EntreWorks Insights (Aug. 2024): The State of Crowdfunding

August 5, 2024
Posted by: Erik
Category: Newsletter

Welcome to the latest edition of EntreWorks Insights, a quarterly newsletter that reports on business trends, policy developments, and other issues affecting the business of economic and workforce development. You’re receiving this note because you’ve asked to subscribe or because you have some previous interest in the work of EntreWorks Consulting. If you wish to subscribe or be removed from this list, please send an email to info (at) entreworks.net. If you’re interested in the newsletter, please read on. Please feel free to share with friends, family, colleagues, and other loved ones. Comments and constructive criticism (and praise) are also welcome. You are also encouraged to visit the EntreWorks blog at http://entreworks.net/blog. Thanks for your interest.

Erik R. Pages

President

EntreWorks Consulting

www.entreworks.net

EntreWorks Insights

Volume 21, Number 2

August 2024

HIGHLIGHTS: Crowdfunding: What’s Working? What’s Next?

What’s New at EntreWorks Consulting?

Crowdfunding: What’s Working? What’s Next?

Let me take you back to the calmer, less stressful, days of April 2012. Justin Bieber’s “Boyfriend” was the top song, and “Hunger Games” topped the film charts. Politically, President Obama was preparing for a re-election contest against Mitt Romney. High on his policy agenda was the 2012 Jumpstart our Business Startups (JOBS) Act, which, among other things, eased the way for equity crowdfunding in the US.

At the time, many observers predicted that crowdfunding might transform the business finance landscape. While a business finance revolution did not occur, crowdfunding has emerged as an important part of the small business support landscape. Data from Florida Atlantic University’s Equity Crowdfunding Tracker shows a large jump in crowdfunding since 2016, when many of the first crowdfunding regulations were finally in place. In 2016, the US saw 188 regulated business crowdfunding campaigns that raised around $25 million. In 2022, these figures jumped to 1,577 campaigns that raised more than $417 million. Today, crowdfunding remains a niche tool for business finance, but it appears to be a viable option for many entrepreneurs—especially minority or women business owners who may face higher barriers to accessing traditional business investments.

What is Crowdfunding and How Does It Work?

The origins of crowdfunding can be traced back to the 1990s, but the industry took off after 2016, as new federal regulations came into effect. The industry has boomed since then, even with slight drops in post-pandemic activity tied to higher interest rates.

Most regulation crowdfunding occurs via leading platforms such as WeFunder, StartEngine, and Honeycomb. These funds in turn invest in a diverse mix of businesses, with a heavy focus on Main Street businesses operating in sectors like restaurants, hospitality, media, business services, and consumer products. Around half of backed firms are young (under 3 years of age, with a median valuation of around $8.5 million. This figure is akin to the valuation levels found for early venture capital (VC) investments, and slightly higher than many initial angel investments. These trends suggest that crowdfunding may now be able to effectively compete with other small business funding sources.

Crowdfunding’s biggest impacts may relate to the nature of firms funded in this fashion. Women and minority-owned companies are more likely to succeed in raising funds via crowdfunding, when compared to other sources such as VC investments. Significant funding gaps still exist, but crowdfunding does seem to have some impact in diversifying the base of company founders.

As crowdfunding for business has grown, the field has also diversified, producing lots of interesting models for investing community capital. (Here’s a useful guide from the National Coalition for Community Capital. You can also learn more from the Crowdfunding Professionals Association).

Many community development organizations embrace crowdfunding as a tool to fund business, community projects, and entire communities too. Most community crowdfunding sites opt for simpler tools that avoid the regulatory complexities found with the types of regulation crowdfunding noted above. But, some very interesting models are underway. These efforts use various approaches, such as rewards-based crowdfunding, where firms provide goods or services to investors, or types of investment crowdfunding that do not require the intense regulatory scrutiny that accompanies pure regulation crowdfunding.

