When government fails businesses, communities can step up to help them thrive
Part of what inspires me and other founders to create new ventures is the thrill of the unknown, and the unpredictability of entrepreneurship. While entrepreneurs have been forced to navigate global economic crises before, such as the 2008 recession, the coronavirus pandemic has created a new magnitude of economic uncertainty across every industry. Small-business owners, startup founders, and other entrepreneurs have been forced to make devastating decisions in order to try to salvage their companies.
Thus far, the public sector approach has been dramatically insufficient. The U.S. government’s federal relief program for small businesses quickly ran out of funds and was never even available to most startups with private funding. And there is not much optimism about how far the new wave of federal relief will stretch. Meanwhile, the private sector has similarly been unable to provide aid. Traditional means of raising capital institutionally, such as venture capital, are drying up and becoming increasingly inaccessible.
These institutions are failing startups, and businesses increasingly need community support to survive. There are encouraging signs: Communities have banded together to support the local businesses they cherish, such as buying gift certificates to help small businesses, ordering from local establishments such as bookstores, and donating to virtual tip jars for restaurant workers. Many people are arranging virtual sessions for service providers that typically operate in-person, like personal trainers and therapists. Additionally, small businesses have raised funds through crowdfunding platforms, where their loyal customers can support them online. Despite negative market predictions, this can be a hopeful time for entrepreneurs and a period of great innovation.
An interesting parallel can be made by examining recent history. After the 2008 recession, crowdfunding platforms such as Indiegogo and Kickstarter rose to prominence to fill the capital gap for entrepreneurs. At that time, traditional crowdfunding became a popular way for businesses to raise funds. These platforms can still provide some relief to owners, but now many donation-based crowdfunding campaigns haven’t been able to gain traction owing to an overwhelming amount of campaigns focused on immediate emergency support.
Equity crowdfunding is one emerging solution that will become even more popular as businesses urgently need access to capital. Through equity crowdfunding, potential investors are incentivized to support businesses because they can buy an equity stake in the businesses they believe in and care about most, gaining exclusive early access. I have had a longtime interest in equity crowdfunding, and earlier this month, I decided to join StartEngine, the largest equity crowdfunding platform in the U.S.
Historically, owing to securities laws that were passed in the 1930s, only accredited investors were able to make equity investments in private companies—preventing approximately 97% of the population from taking part. In 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law, which loosened Securities and Exchange Commission (SEC) regulations and enabled greater access to crowdfunding for small businesses and startups. After the law was implemented, equity crowdfunding turned into a new asset class for potential investors. Even novice investors can have the opportunity to invest in early stage companies and small businesses easily online.
Companies are looking for more than an immediate infusion of capital in order to ensure long-term success. As opposed to institutional investors or quick fixes such as emergency cash programs or loans, equity crowdfunding investors build a direct relationship with business owners and often become loyal customers of the products and services they invest in. These connections can have a domino effect with investors becoming brand ambassadors, which in turn attracts additional potential investors.
Investors like myself are eager to help entrepreneurs fill the void left by the government and institutional investors, but government agencies should also consider introducing new programs rather than solely providing relief packages that have short-term impact.
One idea is creating a program that provides every adult in the U.S. a set amount to buy an equity investment in a pre-vetted local business of their choice. Encouraging people to become strategically-minded investors and build a stake in their favorite companies will have a ripple effect on our economy by enabling companies to both retain current employees and hire new ones, allowing for growth in this nationwide recession. With Americans quarantined at home for the foreseeable future, this is an opportune moment to incentivize a new community of potential investors.
This era of economic volatility can be a catalyst for innovation rather than a doomsday event. All entrepreneurs can leverage these online investor communities that are ready to support businesses in this time of need. Through tools like equity crowdfunding, even more businesses can restabilize and enter new phases of growth despite the challenges to come.
Kevin O’Leary is a renowned businessman and investor, and chairman of O’Shares ETFs. He is also a personality on a range of shows—including Discovery’s Project Earth, CNBC, and ABC’s Shark Tank. He recently joined StartEngine as a strategic adviser.
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