I’ve become a very active investor and advisor to start-ups over the past two years, and I firmly believe one piece of legislation is going to fundamentally change business, investing, and entrepreneurship. In fact, I think it might actually unleash a torrent of changes that impacts the whole world in a very positive way. This piece is part 4 of a 5 part series about Crowdfunding, the JOBS Act, and what all of this means to you. Part 1, Part 2, Part 3.
[NOTE: This is a long piece, like 3k words. Sorry about this, I tried to edit as much as I could, but this piece is the real meat of my entire point about crowdfunding, and it makes a lot of subtle, distinct points. It's about as short as I can make it, but hopefully it's still an interesting read throughout.]
Summary: I believe the JOBS Act will make a flood of capital available to current and potential entrepreneurs, and this will result in an explosion of both new businesses and new entrepreneurs, that will end up revolutionizing dozens of industries worldwide. In short, I think the JOBS Act will usher in a golden age of entrepreneurship that fundamentally transforms the way business is done in America for the better.
How will this happen? There are many steps. First, I think the JOBS Act will cause two distinct societal and cultural changes that will create all sorts of second order effects:
1. The success of equity crowdfunding will create cultural acceptance of “a third way” in life; i.e. it will become socially acceptable to choosing entrepreneurship as a life path, and,
2. Crowdfunding will bring a whole new type of person to entrepreneurship, which will eventually bring start-up culture to new sectors of American business that haven’t seen real innovation in a century.
Crowdfunding Will Create Social Acceptance of “The Third Way”
For the past century, how have Americans worked? That seems like a strange question maybe, so let me phrase it this way:
For as long as anyone can remember, FOR WHOM have Americans worked?
Now you get it–companies, right? In order to provide for yourself you got a job, and the only way to do that is to work for a company. You offer your labor for sale to a company who could monetize it, and they paid you. Everyone works for a big company and has a boss, that’s the American system we’ve all grown up with.
Have you ever stepped back and actually thought about that. Why is it this way? Why don’t more people work for themselves?
If you actually look at the economic history of business in America, for most of our history, the norm HAS been to work for yourself. For most of American history, people were farmers or craftsman or had their small artisan business. The idea that people didn’t work for themselves, that they would work for big companies instead, is actually new to the 20th century.
The culture of America, especially the business and work cultures, changed profoundly in the wake of WW1 and WW2. Those wars forced the wide-spread adoption of mass industrialization, which necessitated changing cultural norms. Without really realizing it over the course of about 30 years (1915-1945), Americans went from regional-based economies that rewarded self-reliance and independence, to a centrally controlled, industrial economy that rewarded conformism and obedience to authority. This wasn’t some nefarious master plan of the Illuminati, just the inevitable consequence of the dawn of the industrial age combined with the resource demands that two World Wars created, and it wasn’t all bad; the reason we can have so much cool material things is a result of the industrial age and the changes it created in society.
But this economic shift had profound cultural consequences. Business shifted from local to global in scale. For a long time, bigger was always better in business, and for multiple generations, no one wanted to work for themselves because the best jobs were with big companies. After a generation or two of everyone working for a larger entity, the idea you can create your own business was forgotten, or at least marginalized. And even for those who wanted to run their own business, it was nearly impossible to compete with the big guys.
Baby Boomers grew up in this world of suburbs and commutes and large companies; to them, this is the only reality that exists. Of course they aren’t going to be starting lots of businesses, they never saw anyone else doing this. For most people, the only realistic options are the ones they see their friends and family taking, and for that generation–and their parents–that was NOT starting a business.
You can still see it. If you are over 60 (roughly defined as the Baby Boomers), you almost certainly have neither started a business, nor even really thought about it. Start-up culture is alien to most 60+, but not at all to under 30, because they’ve all grown up in the digital age and seen people their age come start successful companies. If you are under 30, even if you haven’t started your own business, you absolutely have at least thought about it.
It used to be that when you left school, the options were to get a job, or get more school. But now, starting a business is seen as a “third way” for lots of young people. [Paul Graham has a great essay about this. I talked about this too.]
I think the JOBS Act is going to make starting a new business (“the third way”) a socially acceptable and legitimate path for all people to take in life, not just with the college educated Millenials (where the idea has already become normalized), but with mainstream America (even with Boomers).
This cultural shift is INCREDIBLY important. Why? Two reasons:
1. Social support: Very few people will do anything that their social group doesn’t recognize as valid. For most of the past century, starting a new business wasn’t seen this way. Think about it in your own life–when you left school, what did your parents tell you to do? Get a job, or go to law/business/medical school, right? Those options SUCK, but most people won’t deviate from them without the support of their social group.
