. It appears politicians haven’t completely forgotten about their constituents.

Now the bill needs to get through the Senate. I hear it should be enacted by December of this year.

After that, there will be more legislation to improve ECF. Then after that, there will be some more. The campaign will continue until we’re all able to invest and raise money in the manner we see fit.

Have a great weekend.

Adam Sharp
Founder, Early Investing

P.S. Since we launched our new research service, First Stage Investor, more than 1,200 of you have signed up. Andy and I are blown away by the response so far, and we’re more motivated than ever to make this into something special. We’ve got two new picks lined up, and they are juicy. If you’re interested in joining us, click here.