What businesses does your money support? If you’re like most people, you probably own companies like Apple, Microsoft, Amazon, and NVIDIA. And that’s not a bad thing – tech shares were up big last year!

But the stock market is not the economy.

While tech companies account for nearly half of the stock market, they represent less than 10% of the economy (GDP). Restaurants, gyms, and other local businesses generate more jobs and contribute more to the economy – they’re just not publicly-traded companies you can invest in.

Until recently.

Regulation A – better known as crowdfunding – lowered the barriers for private companies looking to raise capital. Now, any business can raise capital through a growing number of equity crowdfunding platforms. And as a result, it’s easier for investors to diversify their portfolios to invest local.

Investing Local Made Easy 🚀

After graduating with a political science degree, Nick Mathews was an early employee at Uber, where he studied economic development and growth in smaller suburban markets. Over time, he noticed a disconnect between locally-owned businesses and not-so-local funding that allowed them to grow.

He founded Mainvest in 2018 to empower communities to determine their own economic development, utilizing new regulations and investment vehicles to align incentives between local community members and small businesses. In essence, he made it easier for people to invest in their own backyards.

But here’s the catch: Mainvest offers 10% to 25% target returns with a minimum investment of just $100. And those are attractive returns even if you’re not local and just want to support small, local businesses.

Since launching, the platform has helped more than 450 businesses raise more than $15 million while processing over 50,000 repayments to investors.

We Took a Little Test Drive 🚘

We began test driving Mainvest in March 2023 with two small investments in local businesses (we always start small before scaling up). Our modest investment is expected to see a 55% total return over the next five years, resulting in a projected ~16% internal rate of return (IRR).

The model is also pretty brilliant: The issuers must report their quarterly revenue and share a predefined percentage of their total revenue until they reach the agreed upon total repayment (typically a multiple). If the amount isn’t reached by the five-year deadline, the issuer owes the remaining balance.

Since we setup our account, we’ve received a steady stream of payments and both of our portfolio companies are up-to-date. You also receive updates from the small businesses you support, which is far more entertaining to follow than 10-Qs or 8-Ks from publicly traded companies.

But there are some drawbacks: The biggest downside to this revenue-share approach to investing in small businesses is that startup businesses may not have much initial revenue. So, most of your returns occur in later years, which makes returns difficult to project your final returns.

Look at it this way: Suppose you loan me $25 for a year. If I paid you $20 in a six months and the remaining $5 after 12 months, you could earn six months of interest on the $20 you received. However, if I paid you $5 in six months and $20 after 12 months, you could only earn interest on $5 for six months.

Computing your return is also quite challenging when it’s framed as a multiplier over several years rather than an interest rate. It would be nice if the platform had a way to estimate annualized returns over the entire timeframe – even if they may not be 100% accurate due to the timing of cash flows.

The Bottom Line

Mainvest offers an easy way to support local businesses. Rather than issuing loans, the platform enables you to receive a percentage of revenue up to a certain multiple of your investment.

While revenue-share agreements may be attractive to small businesses and make investors feel like they have more skin in the game, other investors may appreciate more predictable returns.