The States of Equity Crowdfunding CF and A+ is strong though some argue that growth is slow. Hundreds of millions of USD are invested annually into small businesses. Some small businesses who raised money through Equity CF are beginning to exit offering a payout to shareholders. Others now have receipts. The technology emerging to support primary and secondary markets via Blockchain and tokenized assets offer the
But even at hundreds of millions of USD annually, some feel that equity CF is moving too slowly.
How can the industry improve?
The Hidden Infrastructre of Equity Crowdfunding
There are elements associated with equity crowdfunding that are equally important as the digital exchange or portal. One element is the price signal. The price signal is a way that investors communicate the value of the frim without giving away the full financials behind the firm’s performance.
Arguably, price signaling is one of the largest components of an open capital market. Traders, analysts, researchers constantly evaluate a share’s performance and signal their findings through the press or trading.
Fueling the analysts’ work is regular disclosures about changes to the firm’s performances. Public markest have higher disclosure requirements, but nevertheless, there is not a robust information network for small businesses to distribute press releases and to engage with investors.
In prior articles, we explored how the lack of secondary markets slows the information network
The Culture of Running a Small Business
Many small businesses across the United States don’t operate with investment outside of debt financing. The culture surrounding a small business at the local level is woefully underprepared to constantly value the financial performance of a small business.
The current entrepreneurial ecosystem is a closed network of investors, technical service providers, and Government funded service providers. The business acumen is strong within these networks, but technical service providers often don’t possess CFO level experience or a mandate to assist the firms to raise equity financing.
For example, many young entrepreneurs seek to establish local businesses that are not looking to scale nationally such as a brewery, coffee shop, or coworking space. Yet the local demographics, despite the entrepreneurs’ best efforts, cannot fully fund the ongoing activities of the business.
Equity financing allows the small business to develop a more aspirational business model that allows the firm to grow into their break-even point. However, understanding how equity finance impacts the model of
The service providers that do exist typically focus on high technology spinning out of research Universities such as medical, robotics, AI, etc. These technical service providers and funders are looking for business models protected by patents and developed by proven researchers. Small to mid-size cities do not have a culture of supporting small business models that utilize equity funding.
The same could be said for many real estate ventures and the creative industries especially. Small to mid-size cities do have a significant tech presence that is capable of building software or competing in media or cultural industries. However, the founders don’t have the capital to spend a year producing a movie or a TV show or developing an app.
The lack of equity CF funding in large part is driven by the lack of culture supporting how equity funding can support the business model of a firm, consistent price signaling to analysts and traders, and the willingness on behalf of small businesses to utilize funding and operate with more transparency.