Early proponents of Equity Crowdfunding argued that crowd finance could democratize entrepreneurship.
Proponents find exclusion to be a major challenge associated with traditional venture finance. Research from 2017 found that female founders got only 2% of venture capital dollars. Another study found that black founders only receive one-percent of venture capital.
A new paper from experts in Equity Crowdfunding Douglas Cumming, Michele Meoli, and Silvio Vismara provides empirical research to the claim that equity crowdfunding democratizes entrepreneurship.
The paper draws several conclusions:
- Younger founders have higher chances to complete an equity crowdfunding campaign.
- Remote companies have higher chances to complete an equity crowdfunding campaign.
- Female and minority entrepreneurs do not have higher chances to raise funds via equity crowdfunding.
The third conclusion casts skepticism on the argument that Equity Crowdfunding democratizes entrepreneurship.
Redefining the Argument for Equity Crowdfunding
Equity Crowdfunding has the potential to level the playing field between large firms who utilize finance and small business locked out of equity capital. Local firms operating in small to mid-size cities experience a dearth of equity (or risk) capital.
Equity crowdfunding can bring value to smaller firms in two important ways. First, crowd shares are the first step in solving the illiquidity discount that undervalues small business by 20%-30%. Second, equity crowdfunding can help founders account for the true costs of starting a business that includes their own labor. Many small business owners fail to include their own salary in their startup costs because they cannot finance operating capital through debt financing sources.
Only those who can afford to take years without pay can start a small business. They often come from privileged backgrounds or have family members who support their new ventures.
Equity crowdfunding levels the playing field because it allows everyday entrepreneurs to use the same types of financial leverage and capital stacks available to wealthy property developers and private equity funds.
Equity funding leveraged for debt ownership of equipment and property, combined with the 20%-30% added value of liquidity, can renew the ability of a small business entrepreneur to run a healthy business without sacrificing their savings.
Equity crowdfunding will open new avenues for social impact investing, however, the importance of equity crowdfunding is rooted in the local.
Equity crowdfunding is a new and larger source of much needed equity financing for the masses that can operate across geography and invest in local deals.
The Importance of Entrepreneurial Ecosystems
Entrepreneurial ecosystems made up of small business champions and startup support organizations are a crucial component of equity crowdfunding support. The entrepreneurial ecosystem can educate new founders and connect them with mentors and other nearby supporters in their communities.
Entrepreneurial ecosystem research and development supported by organizations such as the Ewing Marion Kauffman Foundation must be empowered to focus inclusion efforts specifically on equity crowdfunding.
Equity crowdfunding is ultimately defining a new tool of local finance that improves the capability of small business founders. However, the industry must still focus resources on inclusion both at the investor and founder level.
Over time, equity crowdfunding can level the playing field, but not without hard-work to support female and minority entrepreneurs.