2. Lots of examples = safer: Before normal people will start taking the risks necessary to be entrepreneurs, it has to feel safe and plausible to them. They have to believe that they can do it, and in order to believe this, they have to see many others succeed first. As more and more people create viable start-ups, this path will be seen as less and less risky and more and more realistic.
You may think this idea isn’t new, but you’re wrong, to most of America, it is VERY new.
Understand something: If you’re reading this blog, chances are very high that you are in the cognitive and cultural elite. You watch things like Arrested Development and you read Reddit and you engage the world in a fairly active sense.
MOST OF AMERICA IS NOT LIKE THIS. They are sheep. They watch network TV and consume what they see on the commercials and they go to their jobs they hate and do what they are told by their families, and that’s their whole life. They don’t take risks; they do what everyone else is doing and their world of possibilities is very small. That is the average American.
But I think those people–the mainstream Americans who watch CBS and still have AOL and Yahoo email addresses–are starting to wake up. The old American system of giving your life to a corporation and in turn having them treat you well has been exposed as bullshit. The old system is failing them, and they are starting to realize that they are going to have to engage life and do things themselves. Not only that, more importantly they are seeing other people start businesses and do really well, people they know and can relate to, and they are realizing that they can do it too. Most of them won’t be good entrepreneurs, but many, many will (and it only takes a few people to change the world. Ask Google).
In fact, this idea is even new to the cultural elite. The perfect example is the Veronica Mars film project that was funded on Kickstarter. I have told people for years that crowdfunding would change Hollywood (lots of people said that, not just me), and no one listened. Then a random TV show with a dedicated fan base asks it fans for money to do a movie, and they raise 5 million dollars. What happened? Two other big directors immediately did the same thing (Zac Braff and Spike Lee), and now Hollywood is buzzing about how this will change everything–and they’re saying the same things the forward thinkers said ten years ago. It just took an example of success for everyone to follow.
No sheep wants to be the first one through the gate, but every sheep will be the second.
This cultural shift–which is already underway–will lead to another shift that I think few people are predicting, but will have a much more profound impact:
Social Acceptance of Entrepreneurship = A Whole New Type Of Entrepreneur
Clearly the cultural perception of entrepreneurship is changing, and starting a company is being seen as a legitimate thing for people to do–that should not be major news to you. But there is a more subtle change that crowdfunding will cause: it will alter the perception of who can work in a start-up and what it can be, and as a result, bring a whole new type of person to entrepreneurship who creates start-ups in whole new areas.
Before I explain that, I want you to picture a start-up in your mind. Literally, right now, think about who works there, what their offices look like, what they do, and what their goals are.
What image popped up? Probably something like Google; big bright airy offices with bean bag chairs and gourmet food, filled with young computer hacker-types trying to change the world. Or the Apple myth; two guys in their garage, tinkering and figuring out how to make and design the next big tech thing that will change the world. Whatever image popped up, I bet it was very much inline with the early days of all stories you’ve read about all the huge Silicon Valley tech/internet companies, right? To virtually all Americans, start-up = internet or tech company, and entrepreneur = Mark Zuckerberg or Steve Jobs or someone like that.
But that is just one specific type of start-up. By no means does it have to be that way.
The fact is, right now almost all of start-up culture in America is focused on the tech and internet space. Why? Because that’s where so many of them started, and where tons of companies have had immense success, and where VC and angel communities already have large amounts of capital in place for funding those types of companies.
There is nothing wrong with any of this. Tech and internet start-ups are great. But everyone is so focused on them, they are missing the future.
If you’ve read the prediction pieces about crowdfunding, they all reflect this thinking, and as a result, they make the classic prediction mistake: They assume a linear change. They take whatever exists now, then they make it bigger, and that’s their prediction. Basically, they think that the JOBS Act will mean exactly what’s on Angellist right now, just a lot more of it.
This is called a quantitative change. But when things change in scale, they usually change in quality, not just quantity. For example, a dog on its own acts a certain way, but put it with lots of other dogs, and they don’t act like a bunch of individual dogs. Their behavior changes in qualitative ways–they act as a pack, which has completely different characteristics from individual, isolated dogs. You cannot predict pack behavior from watching 10 dogs on their own. Changes in scale create unpredictable changes in entire characteristics.
