In the beauty of the free market, start-ups provide a catalyst for innovation, economic growth, and job creation. But with the often-high costs of starting a business, there is little debate that start-ups need capital. No matter how much potential a business idea might have, it must have capital investment to succeed. It would be a vast understatement to say that new businesses need as many options on the table as possible as they work to pursue their goals, and their options can sometimes be quite limited.
However, in the age of the internet and the smartphone, more and more funding options are opening up for start-ups. One innovative way to generate business capital through the internet that has emerged in recent years is an investment model known as “crowdfunding.”
Although crowdfunding has multiple forms, a particularly promising form is known as “equity crowdfunding.” Equity crowdfunding raises capital through a campaign that markets a company's potential and offers prospective investors equity in the company. When someone contributes to the crowdfunding campaign, they receive a percentage of the company's profits.
Since most of the investments are small and spread out across dozens, hundreds, or even thousands of investors, it allows new businesses to market their company's potential to the general public and garner more funding. Usually, online platforms market these campaigns, and many have been highly successful. The campaigns provide a funding mechanism for innovators to focus on developing new innovations that are well-funded and receive feedback from investors as they innovate.
For instance, Oculus, a virtual reality headset start-up, started in 2012 with a crowdfunding campaign goal of $250,000. The campaign ended up raising almost ten times the original goal, reaching $2.4 million. Just two years later, Facebook purchased the company for $2.3 billion.
Another campaign led to the launching of SkyBell, one of the first of the “smart doorbell” developers that raised its first several hundred thousand dollars in funding through crowdfunding. The examples are numerous. In fact, crowdfunding has been estimated to generate more than $17 billion a year, with projections for the amount to grow even higher in the coming years. Who knows when the next billion-dollar company will get its start from crowdfunding?
In a day in which the government heavily regulates so much of the financial sector, policymakers should review the potential reforms that could be made to increase the feasibility of crowdfunding as an innovative business funding model.
Although much headway has been made on the federal level with crowdfunding policy, there is a need to reform many of the outdated and ineffective crowdfunding policies in many states. Such reforms would increase the potential for state-based crowdfunding successes as well. By reforming regulations on crowdfunding, states can increase opportunity and encourage innovation by expanding the funding options available to start-ups and small businesses.
The beauty of the American experiment is the potential for each state to bring new ideas to the table to increase prosperity and expand opportunity. State crowdfunding policy reforms for the 21st century could be a way to do just that.
Matthew Nicaud is the Tech Policy Specialist for the Mississippi Technology Institute, a division of the Mississippi Center for Public Policy.