- May 16, 2020
- Posted by: Kirsten Campbell
- Category: Blog
Venture capital has traditionally been an industry with tremendous unchallenged power and the ability to tap a company, and watch its founder become a millionaire overnight. However, the coronavirus has pushed VC towards the sidelines, while crowdfunding is stepping in to fill the void by assisting banks and the Federal government to fund Main Street.
Move aside, grandpa
The venture capital business model is quite conventional, in that it relies heavily on networking and relationship building, and abhors technology. The current way that VCs conduct business —with extensive conferences and in-person meetings— won’t translate smoothly online. Lacking their usual means to connect with their investors and meet startups, VC’s position has been severely weakened. This is particularly true when compared to equity crowdfunding, which has always lived online. While the VC industry is regrouping, crowdfunding is continuing its ascent. Appropriately, March 2020 set a record for Wefunder which has recorded their best month ever and July smashed industry records.
Avoiding the internet isn’t a savvy long-term strategy, especially as the recession settles in and businesses adapt, at a faster pace than originally anticipated pre Covid-19, to a more digital world. Waiting out the storm is a play many investors are pursuing, but that won’t be enough to avoid falling behind in today’s increasingly connected world. It’s time to adapt or die.
Covid-19 is a Catch-22
Current economic circumstances demand alternative funding methods. Small businesses can’t afford to hope for Federal assistance to stay afloat; many have turned to crowdfunding to keep the lights on during the pandemic. At the time when small businesses need money the most, VCs have taken a step back and grown more conservative with their check writing.
The influx of people into the equity crowdfunding arena, which operates fully online, is a powerful force that venture capital is ill-prepared to take on. The power is shifting in crowdfunding’s direction and is likely to cause increasing disruption in the lumbering VC ecosystem and ultimately hit them where it hurts: their wallet.
Brave new world
Crowdfunding has the power to change culture. By funding women and minorities in much higher numbers than VC, crowdfunding is poised to champion fresh perspectives and innovative business ideas. We know that companies with successful crowdfunding raises create and support 54 direct and indirect jobs, on average. Considering 98% of VC funding goes to homogenous white guys, and of that money, 94%+ of it offers no returns, a change is likely forthcoming because this dynamic is unsustainable in our covid-ravaged economy. Currently, women and mixed gender teams receive 44% of equity crowdfunding money. Adversity drives innovation and that’s where diversity thrives. Diverse sub-groups shut out from VC funding are accustomed to swimming upstream, but now with the JOBS Act, they finally have tangible access to capital.
The average accredited investor (by a landslide) in America is a 62 year old white guy and the overwhelming majority of venture capital money also goes to white guys. To date, they’ve acted as society’s cultural gatekeepers. Imagine what the startup and small business landscape would look like today if women and minorities had instead received 98% of venture capital money – or even 50% for that matter. Our culture should be an accurate reflection of our collective values. Based on the current state of the financial ecosystem however, it’s clear whose ideas and comforts are prioritized.
The pandemic certainly threw the current playbook out the window, giving equity crowdfunding the opportunity to prove that there’s another road to startup capital that’s wide enough for everyone. The coronavirus has thrown the financial world upside down, and it seems like the outcome could be quite positive for the crowdfunding arena. More diverse founders, companies and ideas will receive funding now and the ripple effects could change small businesses, the economy and social classes forever.