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Could The Future Of Investment Be Local?


Nick Mathews is the CEO and Co-Founder of Mainvest, the investment marketplace for small businesses.

Small businesses form the backbone of America. Not only do they create jobs and drive the economy, but they also contribute to the overall fabric of society, offering community gathering spaces, opportunities for people to connect and a strong sense of identity. Yet, these community lifebloods have historically been underfunded and altogether neglected by the investment community.

In 2013, I first began to realize the acute challenges that small businesses face around access to capital. Fast forward through five years of economic development rabbit holes and a deep dive into the JOBS Act, my co-founders and I formed our company to help provide small businesses access to capital driven by their community supporters. Other companies like Wefunder and SeedInvest also aim to help connect investors and small businesses.

For too long, retail investors have been barred from private company investment, with investor accreditation limited to high net worth individuals. But things are changing: Recent updates in regulations have unlocked retail investor access to the market of small business capital formation. Beyond the yield potential of this previously inaccessible asset class, deploying investment capital directly into America’s domestic economy creates a catalyst that can accelerate economic growth and development in communities across the nation. There are many reasons why the small business asset class is becoming an integral part of investor portfolio strategy — let’s expand on a few.

Diversification Against Volatile Capital Markets

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Unlike public equity markets or alternative investments like cryptocurrency, art or wine, in my experience the small- and medium-sized business (SMB) asset class fits into a more consistent investment strategy, similar to passive income investments into real estate. Small business capital needs are primarily to build cash-flow positive, moderate growth business models that provide liquidity to investors and the owner-operators over time. This being said, I think the SMB cost of capital and risk profile is compellingly positioned in the current yield environment.

With small business creation booming (paywall) and a shortage of available institutional capital, investors can step in with mutually beneficial terms. Beyond investing, building strong community relations between consumers and the small business ecosystem further enables the growth of circular economies. As a result, more goods and services can be attained at the local level, benefitting both businesses and the communities they serve, as well as the environment as a whole.

Tangibility In Measurement Models

Measurement is critical for investors, as it allows them to track their returns and determine whether or not a particular investment is successful. In the traditional market, investments are much less tangible in this sense — relying on market evaluators to determine and measure the success of investments while being many degrees removed from the actual investor. Oftentimes, investment in these larger, globalized companies can result in minimal learnings — due to the sheer size of the market, it can be difficult for investors to pinpoint exactly where things went wrong.

On the other hand, local investments are inherently more measurable thanks to their smaller size and centralized locale. Where the stock market offers a continued source of funding for publicly listed companies, I’ve found most SMB investments utilize investment capital for one project that can be tracked from start to finish. For example, a brewery that seeks funding to open details the costs of equipment, buildout and staffing to their investors.

Impact Meets Opportunity

When you invest in a small business, you’re not just investing in a company — you’re investing in your community. Local businesses are the lifeblood of any town or city, and when they thrive, everyone benefits. American Express estimates that for every dollar spent at a local business, 67 cents is generated back in the local economy. When you invest in a small business, your money delivers a direct and more impactful effect on the community than if you were to simply give it away.

In the wake of Covid-19, small business creation amounts have hit all time highs while consumer trends point toward an affinity for shopping local and supporting businesses within one’s community. This return to local is creating more opportunities for investors to fund economic development that matters to them while also generating real returns.

Risks

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Two of the most prominent risks in regulation crowdfunding are that offerings might have limited financial information and may be “illiquid,” meaning an investor may not be able to convert their investment to cash. When a person invests in a publicly traded security, there are usually extensive reporting requirements mandated by the SEC. Regulation crowdfunding offerings have more limited financial requirements — small raises typically only provide financials certified by their CEO or equivalent while only the largest raises usually undergo a full audit. Similarly, these offerings don’t have extensive ongoing reporting requirements, meaning that investors may be assessing a long-term opportunity with an incomplete picture.

Separately from filing requirements, investing locally has unique risks of its own. Unlike large corporations, small businesses usually operate with limited resources, including time and personnel. A big business that is traded publicly will often have staff dedicated to investor relations, answering questions and resolving issues while a small business may only have a handful of people on staff for their entire operation. This can pose a challenge in communicating with investors. Additionally, the loss of personnel or a sudden and unexpected need for capital can cause significant harm to a small business that a large corporation could otherwise absorb.

Ultimately, by investing in small businesses, investors can diversify with impact, accessing moderate to high-yield opportunities that they have the option to see and experience in real time. At a time when the global markets are tumultuous, small businesses can offer stability and tangible returns. Those investing in their own communities may see their money working harder than ever before.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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