According to a Kauffman Foundation report, new firms add an average of three million jobs to the U.S. economy during their first year of operation, while older companies cut around one million annually. Unfortunately, at least 65 percent of these new startups go out of business within the first four years due in part to lack of access to financing.
Traditional methods of getting funding are very limited for newly-established businesses, as they are typically considered risky endeavors. Of the six million businesses that launched in the U.S. in 2012, only 1,174received venture capital funding. For newcomers to the entrepreneurial world, the odds of raising an institutional round are almost as small as winning the lottery.
On the upside, however, investment activity by angel investors and friends & family is growing. According to Kauffman, informal investments amount to about $100 billion annually. Between 50,000 and 60,000 deals were funded by angel investors in 2012, and the number of new deals is increasing year-over-year, indicating a positive trend for entrepreneurs. Angel investors - who are required to qualify as accredited investors per current regulations - currently only represent less than one percent of the U.S. population. This is expected to rise significantly with the implementation of the JOBS Act and as investors become increasingly dissatisfied with public market returns.
The JOBS Act, which stands for "Jumpstart Our Business Startups," intends to lift some of the restrictions on private investments for emerging businesses. By infusing startups with capital, they will create jobs and drive growth for the economy.
Equity crowdfunding is an emerging industry that will take advantage of the increased angel activity and help startups acquire needed capital. Platforms like the one I co-founded, RockThePost, eliminate a lot of problems that startups and investors face in the offline world, as they accelerate the fundraising process. This ultimately gives entrepreneurs the necessary resources to continue along a growth trajectory by developing their business rather than spending time fundraising for eight or more months -- the average time it takes to raise startup capital. Typically, with a seed round, a startup can hire at least four people full-time.
The crowdfunding space also comes at a time in history when collaborative consumption is sweeping the world on an international level, as Rachel Botsman eloquently explained in her 2012 TED talk. Services likeTask Rabbit or Lyft serve as good examples of innovative startups contributing to bypassing the middleman and effectively lowering the unemployment rate in the process.
Even though equity crowdfunding platforms are still waiting for the SEC to set the regulations for Title III of the JOBS Act, many are already adding a lot of value to the economy by raising millions of dollars for startup companies.
However, the revolution in capital generation will really be visible post-JOBS Act implementation, which is expected to happen during the summer of 2014. Upon enactment, everyone, including non-accredited investors, will legally be able to participate in private company fundraising, which means more startups will receive capital and more jobs will be created, hence the name the "JOBS" Act.
Crowdfunding is not only creating new lifelines for small businesses and startups pioneering job creation, but also it is encouraging entrepreneurs to continue ramping up the innovation for a better society.