Investment Crowdfunding provides the best opportunity to transform our local communities in the shortest amount of time. Investment crowdfunding, just like any other 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. That’s how you attract real investment capital, and that is why investment crowdfunding will eclipse venture capital funding as the leading source of startup capital by 2025 as community capital strategies continue to become mainstream.
Today, local entrepreneurs and real estate developers can tap the $65 billion in investment dollars that are being funneled to Wall Street and start to invest some of those dollars locally and transform 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. The process of locavesting and investment crowdfunding will create jobs and wealth in the local community.
The COVID-19 Crisis Impact
Small businesses have been devastated by the lockdown in response to the COVID-19 pandemic. The role that small businesses play in the US economy generally and local economies specifically will not go unnoticed as we face the new normal. Women and minority women owner businesses have taken an, even more, sever economic hit than the general economy. Obviously, COVID is having a negative impact on all small businesses but underserved segments have been undermined on a disproportionate basis. While government programs have helped, more needs to be done. Access to capital via digital funding portals and participating broker-dealers can supplant these government programs in the form of locally focused investment crowdfunding platforms.
Locavesting, Crowdinvesting, and Recycling Community Dollars
Locavesting is a term that I came across in my work as an investment crowdfunding consultant. I will state for the record that my interest in investment crowdfunding leans much more toward local real estate development and local business development than towards the tech startups. I believe that local communities must consolidate and recycle their wealth through real estate development and local business development that provides job creation and wealth generation in their community first. According to a Locavestor blog post written by Amy Cortese “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. Even when the owners have the education and experience accessing business capital is highly unlikely. Big banks, which dominate the market, approve just 2 out of 10 small business loan requests. 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 three states.
The Convergence of Locavesting and Crowdinvesting
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 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, investment crowdfunding is the vehicle that will be able to transfer this capital to small local businesses and real estate development.
From Consumer to Investor
There is latent potential capital that is being used only as consumer dollars in local communities. The vast majority of that money is not being saved or invested only spent as quickly as it is being earned. One solution is the junction between crowd investing and locavesting where community members are willing to invest as little as $100 in local businesses and real estate development. Then become customers and brand advocates for the businesses that they have invested in and have a financial interest in being successful.
Investment crowdfunding and locavesting provide a collaborative community-led path forward to increase the viability of community-based business enterprises. Communities can create virtual showcases that allow business owners, startups, and real estate developers, and investors to build local investment crowdfunding ecosystems that promote local investment and the building of resilient and sustainable local economies that are innovative, create jobs, and build local wealth. No one knows what the new normal of local economies will look like, but we know that locavesting and investment crowdfunding are proactive steps that we can take now to build strong local businesses and economies. For more information on how to build local investment crowdfunding please visit Crowd-Max Publishing.