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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.

For more information, visit the following sites:

Clusters: sba.gov

Crowdfunding: sec.gov

Incubators and accelerators: inbia.org

1SBA website, accessed March 2016

2"The Evaluation of the U.S. Small Business Administration's Regional Innovation Cluster Initiative, Year Three Report, Revised November 2014"

3Before making any investment commitment, an investor must provide a representation that he or she has reviewed the intermediary's educational materials and understands that:

  • The investment is illiquid
  • There is no guarantee of any return
  • The entire amount of his or her investment may be lost

An investor must also attest that he/she is in a financial condition to bear the loss of the investment and has completed a questionnaire demonstrating an understanding of the risks of any potential investment and other required statutory elements.

IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020.