Crowdfunding: The Right Tool at the Right Time for Building Back Your City’s Local Economy
Image via Unsplash.
Last year, the U.S. Small Business Administration called small businesses the lifeblood of the economy: they create two-thirds of net new jobs, drive innovation and competitiveness, and account for 44% of U.S. economic activity.
Today, small businesses and, by default, local economies have been decimated by the scourge of COVID-19. By September, nearly 100,000 small businesses had permanently closed their doors. Unemployment levels have exploded from their all-time lows of just a year ago.
As we dig out of the COVID-19 crisis and its impact on the local small business economy, crowdfunding emerges as one of the most powerful tools availability to communities. According to Isabel Strobing, community manager at Mainvest, a leading local investment crowdfunding platform, crowdfunding at its core is “the concept of a community, network, or group of individuals coming together to fund a project. Traditionally, funding a project was something for a select few; entrepreneurs can now source their funds from everyone, i.e., the ‘crowd.’”
This article focuses on the growing use of investment crowdfunding as a community-led economic development tool. According to Topiltzin Gomez of Honeycomb Credit, investment crowdfunding allows “local businesses [to] access capital from their customers and fans in the community, not a big bank or a credit card corporation. The growing use of investment crowdfunding helps to capitalize on local businesses and promote equitable economic development at the community level.”
Gomez talks about the stark differences between traditional financing and investment crowdfunding in terms of data points. “Despite a historic period of economic expansion, a recent SBA report found that bank lending to small businesses declined by approximately $100 billion from 2008 to 2016.” Add to this decline the devastating impact of the COVID-19 crisis and the federal government’s dismal response to promptly provide needed aid to support small local businesses. The challenges facing small businesses and local economies require an innovative solution. I believe that solution is community-led economic development fostered by investment crowdfunding.
Why does investment crowdfunding work for local businesses?
Small businesses and local economies face a stark reality. As Isabel Strobing details, investment crowdfunding has its advantages moving forward during the COVID-19 crisis—and in the new normal on the other side. When small businesses access capital from traditional sources, the lending institutions control the terms of the transaction. Investment crowdfunding turns this conventional approach upside-down. Listed below are three ways that an innovative, community-led process differs from the more conventional method:
Crowdfunding provides an alternative to conventional approaches to raising capital—including the risky strategy of a small business owner maxing out his or her credit cards. Image via Unsplash.
Market validation and buy-in: When a community comes together to fund a business, it proves demand in a way that traditional underwriting processes cannot. A company that receives investment from community supporters can reasonably expect those supporters to become customers; a conventional funding source, such as a loan or venture fund, doesn’t provide this validation.
Flexibility: Traditional funding tends to rely on set interest rates and inflexible terms, and it’s not uncommon for businesses to be stuck with burdensome debt repayments before they’re ready or during downswings. Especially in the age of COVID-19, flexibility is essential. The “revenue sharing note”—the vehicle that MainVest uses in all raises—is tied to revenue, so businesses only start repaying once they’re ready, and they have more manageable repayments when income takes a hit. As subordinated debt, it tends to fit into most cap tables nicely.
Loyalty: Because financial returns are tied to revenue, investors are incentivized to help the business succeed. Not just because they feel emotionally connected to the company, but because their rate of return is connected to it as well. Community investors are incentivized to go to local businesses, refer others, and offer support when it’s needed.
Investment crowdfunding and the Strong Towns Movement
Investment crowdfunding is the perfect tool for small-scale, incremental, community-led development. It is the ideal tool for gradual change in urban or rural areas. It empowers the community to lead the way on needed development by (a) creating a funding mechanism to raise the required capital for a project, and (b) providing an inclusive investing opportunity that allows citizens to become investors in the community development process.
Investment crowdfunding offers an opportunity for small businesses to access capital directly from community members. This process will require developing an adaptive feedback loop to build deeper relationships with, and raise money from, customers, suppliers, and community stakeholders. These community stakeholders will be the people that generate revenue for small, local businesses and real estate development—so making them backers, investors, and ultimately stakeholders in your industry or project (and the broader ecosystem) makes sense for Main Street businesses.
Investment crowdfunding is more efficient than traditional fundraising
When you’re an early-stage company, local retail business, or real estate developer focused on building your business and attracting seed capital, you might not be able to afford all the time and attention that pursuing traditional financing demands. Compared to applying for a loan, or seeking out accredited investors yourself, setting up a successful investment crowdfunding campaign is far more efficient and effective in getting your message out to the right people. With the right platform, you can tell your story, produce a quick video, set up some enticing rewards, and benefit from having everything in one centralized location where potential investors can find you.
Investment crowdfunding allows the business owners to turn traditional capital-raising funnels upside down. The investors are coming to a single website to view the offer online, instead of you packing up your data and information and taking your show on the road (or having the right connections) to reach investors or backers. The crowdfunding model also facilitates deeper relationships with your community and investors.
Investment crowdfunding builds traction and social proof
Image via Unsplash.
A strong, highly visible investment crowdfunding campaign can provide market validation and social proof vital in charting the path forward to raise capital. When potential customers show interest in your startup’s product or service, you’ve generated social proof, demonstrating that other people believe in what you’re doing.
Social proof is traction—whether it’s a large number of investors, pre-orders, or media attention—that’s invaluable as you pitch to other investors. The public nature of investment crowdfunding allows your campaign to grow organically in plain sight of the public. This social proof can also lead to digital and traditional press coverage that can increase social verification and market validation!
Investment crowdfunding provides market validation
Investment crowdfunding can also provide enormous market validation. Market validation is the process of presenting a concept or a product to its target market and learning from those prospective buyers whether or not the idea is worth pursuing. This process typically occurs early on in the conception stage, before any significant investment in developing the product. This process is very similar to social proof, but now people have invested dollars in your product or brand using investment crowdfunding. Market validation is a vital step in the growth and development of any brand or product.
If used correctly, investment crowdfunding is one of the most potent marketing and promotion tools available to small business owners today. Both social proof and market validation are powerful demonstrations of what crowdfunding can do for a small business or brand willing to learn how to implement a crowdfunding campaign properly.
Conclusion
Investment crowdfunding is a great tool to promote small, incremental change in cities and towns of all sizes.
Local investment empowers communities by creating pathways for local entrepreneurs, leading to better representation and creating more access to wealth generation. When local entrepreneurs can pursue their ventures, the revenue they generate is more likely to remain in the community. They’re better able to meet the community’s needs, as they know it better than any corporate chain would. On top of that, when the returns generated by the success of that business are kept local—instead of paid back as interest to big banks—the impact is more significant. It’s truly a way to uplift everyone. As Isabel Strobing, community manager at Mainvest, put it: “Local investment is a powerful way to impact local businesses, your community, your local economy, and your portfolio. As public markets remain volatile, it’s a viable option for diversification while simultaneously making a positive impact on your community.”
About the Author
Bill Huston is a nationally recognized investment crowdfunding consultant, educator, blogger, and speaker who focuses on small-scale real estate development and local small businesses. He’s a board member for the National Coalition for Community Capital (NC3) and a content consultant for Buy the Block and Crowdfund Better. You can connect with Bill on LinkedIn. For more information about Bill’s work and crowdfunding, including great podcast and webinar interviews, visit here.
Brainerd, Minnesota’s newest addition isn't exactly cause for celebration. Instead, this “high-tech” ice machine reveals deeper issues with public investment, community apathy and neighborhood decline that can plague cities.