There may be no richer irony than a web site dedicated to the crowdsourced funding of start-ups. You might say that it’s like using a balloon to inflate a balloon, but in fact it is probably the purest form of capitalism. And it comes courtesy of a nifty piece of federal legislation called the JOBS Act. To get the full story please start here with this New York Times article.
Where this comes from is an age-old challenge to small businesses needing capital for growth. There is an approach to being a start-up where you bootstrap growth through pre-investor money, casually referred to as “friends and family money” with the tacit understanding being that your grandma will lend to you without having to prove either the validity of your concept or even your credit-worthiness.
Outside of friends and family money, securities laws place rather onerous reporting requirements on companies that seek funding from the general public in order to protect that same granny from an ostensibly less scrupulous operator than her grandchild. It has always been the middle ground of “I need more than my friends and family can give but I really don’t have the mechanism in place to go to the general public” that has been a point of significant friction for start-ups and small businesses trying to grow.
This new law allows small businesses to seek equity investments through social media sites or elsewhere on the Internet without having to register the shares for public trading. It’s like Kickstarter for small business. That has to be good, right?
It is good as long as one accepts failure as a reality in the business world. Kickstarter itself has a so-so record of success to failures, which some jump on as a systemic weakness. To anyone in the world of start-ups and turnarounds and small business, this is just life.
The realities of this law — will there be sufficient investor safeguards added later; will the audited statements requirement stick, strengthen or drop, etc. — will work themselves out. The bottom line is that the pathways for obtaining financing for a small business and start-up have finally caught up to the likes of Amanda Palmer, Pebble Watches, and many others. Small businesses and start-ups are finally allowed to be on the same playground with the other kids. With that will come the inevitable scrapes and cuts that come from contact with others and general horseplay.
We feel that, along with the widening availability of financing, will come a strengthening of practices and concepts as these budding companies start to compete with others for dollars. These companies will be able to more fully engage their visions, with proper marketing strategies and executions as well as the ability to look farther into the future of their businesses, and act accordingly. Transparency will increase as well: it will have to because someone will set a standard by which others will be compelled to match or exceed. Being beholden to investors is something that many entrepreneurs try to avoid, for a variety of valid reasons. However, there is also a strong benefit when a small company’s upper management (even if it’s the same person as the middle management and the clerical staff) knows that their decisions matter to more people than just them and their grandma. These managers tend to take farther-reaching, better-considered actions as a result.
Broader financing options for start-ups comes with risks, but the upside is great. JOBS is a big win, with both small businesses and investors benefitting from it.