in terminology relates to investing. Most of us are involved somehow in public capital markets. We own stocks, bonds, mutual funds in some capacity. Companies seeking public trading often conduct an initial public offering (IPO) then are listed on public markets so investors can trade ownership with little restriction.
Small businesses have an entirely different naming structure for investment. Privately held businesses do not conduct a public offering but raise venture capital or private equity through personal networks of investors including venture capital funds or angel investment syndicates.
Startups and small businesses have different implicit characteristics. For example, a small business implies that the firm is not a rapid, high growth firm, but growing incrementally. A startup implies rapid growth toward exit. A large corporation is expected to grow at a stable percentage each year.
The biggest misnomer relates to emerging capital markets such as equity crowdfunding. Firms raising money in accordance with the Equity CF securities exemption are not conducting an initial public offering but conducting an equity crowdfunding campaign. “Equity CF” is simply the legal distinction for raising equity funds from the crowd. Why are there so many distinctions for what are ultimately the same set of actions?
Finance by nature is emergent and naming convention can become byzantine as different characteristics, features, and categories emerge. However, capital markets are capital markets whether they are established for publicly traded or privately held companies. Though a simply challenge to correct in how we view private capital markets, one of the most important. If we cannot get on the same page related to simple terminology and definitions, we cannot build a cohesive industry structure.
This book deals with many undefined or unlegislated upon aspects of the economy. The legislatory goal is to develop open capital markets for local economies. However, the delivery is currently occurring through several different rules and incentives such as Opportunity Zones, Equity Crowdfunding, Venture Exchanges, Blockchain-enabled secondary trading, and more broadly the local, State, and Federal initiatives to increase private investment.
The book is written before the Securities and Exchange Commission harmonizes rules, incentives, and policies into a more coherent framework. In some sections, we use the term Equity Crowdfunding when that might be exclusionary to other initiatives driving local private investment. We simply do not currently possess consistent terminology that captures the breadth of open capital markets for the privately held, or local, economy.
Local Economies In A Global Context
In the 21st century, cities compete globally with other cities. Startups compete globally with other startups. What once was local, is now a global marketplace for resources, ideas, and people. Local economies are now operating in a global context, a change that may transform local economies and position the local as center of 21st century economic and political discourse.
Local economies have long occupied the periphery of twentieth century economic philosophy and discussion as globalization reigned and national economies grew. However, local economies are regaining interest as drivers of economic growth. There are many forces driving the reemergence of the local such as national partisan gridlock devolving power to local authority or the ability for investors and data providers to monitor and invest in privately held assets [1].
Equity investing in small business and startups is still a relatively new phenomenon. Private equity deal-flow grew from thirty-seven deals in 1996 to four hundred and forty in 2017 [2]. Similarly, venture capital grew from less than one hundred deals in 1995 to over two thousand seven hundred deals in 2019 [3].
Many local economies are also emphasizing the importance of real estate reinvestment. A tax incentive from the Trump administration, called Opportunity Zones, seeks to attract investment into distressed communities because of growing disinvestment and blight in American cities [4]. The Trump Administration often notes the disinvestment in declining cities including The Rust Belt, which played an important role in the 2016 Presidential campaign [5].
Reinvestment into real estate development, startups, small businesses, and private equity play an increasingly important role in local economies. Each investment vehicle is fundamentally rooted in the local. Real estate’s impact on the local is a bit more obvious than venture capital or private equity.
In venture capital, companies connect with local support resources and investors to help nurture and launch the company. Resources come in the form of accelerators, incubators, coworking spaces, and most importantly, investors who seek deals based on geographic proximity. Private equity can play an important role in healthy local economic development as a consolidator of declining assets. Smaller private equity funds can play an important role in stabilizing local sectors, and potentially preserving jobs, by consolidating successful assets within declining industries.
Privately held investment vehicles such as venture capital, private equity, and a renewed focus on real estate create a new capacity for local economies. This capacity includes funds, fund managers and analysts, data sources, and locally focused economic development resources and incentives.
Billions in reinvestment and countless new organizations are transforming the local economy into a complex but powerful resource for economic growth. The contrast between local economies thirty years ago and today is striking.
Thirty years ago, the hierarchy of industrial manufacturing supply chains simplified local economies and economic development efforts. Efforts focused on supporting large industrial manufacturers. They would, in turn, establish a supply chain of local subcontractors and component parts manufacturers. Smaller manufacturers exemplified the grit and determination of the small business owner, though they were unlikely interested in rapid, international growth like today’s startups.
Real estate efforts followed suit as regions established suburban shopping malls. Malls attracted big box retailers and franchise restaurants. Multi-national retailers won competitive advantage through internal analytics and cost engineering, often while regional ‘downtown’ cores suffered decades of disinvestment.
Today’s world demands that cities compete with other cities to provide amenities that attract talent, companies, and investment. A city’s downtown arts and entertainment amenities are compared with other cities across the globe. Similarly, a region’s industry is measured and compared. Cities now have core competitive clusters of industrial activity. Some cities stand out as robotics hubs, such as Pittsburgh Pennsylvania [6]. Cities such as Columbus, Ohio emerge as a hub for smart transportation [7].
Two clear trends emerge. The first is an explosion of resources that include local investment, fund managers and analysts, and new data resources to understand local economies. Local resources are just forming to support a new creative and digital economy. The second trend is that local economies are operating in an increasingly global context. Cities must build an economic and cultural identity to communicate their uniqueness and value to the world.
Local economies are undergoing nothing short of a sea-change from periphery to a greater share of the core occupant of economic discussion and attention. If not entirely the center in terms of economic production local economies now occupy the beginnings of how we perceive economic growth in terms of production.
How do we understand the shift in local economies from the 20th century, where local economies were more isolated, to the 21st century, where local economies are exposed to greater degrees of global competition and context?
One striking difference about local, privately held economies and international, publicly held economies is how capital flows to investment. National or international capital markets are open and accessible by residents across the world. Many are invested in national and international markets as owners of stocks,