Apply this to start-ups: Once the field is opened and normal people believe they can start a new company, I think crowdfunding will attract a whole new type of person to entrepreneurship. Namely, I think the JOBS Act will take start-up culture out of the exclusive domain of technology, and empower non-tech entrepreneurs to move it to virtually ALL others sectors of the American economy.
Well, if I’m right, it means that every sector of the American economy is about to undergo the same transformation that the technology and communications sectors underwent over the last 40 years. Which is to say they are about to completely, utterly change in every way.
I hope you understand what I’m saying and the implications, because this is basically the entire fucking thesis of this whole 5 parts series: This shit is about the fundamentally change the whole goddamn world. Think about what Google search did to information, or what the iPhone did to phones. Now imagine that sort of change in everything; dry-cleaning, health care, cars, etc.
Here’s why I think it will happen like this:
I think most of the new, post-JOBS Act entrepreneurs won’t come from the established tech start-up ranks. Why? Because the people who can do conventional start-ups are, for the most part, already doing them. This new entrepreneur will not be tech people; they will be all sorts of different Americans. Maybe people who are great at business, but could never raise enough money to do big things before. There are a ton of Americans who DO understand all kinds of different businesses, and many of them DO believe they could start a new business or do things differently than their boss. And like I talked about above, once they see lots of people using the JOBS Act to start businesses in their community, and they see it becoming socially legit and the process becomes accessible, they will try their idea. And some of these ideas will be incredible and amazing and change entire industries–not just tech and internet industries.
I am not making some wild prediction. This revolution has already quietly begun, it just doesn’t have a name yet, so many people aren’t recognizing it. Some examples where it’s already happening; Franchising, Real Estate Investment, Movies, Beer, Books, Music, Open source software (yeah the last one is tech, but its a totally different approach and cool as hell).
I could go on and on; there are literally hundreds of small examples, and this trickle will soon become a flood of innovation that will ultimately unlock a huge amount of value creation in America–precisely what happened in the tech sector just a few decades ago.
New Entrepreneurs Will (Accidentally) Create A New Way Of Doing Business
Because of this new type of entrepreneur, I think there will be another major change: The disruptive companies in the post-JOBS Act era will be totally different than the ones we see now. The fundamental change will be a shift in thinking from ‘profit’ to ‘problem solving.’
Don’t get me wrong; these new companies will make money. This is not charity, and I am not saying that. I am saying that these companies will not arise from the question of “how do I create profit” but instead will arise from the question “how do I solve this problem that I have?” It may sound like the same thing, but it creates very, very different results.
Why? For the last 40 years, the people who started businesses were people who knew how to raise money. In case you didn’t know, raising money was VERY hard, and there not very many people who would give you money to start companies, especially start-up style companies. This had a very specific result: The only things that got funded, were, for the most part, companies that reinforced the status quo, companies that did business the same way as everyone else.
That began to shift with the advent of technology start-ups. And it accelerated with internet start-ups; their entire culture is about disruption of entrenched power. And the cost of starting companies has come down drastically, making it even easier to fund disruptive ideas. But again, the vast majority of these companies are restricted to one sector of the US economy.
The point is though, TODAY, if you want to get money from the financial establishment, you have to do things the way the financial establishment says. That means you squeeze every dollar out of every transaction. You see labor as a cost center, not as actual people. You essentially become Wal-Mart or Exxon.
But it doesn’t have to be this way. Companies can make profit, and treat people and the world great. And I think the JOBS Act will help facilitate this shift. How?
Even though the sexy tech crowdfunding projects are the ones that will get most of the attention at the beginning, I think the vast majority of crowdfunding will end up being for local projects and businesses; bars, restaurants, apartment buildings, farms, playgrounds, etc–i.e., things that either don’t scale, or aren’t intended to scale.
This is because most peoples day to day concerns do not really go beyond their local community, and most people aren’t well suited to build large companies, nor do they even have world changing ideas. But A LOT of people do enjoy running small, local businesses that provide real value to their community, and are perfectly capable of doing that very well. But they haven’t started them in the past because of the aforementioned social, capital and educational issues. But with those solved, I think we’ll see an explosion in local community entrepreneurship and investment.
Not only that, but think about where the majority of the money will come from. I talked about this in the investment piece: the huge chunks of money that go to the potentially high growth companies will still mostly come from some form of private equity or accredited investors (rich people), but all the little pieces of money that can add up to a lot will come from normal people. Why? Because the rate of return on these projects is not high enough to interest professional investors and banks, but it is engaging to real people who will personally benefit form these projects. And quite frankly, normal people tend to know better what they and their communities need than some disconnected investor who lives in New York City.
