Government focused on growing economies focus on creating jobs. Small business and entrepreneurs are the driving force behind every successful economy across the globe. Cultures and governments that embrace and celebrate the entrepreneur are more likely to succeed in both the short and long term.
Although crowdfund investing is not an economic cure-all, it can be an important part of the solution. It allows significant numbers of citizens to make modest investments in high-growth and/or community businesses. And it can benefit your country for the following reasons:
1. Ideas Follow the Money
Fostering an ecosystem that encourages entrepreneurship and innovation requires capital. If the financial markets or regulations in a particular country are such that capital isn’t flowing, businesses can’t get the money they need. Entrepreneurs who are passionate enough about their ideas will go where the money is available to fund them. This is why many Canadian entrepreneurs head to the United States: because capital is more readily available to fund them there. Countries that wait to update their securities laws will create “brain drain” as skilled entrepreneurs head to other countries where they can fund and launch their businesses. An idea that is successfully funded in one country generally stays there and rarely returns back to the entrepreneur’s country of origin.
2. Ideas Turn into Job-Producing Businesses
Ideas launch businesses. Businesses require people to grow. Good ideas can turn into great job-creating businesses. According to the Small Business Administration, all net new jobs in the United States in the past 30 years were created by small businesses. Big businesses employ thousands of people, but tens of thousands of small businesses create a much larger number of jobs. Crowdfund investing allows a community to fund local businesses and, in doing so, to create its own jobs.
3. Job-Producing Businesses Are Tax Revenue Generators
Businesses pay salaries to employees. Employees pay payroll taxes to the government. U.S. payroll taxes fund both Social Security and Medicare. The more jobs there are, the greater the tax receipts. The greater the tax receipts, the more money the government has to cover these expenses and pay for the future health of its citizens. In addition profitable businesses pay taxes on their profits to help support the infrastructure (roads, electricity, water, and so on) without which a business could not operate. Crowdfund investing will encourage more profit-seeking businesses that will generate more tax receipts for governments.
4. Economic Stimulus Is a Byproduct of Entrepreneurship and Innovation
Entrepreneurship and innovation are about creating and sustaining ideas — ideas that provide solutions to problems and are purchased by consumers domestically and globally. The cash that consumers pay to a business is used to purchase goods to make the product or service, to hire employees, and to pay for things like lawyers, marketing services, and rent. This flow of capital is a boost to an economy. The more a government can do to encourage entrepreneurship and innovation, the more capital will flow, and the better off its economy will be.
5. Local Investing Keeps Money in the Community and Country
The vast majority of capital local businesses spends stays in the local communities where other shops reside. That money is spent on chamber of commerce dues, tax attorney services, lawyers, general contractors, landlords, business services (phone, Internet, trash pickup), local advertising, and so on. Businesses also employ people who make a living from a business’s revenue and, in turn, support the local communities further via grocery stores, gas stations, restaurants, and other everyday expenses. Many state and federal governments understand this multiplier and try to make their regions as attractive as possible for entrepreneurs to start businesses.
6. Crowdfund Investing Leads to a Larger Middle Class and Greater Stability
Having a “barbell” economy with a large underclass, a large wealthy class, and very little in the middle is unhealthy. A barbell economy doesn’t offer people in the underclass models for how to improve their circumstances or create better lives for their families. Also large unemployed population is a dangerous situation for political stability. When you have over 15 percent unemployment in a country, and when that unemployment is particularly pronounced in citizens under 30 (who are educated and frustrated because they are unable to work), you have a recipe for unrest. Crowdfund investing provides communities with a way to build businesses that add value and create jobs. Countries must create ways to grow the size of their middle class.
7. The Number-One Source of Net New Jobs Is Small Businesses
Many economic studies show that the number-one source of net new jobs is small businesses. To create new jobs in your country, you need to help small businesses to start and grow. With the legalization of equity-based crowdfund investing, small businesses have a new spigot of capital that they can use to grow their businesses and create jobs. People working in small businesses are already oftentimes wearing multiple hats (sales manager, sales person, marketing manager, social media marketer, advertising manager, and so on). When small businesses grow, they have no choice but to hire more people.
8. The Web Can Get Capital Flowing
Before the Internet, banks or other third parties were the only way for individuals to pool their resources and then provide them (via the banks and their lending guidelines) to other individuals to build businesses. Now, individuals can use the web to connect people who have capital to people and businesses that need capital. Other than face-to-face communication, there is no more transparent communication channel than the Internet. The web supports many-to-many communication that enables people to communicate their needs and allows other people to evaluate those needs and determine whether to provide the requested resources.
9. People Want to Support Their Country
Don’t underestimate the power of national pride. People want to support the country and culture they know. People want to invest in people, products, and services they know. In a lot of countries it’s hard for people to invest in businesses that their fellow countrymen are starting and growing. Rather they have to send capital to other countries where it is easier to find a return on their investment. National pride is one reason, but savvy and successful businessmen and women also understand that the better off their country’s economy is, the better off their own businesses will be. This is one reasons we believe crowdfund investing will increase the flow of diaspora money. Today, literally billions of diaspora remittances are already flowing back. With crowdfund investing, countries create the opportunity for additional capital flows to not only support basic needs but also to make real investments in high value and potentially high-growth businesses in the countries to which people feel deeply connected.
10. You Don’t Want to Be Left Behind!
Crowdfund investing is the dawn of Web 3.0, where the social web meets capital formation. It’s a true disruption of the private capital markets. For the first time, both existing Main Street businesses and startup businesses can seek capital via the same channel and can leverage the power of their communities. More and more countries are exploring this opportunity and working to legalize versions of crowdfund investing that are appropriate for their culture and capital markets. This is another step in making the world a smaller and more connected place. Don’t be left behind!
Sherwood Neiss is a Principal at Crowdfund Capital Advisors. CCA is a strategy and technology advisory firm that works with Governments and NGO on implementing a CFI infrastructure.