“Venture capital funding breaks records—and fuels bubble concerns.” Headlines like these abound these days. When reading the tech press, you would think that entrepreneurs are drowning in capital. But while this may be true in some sectors, the reality for the vast majority of founders throughout America is very different.
The percentage of venture funding going to female-only founding teams has dropped to 2.2% in 2021. That’s the lowest it’s been in five years. In 2020, Black founders received only 0.6% of venture funding. Just three states (California, New York, and Massachusetts) currently account for 77% of all venture capital. For this last reason especially, over the last few years, my team at Wefunder, a platform that allows anyone to invest in startups, has taken three cross-country train trips to meet hundreds of founders in their own communities.
We were blown away by the sheer amount of raw talent we met—brilliant founders working hard to bring their dreams to life. But we were also angry that they were not getting the support or resources they deserved. That talent was being squandered. So often we saw founders being held back because they were not exposed to the right people. Some didn’t realize yet what they were capable of. There was no one they knew in their community who inspired them on what was possible—to think bigger, to give them the self-confidence that they were good enough to take their shot.
They were also frequently starved of capital. One founder in Nashville told us, “You can’t get in front of angel investors here until you have $1 million in annual recurring revenue.” We heard of a founder in Kentucky who took a $25,000 angel investment for 20% of his company—which is now worth $10 million. In so many cities throughout the country, a tiny cadre of rich old men have a stranglehold on early-stage startup investments, and those startups are being choked as a result.
To provide some context, in a Regulation D world—where the only people that get to invest in nascent companies are millionaires—this hegemony is difficult to disrupt. But the passage of the JOBS Act in 2012, the rollout of Regulation Crowdfunding in 2016, and the improvements to the rules in early 2021 now allow anyone to invest in startups they love, not just rich people. In politics, we believe democracy drives more equitable outcomes. The hope is that investment crowdfunding can drive more equitable outcomes in early-stage investing.
If an aspiring restaurateur in Omaha needs $150,000 to open a restaurant, they might struggle to raise that money from investors writing $25,000 checks. Restaurants are risky. In order to earn a risk-adjusted rate of return, an investor might demand an interest rate that’s punitively high. This then increases default rates and business closures, and the cycle is reinforced. But if someone who lives in Omaha can invest $100 in that restaurant, maybe she would be willing to do that because she believes in the entrepreneur, or because she would love another delicious restaurant in her neighborhood.
On our Amtrak trips, we met hundreds of founders like this. Leaders in their community, with passionate fans and customers. Historically, these supporters have been able to invest in Starbucks or Facebook on Wall Street, but not in these local companies they love. But now—thanks to the JOBS Act and investment crowdfunding platforms—they can.
The Nashville founder mentioned above might not be able to get in front of local angel investors until he has $1 million in annual recurring revenue (ARR), but what if his earliest and most passionate customers could invest $500 when he’s at $100,000 in ARR? Or what if that Kentucky founder had other funding options available so that he didn’t have to feel compelled to give up a fifth of his company for $25,000? We believe that investment crowdfunding has the potential to get much more capital (and more values-aligned capital) flowing to founders throughout America—especially to so many of the communities we encountered, which are badly under-capitalized today.
But our vision for investment crowdfunding is bigger than expanding access to capital for founders. We identified two systemic challenges on our train trips—a lack of access to capital, but also a lack of mentors, champions, kindred spirits. Enabling a founder in rural Arkansas to connect with an investor on the other side of the country could spark synapses of connection that can encourage and empower founders to take their shot, and lift their vision.
The internet has connected friends on Facebook, drivers and passengers on Uber, apartment owners and travelers on Airbnb. It’s now time for it to start connecting millions of founders with millions of investors across the country.
Jonny Price is the VP of fundraising at Wefunder.