Last week was Global Innovation Week 2014 and one of the highlights was the Global Innovation Summit (GIS) in Silicon Valley.
The focus of the GIS conference was on the great topic of ecosystem development - a topic of great import to conference leaders Victor Hwang and Greg Horowitt, venture partners at T2 Ventures and authors of The Rainforest: The Secret to Building The Next Silicon Valley.
In this article I share the 3 ways in which equity crowdfunding will accelerate the growth of local entrepreneurial ecosystems, in the U.S. and internationally.
Equity Crowdfunding: One of Many Ecosystem Growth Drivers
Innovation ecosystems, where entrepreneurship flourishes, have several different growth drivers within a given city or country. Some of these drivers include: mentors, education, culture, talent, dense "clustering" and, finally, capital.
Today, I'm going to talk about capital. Reason being, I believe that you and I are alive at a unique moment in history where we are experiencing what is likely the most radical shift in early stage finance for entrepreneurs that we'll see in our lifetime.
In the U.S. this shift has recently been enabled by the JOBS Act and the movement of early stage investing online. Globally, there has been similar legislation introduced and implemented to move entrepreneur capital online in a growing number of countries.
And unless you've been living under a rock lately, you've already heard about this shift in finance. I'm talking about crowdfunding. Or more specifically, equity crowdfunding.
Rewards-based crowdfunding has grown exponentially over the last 5 to 7 years from virtually an entirely new model to a multi-billion dollar industry.
Now the crowdfunding model has expanded via sites like Crowdfunder.com and CircleUp who are bringing an ever more potent and powerful element to the table -- investment. (Previously, it was against the law to raise investment online.)
Of course, equity crowdfunding is not purely a U.S. phenomenon, as some US investment platforms have already expanded internationally to help bring the model of early stage investing in startups and innovation to new regions.
But can this help create new "Silicon Valley" environments and ecosystems in other places around the world?
Well, Silicon Valley doesn't have a monopoly on innovation, entrepreneurship, or investing. But, Silicon Valley is unique and it has taken 4 to 5 decades to become the one-of-a-kind place it is today.
Here are three ways in which equity crowdfunding will help speed the growth and acceleration of innovation ecosystems around the world into their own unique environments that support game-changing entrepreneurs:
1. Crowdfunding Platforms Speed "Clustering"
The Harvard economist Michael Porter talks about the theory of economic development called "clustering." In short, the growth of a local ecosystem is enhanced and accelerated the more dense and interconnected it's network of diverse participants become.
Technology and the Internet is already speeding up the development of specialized social networks both online and offline.
Technology and the Internet have also been taking industry after industry and bringing automation while dis-intermediating many long established incumbents.
Equity crowdfunding is now bringing investment online, and changing the way early stage capital is invested in given industries.
In this process, the place where entrepreneurs and investors are connecting to fund and grow businesses -- equity crowdfunding platforms -- will also be the places where more clustering happens rapidly online.
Leading platforms are already seeing this kind of rapid clustering outcomes in less mature ecosystems like Mexico and Latin America, where investors value plugging in to top deal flow and entrepreneurs are challenged by the lack of active investors at the Seed and Series A stages.
2. Accelerated Access to Capital
In recent studies it turned out that the two most common reasons why startups fail were turmoil among the founding team, and lack of capital.
Governments interested in creating their own "Silicon Valley" type ecosystems have been trying for a while now to solve their local funding gap problems for entrepreneurs via a "top-down" approach of putting capital to work in government backed incubators and the like.
In many ways these top-down approaches done in isolation haven't worked to actually improve local ecosystems in a sustainable and long term way.
But crowdfunding is the ideal complementary "bottom-up" method that further accelerates access to capital for deserving entrepreneurs.
In some places, online investment and crowdfunding can even help to shorten or "leap frog" development time in the early stages of an ecosystem where investors are slow to take the risks required to fund early startups and true innovation.
Part of the magic of crowdfunding is that it makes the funding process a more open and public process than it has ever been, while also helping spread risk across a larger group of investors for smaller amounts per investor.
3. Attracting Strategic Relationships
When equity crowdfunding was first coming online with accredited investors, it was assumed that there would be nothing more than "dumb money" thrown at ideas that weren't getting funded otherwise.
Fast-forward to today. Crowdfunding sites are seeing the companies' online fundraising get strategic angels and VCs investing. A recent deal, TradeYa, raised $1M and received a highly strategic investor who invested $100,000 3 days after they launched, whom they also brought on as an advisor to the company.
Equity crowdfunding is helping entrepreneurs market their companies and fundraising efforts in a new way and not just raise capital, but in many cases attract the attention of mentors, advisors and partners.
If you're an entrepreneur, investor or someone who wants to support local entrepreneurs then now is the time to get involved online by joining an equity crowdfunding platform and connect to your local community online.
This post is part of a series produced in partnership by the Global Innovation Summit and The Huffington Post around impact, innovation, and technology. For more information on the Summit, click here.