New businesses begun with less than $5,000 in capital but average capital required for a small business is $80,000.

posted Nov 15, 2012, 4:41 PM by David Khorram   [ updated Nov 15, 2012, 4:58 PM ]

Why Entrepreneurship and Crowdfund Investing Go Hand-in-Hand in Recognition of Global Entrepreneurship Week

This week, countries all over the world are celebrating Global Entrepreneurship Week, honoring those innovative small business owners who historically have created 65 percent of net new jobs in the U.S, according to the Small Business Association (SBA).

With access to capital being the primary hurdle that entrepreneurs currently face, understanding what crowdfunding regulations imply for capital markets is critical for startups and small business owners. Small businesses only receive one percent of all investment capital in the U.S. -- an astoundingly low figure.

Crowdfund investing enables large groups of people to pool small amounts of money together to help fund an entrepreneur in exchange for a piece of the company -- kind of a cross between traditional venture capital and purchasing shares on the open market. Social networks will bring interested investors together to fund entrepreneurs and enable them to discuss associated risks.

In 2013, debt- and equity-based crowdfund investing will become legal thanks to the Startup Exemption, part of President Obama's JOBS Act which passed Congress earlier this year. This was an unparalleled development for job creators needing investment capital for their startups but who encountered hurdles obtaining a small business loan or traditional venture capital. Raising capital for small- to medium-sized startups will become substantially more efficient via crowdfund investing, setting the stage for 2013 to be the "Year of the Entrepreneur."

The public has a great opportunity to learn about the impact of crowdfunding on the economy this and next week. This Thursday, we will speak at the White House and the SEC's Government-Business Forum on Small Business Capital Formation; after that, we will unveil new data to discuss the economic impact crowdfund investing could have over the next five years.

The new data will show crowdfunding's enormous potential when put into context: in 2011, venture capitalists invested more than $30 billion into the U.S. market alone -- and we expect that over the next five years that number will grow substantially, to nearly $60 billion.

New opportunities abound with crowdfund investing. The ability to deliver capital to high-growth businesses that were traditionally funded by venture capital, and now to conventional businesses that previously turned to banks for financing. While revolutionary, crowdfund investing is likely to be most attractive to the new venture, growth venture, and small business segments. Contrary to rumors circulated by some in the popular press, crowdfund investing is unlikely to replace existing early-stage funding channels like angel investors or venture capitalists. Rather, it will expand upon capitalization alternatives and compliment other funding mechanisms. For example, a startup could utilize equity-based crowdfunding to gain enough capital to produce results that will attract a top-tier venture capital firm for a second round of funding. (The specific SEC rules state that crowdfunding will be available to small businesses seeking no more than $1 million in capital annually.)

According to the Kauffman Foundation, the largest foundation dedicated to promoting entrepreneurship, approximately 565,000 businesses were started in 2010, with 31 percent of new businesses begun with less than $5,000 in capital. The foundation further reports that the average capital required for a small business is $80,000, with 10 percent of startups forgoing outside financing altogether.

In our soon-to-be-released white paper, we calculate the market for new business financing from external capital sources at approximately $40 billion dollars annually. Given these figures and assuming a five-year adoption timeline for crowdfunding, as was the case for e-commerce, we estimate that five percent of business ventures will seek financing in the Crowdfund investment marketplace by 2017. We also project that new businesses will demand $4.3 billion in funding in year one and $59.6 billion by year five from the Crowdfund investment marketplace.

Crowdfunding will be one of the most transparent, efficient and necessary investment channels in the future. Each company funded will create jobs. Therefore, funding more companies translates to a greater number of jobs created. Customers become investors and have a vested interest in the success of a company and become brand evangelists. This is only now possible because crowdfunding democratizes access to capital, something we can all celebrate.

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