Again, I am not just guessing at this. There are literally hundreds of projects on Kickstarter and Indiegogo like this that not only work, they get funded at huge levels because they connect to real people. And that’s BEFORE any of the investors are allowed to benefit from them.
But even more persuasively, local crowdfunding is ALREADY working great–Georgia and Kansas have already legalized local crowdfunding, and it is exploding in all the ways I am talking about.
Not only that, but these companies will look fundamentally different than the 20th century companies they compete with. They will be locally based but have networked IT and informational systems that will allow them to utilize all sorts of economies of scale the internet enables, they will have different priorities than global corporations (caring about actual people and real value instead of of nebulous shareholder value), they’ll be untethered to the global financial system (and thus free to make decisions based on whats right for their customers, not what a suit in another city thinks), and they will revolve around solving actual problems that real people have, not creating a product and then finding a way to trick people into buying it. Quite frankly, they will be created by real people with the intention of solving real problems, and the investors will be real people who care about those problems being solved. This is totally different than the way ANY private equity thinks, and so different than Wall Street as to be coming from a different universe.
Because of this, I think a huge amount of innovation and the subsequent economic disruption of the old, stale industries will actually end up coming from non-traditional entrepreneurs adopting elements of start-up culture, but beginning mostly at the local level, because the successful companies will solve actual problems, not just seek profit. They will create value instead of extracting it.
Does that all sound like bullshit? OK, lemme paint a very realistic scenario for you, one that begins hyper local and small but eventually grows into a monolith that disrupts the largest social network on earth:
Take a woman who works in a relatively small economic sector–say organic farming. Say she lives in a small but progressive city–say the city where I live, Austin, Texas. Now lets say she wants to connect all the foodies in her city. So she decides to create a local social network based for people who live in Austin and care about where their food is grown, who grows it, and how it gets to them; you know, real foodies.
OK, say she teams up with a programmer, and raises the 10k it takes to start it on a crowdfunding platform, say she uses WeFunder. And say she does this: she decides that she doesn’t care so much about making tons of money, but instead she wants to make the best foodie social network ever. So she decides that, beyond just the investors who put up the 10k getting a share of the company, the first 100k actual users get 10 shares of stock apiece in the company, just for signing up and using the network. As the company grows and makes money, the users make money right along with it–after all, they are the ones who really create the value in the foodie network.
Immediately, this becomes THE social network for every foodie in Austin. All of the sudden, there are 100k dedicated users. She figures out that, within these original 100k users, there are a small number of “power users” who’s presence and posting and stuff creates a ton of value on the network. So she figures out a formula that rewards the power users, because these people create a ton of value on that platform and encourage other people to join. Let’s say they get 100 shares or more.
This really inspires the power users, and the network adoption goes parabolic. It starts spreading to other cities, and she figures out a way to reward the new power users in the other cities too with equity. And it spreads and it grow and it spreads, and she realizes: Everyone in all the cities this social network is in is using it–not just foodies–because its where everyone’s friends are. So she tweaks it slightly to make it less about food, and opens it up to everyone, with the same equity sharing for power users. And in five years, there are 1 billion people worldwide on this social network.
You see where this is going? Change “foodie” to “Ivy league college” and you have the rise of Facebook—except Facebook wasn’t allowed to give equity to its power users. In fact, Facebook took the other path, and is now just an evil company that exploits all its users for ad revenue.
What happens when the next Facebook comes along that, instead of exploiting users, makes the users into OWNERS?
HOLY SHIT! Everything changes. This is just one tiny example of 1000 possible ways these things can play out.
Scenarios like this aren’t just plausible. They are coming. All the old industries will get disrupted. Even the former disruptors, like Facebook, will get disrupted. And we’re going to watch them unfold, and possibly even invest in them and help make them happen.
I know, exciting, right!
I am stopping this now, because I could literally write 10k more words about all the different permutations on how this could play out, and the deeper societal implications and trends this change is going to interact with. I’m so fucking excited about all of this. It’s a great time for all of us to be alive.
[Part 5 will come either Friday or Monday, and will cover all the various crowdfunding platforms. If you want to invest, it'll be a must read.]
This is Part 4 of 5. Once I finish this series, intend to compile it all, revise it, and turn it into a long post for other media outlets. Any comments, corrections, ideas or arguments are welcome: email@example.com