Conference Presentation, Panel, Fireside Chat
Alternative Small Business Financing: Keeping California on Top and Sharing the Wealth
Milken InstituteCarolyn Karo, Autumn Burke, Manny Fernandez, Chris Hameetman, Victor Parker, Richard Swart
- California is projected to maintain dominance in alternative financing, supplying 58% of AngelList global funding, while Silicon Valley innovators utilize peer-to-peer, marketplace, and crowdfunding vehicles to enter new markets.
- Healthcare and software development are expected to drive capital formation in California, with software attracting the majority of venture dollars due to product-market fit achievable within six to twelve months.
- Venture capital concentration is predicted to remain heavily skewed, with 99% of funds directed toward graduates of the top 10 US universities.
- Crowdfunding market value is projected to grow from $34 billion in 2015 to surpass global venture capital investment in 2016, though it may best suit "sexy" sectors like cannabis or unique vehicles rather than standard profitable businesses.
- Revenue share notes are expected to benefit non-tech small businesses, particularly in Texas, while companies raising $100,000 in crowdfunding are projected to hire an average of 2.2 employees immediately post-funding.
- Communities of color and underserved populations require massive financial literacy education and culturally appropriate outreach to access alternative finance, with crowdfunding serving as a vital alternative to traditional networks or SBA loans that can take two years to process.
- Reg CF is expected to underperform or fail for many users due to unwieldy regulations, high costs, and a $1 million cap (adjusted to $70,000 by some), making it uncompetitive, while interstate exemptions face hurdles from legislative lack of education in California.
- Interstate crowdfunding success depends on clear rules, safe harbors to prevent shareholder lawsuits, and state-specific tailoring, though some states may see zero dollars funded and the Texas model's allowance of up to $5,000 per person could force platforms to scale lower-quality companies.
- Global Initial Coin Offerings (ICOs) are expected to rise from over $2 billion to over $3 billion in a single year, yet slow-moving cryptocurrency laws create uncertainty for companies selling digital assets.
- California risks losing its competitive investment edge without targeted tax treatment for early-stage companies, specifically lacking a state-level exemption comparable to federal Section 1202 for qualified small business stock gains.
- To maintain leadership, California must leverage diversity, public-private partnerships, and youth entrepreneurship education, while other states are catching up if they continue to adopt new technologies and foster youth pipelines.
- Significant legal risks exist regarding crowdfunding, including potential shareholder lawsuits if non-accredited investors claim a lack of financial intelligence, which could jeopardize transactions and sink companies.