Clusters, Crowdfunding, and Other Ways Small Businesses Survive

Small-business owners must rely on their own ingenuity and innovation to survive. Fortunately, over the past decade, innovation has also emerged in the networks supporting small businesses, helping them acquire much-needed resources.

Clusters: strength in numbers

Clusters are groups of businesses, suppliers, academic institutions, and other related organizations working within the same industry and concentrated in the same geographic region. Although they’re often competitors, cluster businesses can benefit from access to necessary resources such as talent, raw materials, research, and financing opportunities. Examples of clusters include the medical centers in Massachusetts, the high-tech industry in Silicon Valley, and the wineries in northern California. The advantages gained from organizations working together can include economies of scale and political influence, benefits typically associated with corporate giants such as Walmart and Apple.

In 2010, the Small Business Administration unveiled the Clusters Initiative, a program that invests in 14 regional clusters representing various industries throughout the United States. According to SBA Administrator Maria Contreras-Sweet, the SBA has “built a strategic infrastructure of financing and consulting networks in key cities to help new companies launch and small companies grow.”1 A third-party organization has been tasked with evaluating the SBA program each year. Results from the 2014 report (the most recent data available) include the following:2

  • A majority of small and large businesses have established at least one alliance with other cluster members.
  • Nearly 40% of small businesses said cluster services had some influence on their access to capital.
  • Revenues in cluster-associated small businesses increased an average of 6.9%, twice as fast as benchmark firms.
  • Average monthly payroll in small businesses grew an annualized 14.1% during the two years ending September 2013, besting benchmarks by almost 11 percentage points.

Crowdfunding: online investing

What started more than a decade ago as a way for art and music lovers to help fund their favorite artists’ latest endeavors has evolved into a sophisticated means for small-business owners to raise capital. In the fall of 2015, the Securities and Exchange Commission released final rules governing equity crowdfunding, or the ability for entrepreneurs to issue equity to individual investors over the Internet. Companies can now raise up to $1 million over a 12-month period via “funding portals.” Individual investors can invest certain amounts over a 12-month period based on their income and net worth.3

Businesses wishing to use this 21st-century financing method will want to be aware of the governing regulations, which include providing certain information to the SEC, potential investors, and the funding portals, including:

  • A description of the business and how the funds will be used
  • The price of the securities or method of determining the price
  • The target offering amount, the fundraising deadline, and whether the company will accept investments exceeding the target
  • Financial statements, possibly reviewed by an independent public accountant and accompanied by the company’s tax returns

Incubators and accelerators: fueling growth

Incubators and accelerators are organizations that are similar in terms of providing valuable resources and mentorship to new businesses; however, one is intended to help “incubate” the budding business owner’s idea, while the other is generally designed to “accelerate” the growth of an existing company.

Business owners apply to these often highly competitive programs and, if accepted, may need to relocate and share space with other similar organizations.

According to the International Business Innovation Association (InBIA), incubators provide companies with programs, services, and space for varying lengths of time based on company needs and incubator policies. By contrast, accelerators take a group of companies through a specific process over a defined period of time, typically three to four months. The program often culminates in a funding pitch or demo day. While accelerators make seed investments in companies in exchange for small equity stakes, incubators typically do not make such investments.

This is just a brief overview of some of the innovative opportunities designed to help small businesses survive. Business owners interested in learning more should start by visiting the websites noted in the sidebar at left.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016