The bubble is about to burst. With the near-catastrophic collapse in credit markets in 2008, the stage has been set to bring in a new generation of financing alternatives and end the Big Banks’ oligopoly on capital markets. Innovative tools like crowdfunding are emerging to help entrepreneurs, creative types and business owners get access to capital in new ways, marking the beginning of a new era in finance. Welcome to the world of Finance 2.0, where the Web is helping to redefine the financial ecosystem and move the power from Wall Street to your web browser.
Even five years ago, it would have been hard to imagine the economic reality we are facing in today’s world. Stagnant (if not non-existent) growth, high unemployment, massive debts levels and flat-lining wage growth for the middle class. Place this economic reality in the context of our current financial system, one dominated by big Wall Street banks and post-War industrialists, and you see why the need for new alternatives has emerged.
Yet it is precisely this economic backdrop, in conjunction with the explosion of the social web and technological advances, that is giving birth to a whole new financial system. Unlike the traditional system, where decisions are made within rigid hierarchies, the new system will be driven by intelligent crowds using fluid online platforms. Imagine the transition from a system that is vertical and opaque into one that is horizontal and transparent – that’s how the democratization of finance is unfolding.
For the last two weeks, I have been in London, UK studying the emergence of this new financial ecosystem. Given The City’s history as a global financial hub, it is not surprising that a good percentage of world-leading financial innovation is taking place here. I had an opportunity to take in two exciting events here in London, including the Next-Generation Financial Forum and Startup Britain’s Crowdfunding event. Both events were sold out, and showcased companies who are on the cutting-edge of innovation in the financial space.
The catalyst for the Finance 2.0 movement began with the global financial meltdown in 2008, coupled with the advent of collaborative financing platforms, namely Kickstarter, in 2009. Since that time, crowdfunding platforms have been blossoming in countries around the world. The effects have been profound, as Kickstarter raised almost as much as the National Arts Endowment (NEA) in the US in 2011, meaning that crowdfunding could soon become a more viable source to raise money for creative projects than government grants.
It was about this time last year when I started to become deeply interested in the crowdfunding movement, which prompted me to take a trip down to South America early this year to study the action. My journey, which I wrote about at www.mycrowdfundingstudy.com, allowed me to get an inside view into the emergence of crowdfunding in an area of the world where the cultural and social dynamics are conducive to the explosion of collaborative processes, like crowdfunding.
Now, investment via the crowd is entering into a new phase, as crowdinvestment has officially become a fundraising alternative for entrepreneurs in the UK, and soon the United States. Earlier this year, London-based Seedrs soft launched its FSA-approved crowdinvesting platform ; the platform is set to open up to the public in July. Meanwhile, Barack Obama officially signed the JOBS (Jumpstart Our Business Startups) Act into law earlier this year – now the SEC (Securities and Exchange Commission) is reviewing the details of the legislation as part of its 270-day review period. Following that period, anyone in the US will be able to raise equity for their new ventures through certified crowdinvesting platforms.
Unlike crowdfunding, where funds are raised on a donation-basis in exchange for a social reward, crowdinvesting allows businesses to raise equity capital. By putting the process online, crowdinvesting platforms allow entrepreneurs to efficiently tap into their networks (and beyond) in order to raise money. The upside to crowdfunding is that there is no cap on the amount of capital that can be raised, whereas with crowdinvesting you can only raise the proposed amount of capital.
Two prominent examples of crowdfunding campaigns illustrate the potential success that the concept has:
- In Brazil, the Belo Monte project raised over 140,000 Reais (approximately $80,000 USD) in thirty days (a Brazilian record), giving the producers of the hard-hitting film enough to cover production costs – the film will be released for free on the Internet in the near future and is sure to sway public opinion on the controversial hydroelectric project that is underway in the Amazon
- In the US, Pebble is in the final stages of its campaign, where over $10 mllion dollars on the Kickstarter platform has been raised for the company’s innovative E-Paper watch. The company was unable to raise the necessary funds ($100,000) from venture capitalists, so the founders turned to Kickstarter to meet their funding needs.
And the real fun is only just beginning. The next phase of the crowd is about to be tested, with the crowdinvesting cycle ready to begin. In addition to crowdinvesting, new business models, concepts, and niche platforms will emerge to satisfy the public’s demand for crowd-based opportunities.
Beyond just crowdfunding and crowdinvesting, other financial innovations are hitting the market to ensure that new companies are able to get around the hurdles faced by early-stage companies. Market Invoice, a London-based company, gives new companies the ability to factor their accounts receivables at low rates through their online portal, ensuring that these businesses can access working capital upon issuance of their invoices. Other notable new financial platforms include Bank to the Future, a next-generation platform for entrepreneurs, and the Social Stock Exchange, a new public trading platform for socially-focused ventures – both are set to launch in the not-too-distant future.
Overall, we are at the beginning of a new era of financial innovation, one driven by technology, online networks and the desire for a democratic, horizontal process of financing new ventures. At Lumos, we are big-time bullish on this trend and are digging deep in order to develop the best strategies for funding new ventures and validating new concepts using crowd-based platforms. If you are considering raising funds for your business or creative project via the crowd, or would like more information, contact me at joel at lumosforbusiness dot com.
And stay tuned, as June will be the month of the crowd, with several blog posts dedicated towards crowdfunding and crowdinvesting!
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