The Promise of Investment Crowdfunding

Bill HustonAlternative Finance, Community Capital, CrowdfundingLeave a Comment

Introduction 

Investment crowdfunding provides the best opportunity to transform our local  communities in the shortest amount of time. Investment crowdfunding, just like regular equity investment, allows entrepreneurs to sell shares of their business to private shareholders, shares that can potentially be sold later at a much higher price per share or they can become completely worthless in the process. Always remember during the reading of this blog post that there is an inherent business risk in every investment.  That’s how you attract real investment capital, and that is the risk that is always involved. 

The Peter Lynch Effect 

Peter Lynch, the author of the seminal  book, One Up On Wall Street suggests that the best investments are made into businesses that you know the industry or use the product and this is why local investment crowdfunding has a distinct advantage for the small business that have a loyal customer base that already exists. Many of the businesses that are in the best position to raise capital using Investment crowdfunding have an untapped email list or Facebook page that they are simply not engaging right now. These customers already have provided the market validation and social proof for your business. They are already paying customers that have demonstrated that they are willing to part with their hard earned dollars to purchase your products and services. This is the group of people that investment crowdfunding allows you to engage to raise capital for your business during the uncertain time caused by COVID-19. 

The Transformative Power of Investment Crowdfunding

Today, local entrepreneurs and real estate developers can tap the $65 billion in investment dollars that are being invested on Wall Street and start to invest some of those dollars locally bto build businesses and real estate developments that follow the Peter Lynch Effect, those are business that you have an intimate relationship and that drive revenue, job creation, and local wealth. Investment crowdfunding also provides an opportunity for the development of a new retail investment class and transforms the average local resident  into an investor and consumer that allows money to circulate in our local communities building individual wealth and accumulated community wealth. Amy Cortese coined the term Locavesting in her book by the same name in 2011 and in 2016 Locavesting and investment crowdfunding collided to provide new opportunity for local businesses to raise local capital and local investors to build wealth through inclusive investing while creating Local Crowdfunding Ecosystems.   

Locavesting, Investment Crowdfunding, and Recycling Local Dollars

Locavesting is a term that I came across in my work as a crowd investing consultant. I will state for the record that my interest in crowd investing leans much more toward local real estate development and local business development than towards tech startups. I believe that local communities must consolidate and recycle their wealth through local real estate development and local business development that provides job creation and wealth generation in their community first. According to a Locavestor blog post “Small businesses—which by definition are locally owned—create two out of every three jobs in the U.S., employ half the private workforce and generate half of private GDP.” “They create local wealth by keeping money circulating locally—that’s called the local multiplier effect.  They provide the foundation for a healthy and diversified local tax base, and contribute to the health and well-being of their communities.”

Lack of Access to Capital

Access to capital is the number one issue facing many local businesses no matter the size or type of business, but in communities of color accessing capital through traditional methods is almost impossible. Big banks, which dominate the market, approve just 2 out of 10 small business loan requests and demonstrate their inefficiency at providing capital to the local small businesses during the disastrous roll out of the Government PPP funding. The odds are worse for women and minority-owned firms: Just $1 out of every $23 in small business bank loans goes to women-owned businesses, for example, even though they represent 30% of all small firms. In the equity space, less than 1% of all businesses receive venture capital funding—and most of that is invested in just 5 metros. These dismal realities, of the traditional funding sources inability to fulfill the needs of local small business provides an unexpected opportunity. Today inthe age of investment crowdfunding these business owners now have the ability to engage their current customer base as investors. 

The Convergence of Locavesting and Investment Crowdfunding

When we look into the investment portfolios of most individual investors we will find stocks and bonds of large multinational companies that very often send jobs and profits overseas. The new retail investor class that investment crowdfunding creates is very cash rich and rarely finds itself being invested in local businesses that as stated above are the economic drivers of our local communities. How do we change that dynamic? How do we channel more capital to productive use—to the small businesses that create jobs, spur innovation, and build strong local economies? Well, using investment crowdfunding as a vehicle that will be able to transfer this capital to small local businesses and real estate development while creating inclusive investing opportunities for a new class of local retail investor. 

From Consumer to Investor

There is latent capital that is being used only as consumer dollars in local communities that has the potential to become the economic drivers of local business and real estate development projects that are community-led. Investment crowdfunding empowers communities to see what is needed in their communities and fund the creations of the business or real estate developments. The vast majority of community capital is not being invested only spent on consumer spending as quickly as it is being earned. One solution is the intersection between investment crowdfunding  and locavesting where community members are willing to invest as little as $100 in local businesses and real estate development, and become investors, customers and brand advocates for these local small businesses and real estate developments that they have invested in and have a financial interest in being successful. These community investors then become the backbone of an enhanced local crowdfunding ecosystem as community business stakeholders.

Key Takeaways

Investment crowdfunding and locavesting provide a community-driven mechanism to provide access to capital for local small businesses and real estate development that increase the viability of community based business enterprises. Provide new opportunity for business and customer engagement through inclusive investing and wealth building opportunities for the entire community. For the people that are willing to make the investment in local community-led economic development they are making a long-term commitment to becoming stakeholders in strong, resilient, and sustainable economic development by voting with their dollars. Investment crowdfunding and locavesting have the power to truly democratize the economy through community-led development driven by community capital. For more information on how to use investment crowdfunding as either an investor or local small business please visit the crowd-max.com blog page and register for the blog.

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