Just about anyone who can spare $100 can now become a venture capitalist, thanks to new Securities and Exchange Commission (SEC) rules in effect. This is a game changer: both for the doors that have opened allowing everyday citizens to become investors in startups, and for the entrepreneurs who, until just a few years ago, had very few options when it came to raising much-needed capital.
Growing Businesses via Crowdfunding
It used to be that the bank of Mom and Pop or bootstrapping were the only real options available to startups looking to raise capital to fund (and fuel) growth. Now, companies are able to raise up to $1 million in capital from ordinary Americans, not just wealthy investors, via Title III crowdfunding which recently went into effect. Other forms of crowdfunding, some of which don’t have limits on how much money can be raised, are also available now as well. These new SEC rules implementing Title III, together with the other rules that implemented other forms of crowdfunding, signal a new era of capital raising. Combined with the democratizing effect of social media, suddenly an idea and a social-savvy marketing campaign is as important as business strategy and leadership capacity.
When the Jumpstart Our Business Startups (JOBS) Act was first introduced in 2012, the changes it would bring to the investment landscape were touted as a key way to inject much-needed cash and capital into the entrepreneurial economy. As entrepreneurs are drivers of innovation and creators of jobs, it made sense to make changes that would open up new doors to growth. Pundits and statisticians will be busy for years to come attempting to answer the question: will it make much of a difference to the economy?
Risk to Investors
The benefits to small business of this new source of relatively easy capital is counterbalanced with investor risk. Previously, only investment-savvy accredited investors with deep pockets were permitted to play with table stakes, and if they lost their investment, at least there was comfort in the fact they knew what they were doing and what they could afford to lose. More people may be about to kiss their hard-earned and potentially meager life savings away because they were drawn to an effective and catchy crowdfunding campaign that might not perform as an investment.
Scalability the Next Challenge
What isn’t currently clear is whether those growth-hungry businesses who have initial crowdfunding successes will actually be able to translate that capital into true scalability, maintaining or improving profitability with an increase in sales volumes. Investors need to remember that fancy marketing campaigns don’t necessarily equate into profitable businesses. Also, poor investment terms in great companies could mean that the company does very well even when its investors don’t.
There is no question, though: new classes of investors, new forms of raising capital for startups previously shut out of the venture capital game mean it truly is out with the old, and in with the new.
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