I've always been fascinated by the unintended consequences of tools. Toolmakers often start out trying to achieve a specific goal, but when people start using the tool they sometimes find that its useful for many other purposes.
Crowdfunding illustrates this point. Designed as a capital-raising tool, we are just beginning to see some of the many socio-economic effects.
In researching my book Crowdfunding Opportunities and Challenges (Thompson Reuters), I found early statistics showing that Crowdfunding makes it easier for women entrepreneurs to raise money.
Early statistics were startling. Women led businesses get:
•4% of SBA loans
•7% of venture capital investments
•34% of online capital
The Crowdfunding success rate of 52% for women was higher than the 39% success rate for men. Women were also getting higher valuations. But the men also benefitted. Crowdfunding success rates and valuations are higher for both men and women compared to traditional capital-raising. So, Crowdfunding is a rare win-win solution. I note these Crowdfunding statistics were based on only one large Crowdfunding platform – CircleUp. But even assuming the statistics are not representative of all platforms, something startling seems to be going on in the Crowdfunding world.
Crowdfunding's designers probably didn't know they were unleashing a force that could close the capital-raising gender gap, but that may be just one of the big unintended consequences.
So, what's going on Online? Why is this happening?
One thing is that CircleUp attracts a lot of consumer products entrepreneurs and investors. It has very few technology plays dominated by engineers and Silicon Valley nerds. Maybe Crowdfunding is like the investor version of Home Shopping Network. Will Home Shopping Network seize the opportunity to become an investment marketplace too?
Successful Crowdfunding offerings use videos and social media to generate investor interest. Seeing the actual product and how consumers use it is probably a better selling tool than trying to describe a new software product or medical device.
Each investor in Crowdfunding deals usually invests a smaller amount per investor than traditional capital raising deals. The Crowd seems to love giving small amounts to women entrepreneurs. The beauty of Crowdfunding is that small amounts from lots of people can create big wads of cash for entrepreneurs.
It will be interesting to see whether the same holds true for minority entrepreneurs. Wouldn't it be amazing if one of the unintended consequences of this new Crowdfunding tool achieved what all the conferences, articles and laws that focus on closing the gender gap couldn't to? Just think of all the time and money spent going in the wrong direction. When you are lost in the forest, having a good sense of direction matters more than having good intentions.
This raises a question: Why has it taken so long for Crowdfunding to come? Neither the technology nor the business model is really new. Crowdfunding is just selling something on the Internet. People have been doing that for decades. Why didn't we close the gender gap twenty years ago?
The answer, of course, is that securities laws made Crowdfunding illegal until recently. So, we have the strange situation that the same Government that promotes gender equality made it illegal to use a tool that may outperform all Government programs designed to create equality.
This brings us to my home state - North Carolina. More than 30 states have legalized Crowdfunding, but North Carolina is still sitting on the sidelines watching. It's time to pass the NC PACES ACT that will legalize state Crowdfunding in North Carolina.
Bob Dylan said: "Get out of the way if you can’t lend a hand." That's a good motto for Government to live by every day.
Ronald Reagan said: "Mr. Gorbachev tear down that wall."
The times won’t be changing if we don't tear down the walls Government builds.
If two very different leaders like Dylan and Reagan both agree, then why does North Carolina still have a legal wall between entrepreneurs and investors?
Mother's Day is a few days away. So, for Mother's Day 2016, how about giving the Mothers of North Carolina what they really need: Crowdfunding to grow their businesses. Your Mom would be so proud of you if you do. Who knew your Mom would turn out to be such a free market Libertarian?
About Jim Verdonik:
Jim is an attorney with Ward and Smith PA. You can reach him at JFV@WardandSmith.com
Check him out at www.YouTube.com/eLearnSuccess
Jim writes a column about business and law for American Business Journals http://www.bizjournals.com/triangle/search?q=%22Jim+Verdonik%22&%20title=
You can purchase Jim's book Crowdfunding Opportunities and Challenges at http://www.amazon.com/Crowdfunding-Opportunities-Challenges-Jim-Verdonik/dp/1483442802
See the post on Jim's blog here.
(this article is based on Jim's article that was first published by Triangle Business Journal on May 5, 2016)