Any economist will tell you that most job growth takes place among small and medium sized companies. For example, the November 2013 ADP National Employment Report showed that of the 215,000 jobs added in November, only 65,000 (26%) were in large firms. While the economy has been recovering from the crisis of 2008, job growth has been very sluggish. In response, Congress passed the Jumpstart Our Business Startups (JOBS) Act. Among other things, the act helps create jobs by removing some of the obstacles preventing private companies from raising capital and hiring workers.
Since Venovate’s mission is to lead the way in capital formation for private businesses, I want to explain how this landmark legislation works and how it will help get Americans back to work. It will also create a new class of investors who will have access to a broader set of private investment opportunities than ever before.
Back in the 1970s, the founder of my former employer, Charles Schwab, borrowed money from his uncle to start Charles Schwab & Co. More recently, Steve Ellis started Chipotle Mexican Grill restaurants with a loan from his parents. Both of these companies have created lots of jobs. This is how many businesses got started – visionary entrepreneurs raised money from their friends and family.
The Charles Schwab story is particularly interesting to me because he took advantage of the deregulation of commissions in 1972 and started one of the first discount brokerage firms. Firms like Schwab, E*Trade, Fidelity, and TD Ameritrade gave a whole new kind of investor access to the stock market and created untold personal wealth in the middle class. I believe the JOBS Act will have just as profound an impact on how people invest as the end of fixed commissions did forty years ago.
Suppose you had a great business idea, but no rich uncle? You had a problem. It was illegal to solicit investment capital from the general public – people you did not already know – unless you registered your securities with the SEC or your state. Registration is expensive and not appropriate until you are ready to go public since you are just too small. In fact, the cost to go public is now so high, most private companies wait until they are very large to have a public offering. The days of investing in a small, publicly listed growth company may soon be over.
The other route is through venture capital (VC). Venture capitalists might invest in your company, if it needed a very large sum of money and had the potential to go public in just a few years. However, that is not the right path for many companies and most don’t need that much money to make it until they break even. The cost of venture capital in terms of ownership and control can be very high as well. VC funds need very high return on investment, therefore are only looking for multi-billion dollar ideas, and they demand a significant stake in your company.
The result is what I call the “capital gap.”
The VC model is breaking. It only works for a select group of companies. The flow of capital to innovative ideas has been choked off as venture capital funds have become larger and the time to a liquidity event has gotten longer. I believe there are plenty of great opportunities out there that have been unable to grow because they can’t get capital. Funding these ideas can rebuild wealth in the middle class and get Americans back to work. We just need a different investing model.
The JOBS Act closes the capital gap by allowing small companies to solicit funding from accredited investors – institutions and wealthy individuals. It gives small business access to a large pool of untapped money. Now, investors who want to put a portion of their money to work in small, fast-growing companies can choose among many business opportunities. They also have access to other alternatives for raising capital such as direct investment in natural resources and real estate deals, or even private equity, venture capital and hedge funds. All of these alternative investments form capital and create jobs.
This democratization of private investing presents challenges of its own:
- How can entrepreneurs be sure potential investors are accredited?
- How can investors be sure the company is legitimate? (those securities laws were made for a reason)
- How can an investor sell his stock down the road if the company is not yet public?
Venovate is meeting these challenges. First, we are creating a safe space for entrepreneurs to present their opportunities to investors. We have a process by which potential investors are vetted to ensure they are accredited – before they can indicate interest in investing. We also provide a template for companies to present investors with the information they need to evaluate an opportunity and be sure it is right for them. We even let investors and entrepreneurs interact directly to ask and answer questions.
Second, Venovate will operate a secondary market to provide liquidity for investors. We are a FINRA licensed broker-dealer, and an SEC registered Alternative Trading System (ATS). As such, we are able to facilitate trades between early stage investors who want liquidity and those who want to buy pre-IPO stock.
We don’t claim to remove the risk from investing in private companies. These are small startup companies. Success is never guaranteed and there is a very real risk of losing money. However, we provide a place where investors can evaluate a broad range of opportunities and companies can give investors the data they need to make informed investment decisions. Our vision is an open, transparent marketplace for alternative investments.
The JOBS Act is a big topic and I plan to explore it in more detail in future blog posts. The best way to get a preview of Venovate is to request access to our upcoming Beta. Just complete the short form on the right.