Small businesses are the backbone of the American economy--and while new options such as regulation crowdfunding look like nice fixes on the surface, they're not the true answers to our problems.
The hardest part of starting a business is getting the proper funds in place. In my humble opinion, I also think it is the single biggest barrier for anyone thinking of starting a business of their own. According to the Small Business Administration, there are about 29 million small businesses in the U.S. employing about 57 million people. This makes up an astounding 99.7 percent of U.S. businesses and 48 percent of U.S. employees.
When you look at those statistics, it's amazing that securing bank and SBA loans is still a long and arduous process. Before we get into regulation crowdfunding, it's important that I make the distinction between it and platforms like Kickstarter.
By legal definition, contributing money to a Kickstarter campaign isn't investing--it's donating. Indiegogo, Kickstarter, and others are branded as crowdfunding but they're really rewards-based donation platforms.
They don't allow you to obtain the money raised unless you hit your set goal. They enable anyone to invest with any amount of money. Regulation crowdfunding typically requires a minimum investment of $2,000 and investors are granted equity. Examples include SeedInvest and OurCrowd.
This brings us to an important question.
Regulation Crowdfunding or Venture Capital?
I've done both for my company Apptopia so I want to walk you through some pros and cons I've realized. Keep in mind many people who want to go the venture capital route still may not be able to secure funding for a variety of reasons.
Crowdfunding is a good option for those companies. One reason, as pointed out to me by Cheryl Sutherland of PleaseNotes, is to avoid wasting time and money on pitching venture capitalists who, statistically, probably would not fund her (as she's a woman of color).
A big benefit to the crowdfunding route is the free public relations. The people investing in you like your product or service. They aren't accredited investors and are likely to be big fans of what they've just invested in. They're probably users of the product and can give you legitimate feedback. They'll share information about your product on social media and help spread awareness via word of mouth.
They don't become board members. They're generally not looking for the level of return that venture capitalists are. Crowdfunding is also generally a much faster process than raising a venture capital round.
That's a good and a bad thing. I experienced a higher level of effort dealing with the many crowdfunding investors for a smaller sum of money than I'd gotten through venture capital.
Instead of a set amount of firms and people to answer questions from, you potentially have thousands of questions to answer from hundreds or thousands of people. You're also getting naked in front of these people and your competitors: Information that you'd normally share with a few accredited investors gets shared publicly.
Crowdfunding doesn't give any investors seats on the board, but it does give them equity in your company--and you may need to convince a large group of people that something you believe in is good for the company. These people generally aren't as knowledgeable about business and your industry as a venture capitalist, and turning to them for help and support isn't always an option.
What About Non-Tech Companies?
These options are great for tech companies. That's not the majority of small businesses in America though. If you want to open a bakery or a jewelry shop, you won't have much luck from the crowd or accredited investors. Crowdfunding solves a problem for some, but the vast majority of small businesses are still living with the problem of accessing serious credit.
Bank loans are great for small businesses. They come with low rates and the owner doesn't relinquish any equity. But it's getting harder to obtain a bank loan--and even if you can, it's a lengthy process of paperwork and review time. We're talking months, and generally, businesses need capital faster than that.
I'm looking forward to the day when bank loans for small businesses get smarter and America can see more small businesses start and grow. In the meantime, if you do run a non-tech business, there are still options for you.
One of my favorites is PayPal Working Capital. The catch, of course, is you need to be processing most of your sales through PayPal.
If that's not an option for you, try looking at Nav. It's a free platform that looks at your business and evaluates which lenders are most likely to say yes to you and explains all of their terms in plain language.