You know what creates jobs? New businesses. I have heard people argue that it doesn’t and that is crazy. I am trying to start a business and it will create 13 new jobs in Texas. And don’t you think the jobs they leave will probably need to replace them? All this creates a greater demand on the workforce, lowers unemployment, the increase in demand on the workforce raises the average income per capita. And the people with new, higher paying jobs? They spend money and all this creates an economic ecosystem. My guess is anyone saying otherwise is vested in a business that does not pay its employees very well. I have no sympathy for them.
So what is equity crowdfunding? It is raising the money for small business through unaccredited investors through online solicitation. Unaccredited investors are investors that have less than $1 million in assets or make less than $250,000. So the 99% of us. If you are familiar with Kickstarted, it is similar but instead of getting goods or services, you get equity. Here is a great video that explains some of the ends and outs.
I think the coarse Facebook and other recent startups have taken is both interesting and telling. Facebook raise a considerable amount of money through angels and VC. Traditionally, people have used IPOs as a way to raise money. In other words, they would sell shares on the open market to fund their business. Facebook instead raised money in a non traditional fashion. I imagine because they could artificially keep demand high and get more equity for themselves. By the time Facebook had an IPO, arguably all the growth was realized. It is this growth in startup businesses that has value. It is the reason we invest. I think this demonstrates that the opportunity to make huge gains comes by investing early in a company. Not once the businesses growth is realized.
If that is true, people could potentially see greater returns investing in startups. Investing in startups is riskier but the higher the risk, the higher the reward. Taking risk is part of investing. Another thing that is interesting about equity crowdfunding is that the level of interest in a campaign can indicate the markets interest in a business. If Google Fiber did a crowdfunding campaign to bring high speed internet to Dallas, you better believe every Time Warner Cable customer would be the first to put money in that. Why? They want the service. And they can invest money to make it happen. I am sure that scares the shit out of shitty companies that sell shitty services or products or exploit there employees. Imagine a world where employees could quit their job and start a business that competes with their previous employer. And if a lot of people give small amounts to a business, it indicates to larger investors like VC and Angels that this is a good investment. If there is a strong demand for equity in a business, there is probably going to be a strong demand for that service or product. I heard a great example from my friend Chris Camillo, who wrote Laughing at Wall Street. He told me of how there was a friend of his that was going to make dance shoes and was looking for investors. The idea sounded a little crazy until he put it on Kickstarter and pre sold the first batch. After that, Chris invested because he knew people that dance wanted this particular type of dance shoe. But equity crowdfunding is different in that instead of pre selling products or services, you get equity. It would be like buying shares of Dell while he was still in the dorm room before the IPO. Those shares would see the greatest return.
Right now lawmakers are trying to decide what rules to put around equity crowdfunding. How much can each person invest in one startup? How much can a startup raise? What documents must a startup disclose? How do you avoid fraud? These are all important questions. As far as how much can a person invest, I would say there should be no limit. There is no limit to playing the lotto and that is considerably more risky. By a magnitude of infinity. The amount a startup can raise should be dictated by the market. This is a good thing for the economy and investors. I think they should be prudent and have a diversified portfolio but a few investments in startups could be very lucrative.
I plan on running a equity crowdfunding campaign in the new year for Jables. Go sign up for our email list and we will be sure to keep you informed.