Here are a few examples worth learning about:

Many states and localities are embracing crowdfunding as a tool to match funds for community projects. Vermont is a national leader on this front, via the Better Places initiative. Using the Patronicity platform, Better Places allows Vermont communities to access outside funds for community placemaking projects, such as trails, skateparks, and community makerspaces. Participating communities receive technical assistance along with a 2:1 matching grant from the state of Vermont. Since the program started, it has backed 52 projects which have attracted nearly $700,000 in local investment, along with around $1.25 million in state funds. Thanks to this platform, Vermont communities have funded a local maker space (Springfield), downtown street art (Brattleboro), and a local music festival (Hardwick). Many other states also offer similar programs using the Patronicity platform; this list includes Connecticut, Indiana, and Michigan, among others.

Other platforms, such as Small Change, tap crowdfunding to support real estate development. This tool has been used to support minority real estate developers, who often face challenges in accessing outside financing. Small Change has helped back projects, such as affordable housing, shopping centers, and community spaces, around the US. In Philadelphia, El Centro Home is currently using the platform to fund conversion of an old warehouse into a community workforce training center.

Finally, I’ve been very intrigued with how some small business support organizations are using crowdfunding tools as a supplement to their existing programs and investing platforms. Beginning in 2014,the Wisconsin Women’s Business Initiative Corporation (WWBIC) has partnered with Kiva, a global microlending platform to support the provision of “nano-loans” (ranging from $1,000 to $15,000) funding via the KIVA crowdfunding platform. This tool offers a means to help new entrepreneurs access early-stage funding and prepares them to successfully compete for additional financing from both public and private sources. Over time, this partnership has supported more than $3 million in micro-lending activity across Wisconsin, with an average loan size of around $6000. Beginning in 2023, the Wisconsin Economic Development Corporation also offered its support, by providing a one-to-one match (up to $5000) to Wisconsin entrepreneurs who raise funds via Kiva. This model, pioneered in Wisconsin, is now being deployed in other US sites, with Kiva Hubs operating in 30 states.

Why is Crowdfunding Relevant to Economic Development?

As these examples suggest, crowdfunding offers a set of tools that can help economic developers to build local businesses and invest in community assets. Crowdfunding is not a panacea: it takes a lot of time and resources to raise funds, the business model for some funds may be questionable, and the crowdfunding model may not be relevant for all types of businesses and communities. Yet, it does offer hope, especially for early startup founders who cannot access traditional funding sources. It also offers hope for communities who may lack the resources to win big federal grant competitions and other outside funds. Crowdfunding is one tool to help these places invest in themselves.

So, what does this mean for economic developers out in the field? At a minimum, they should assess whether crowdfunding is a tool with relevance for their communities. These programs can provide needed funding to underserved entrepreneurs, and can be a great resource to fund smaller community projects like parks, trails, and building updates. Regardless of who prevails in our upcoming elections, the flow of Federal dollars from Washington is likely to slow. As such, we all need to be aggressive and creative in seeking out and using new tools for funding specific projects and our regular day to day activities. Crowdfunding can help on this front.

We also need to advocate for changes to current crowdfunding rules and regulations. The industry is facing some challenges, with many crowdfunding platforms facing funding and political headwinds. For example, MainVest, one of the early sites, recently shut down quite abruptly.

Going forward, we need to streamline current regulations related to crowdfunding—you can find some useful ideas from the Crowdfunding Professionals Association here. That’s one step, but, in general, we need to do more to encourage the development of all sorts of community capital sources, from foundations to local funding pools to crowdfunding to many other sources as well. If you want to learn more about other community investment options, here are a few organizations that can serve as good resources to get started.

What’s New at EntreWorks Consulting?

We hope that you are having an enjoyable Summer and getting ready for the arrival of fall. Here at EntreWorks Consulting, we remain focused on continued projects in Louisiana and Indiana, along with newer work for the Development District Association of Appalachia and the US Department of Defense. You can find reports and other great resources at our website; we encourage you to check it out. The website also includes access to all past issues of the EntreWorks Insights newsletter and the EntreWorks blog at http://entreworks.net/blog. Recent topics include the linkages between economic resilience and entrepreneurship, our ongoing energy transition, and trends in self-employment. In addition, you can still access blog updates at our Facebook and LinkedIn pages. We look forward to connecting in person in 2024.