The Kickstarter Economy: How Technology Turns Us All Into Bankers

The democratization of lending could in time have as revolutionary an effect on traditional banking as digital music has had on the traditional recording industry

615 crowd reuters.jpg

Reuters

As the U.S. jobs market continues its slow, not-very-impressive-but-nonetheless-forward march, one area of the economy still lags. Banks have only very recently begun to lend. Both individuals and small businesses have faced tight credit standards enforced by risk-averse banks; mortgages have been hard to obtain, and small business credit has been tighter yet. From 2008 to 2011, loans to small businesses fell 20 percent. The net effect has been to mute an already muted recovery.

These trends haven't been confined to the United States. Lending has been even tighter in Europe, particularly in stressed markets such as Spain. While there are some signs of a thaw, the days of easy credit spurring new and small entrepreneurs to create new and innovative companies seem increasingly of the past.

Or so the data points from the banking and credit industry tell us. What they don't tell us is that as traditional sources of credit and funding have withered, alternate sources have blossomed. We have been so focused on the negative shifts triggered by the financial crisis of 2008-09 that we may have neglected to notice some new and powerfully positive trends.

Take the case of Kickstarter. It may be no coincidence that the site launched in April 2009, just as the global credit crunch was reaching its apex (or nadir, depending on your perspective). With the almost complete evaporation of traditional forms of financing, especially for high-risk entrepreneurial projects with shoot-for-the-moon ambition, Kickstarter took an entirely different approach: It used the Web to connect people with ideas to people with money. In Kickstarter's case, however, the connection isn't to people with lots of money ‑ it's to anyone willing to put up a little bit for an idea that inspires, excites or intrigues.

Kickstarter is an exercise in what has been called "crowdfunding," and its numbers are startling. According to its own published numbers, since the site launched less than four years ago, 3 million people have pledged more than $400 million to 35,000 different successful projects. The majority of them have raised $1,000 to $10,000, but more than 400 projects have raised $100,000 to $1 million. The most successful projects have been clustered in the arts (especially film), but the largest project is a smartphone watch called the Pebble E-Paper Watch that is expected to launch sometime this year; its creators raised more than $10 million in pledges made by almost 70,000 people. The launch has had several delays, but that has little to do with funding.

There is every reason to suppose that this model is in its infancy. With the passage of the JOBS Act last year, many of the restrictions on raising money to finance private projects could be lifted as early as this year, making it that much easier to advertise. There are also numerous other crowdfunding sites focused on donations and non-profit ventures, but the surge in Kickstarter speaks to a fact that is all but lost in the focus on dwindling lending by traditional banks: We live in a world awash in capital, much of it inexpensive because of low interest rates. Rather than funding flowing in large chunks from a small numbers of banks, it can now flow in small chunks from a vast number of small investors looking to be a part of the next new thing.

Presented by

Zachary Karabell is Head of Global Strategy at Envestnet, a financial services firm, and author of The Leading Indicators: A Short History of the Numbers that Rule Our World. More

At River Twice Research, Karabell analyzes economic and political trends. He is also a senior advisor for Business for Social Responsibility. Previously, he was executive vice president, head of marketing and chief economist at Fred Alger Management, a New York-based investment firm, and president of Fred Alger and Company, as well as portfolio manager of the China-U.S. Growth Fund, which won a five-star designation from Morningstar. He was also executive vice president of Alger's Spectra Funds, which launched the $30 million Spectra Green Fund based on the idea that profit and sustainability are linked. Educated at Columbia, Oxford, and Harvard, where he received his Ph.D., he is the author of several books, including Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It (2009), The Last Campaign: How Harry Truman Won the 1948 Election, which won the Chicago Tribune Heartland Award, and Peace Be Upon You: The Story of Muslim, Christian, and Jewish Coexistence (2007), which examined the forgotten legacy of peace among the three faiths. In 2003, the World Economic Forum designated Karabell a "Global Leader for Tomorrow." He sits on the board of the World Policy Institute and the New America Foundation and is a member of the Council on Foreign Relations. He is a regular commentator on national news programs, such as CNBC and CNN, and has written for The Wall Street Journal, Newsweek, Time, The Washington Post, The New Republic, The Los Angeles Times, The New York Times, and Foreign Affairs.

The Best 71-Second Animation You'll Watch Today

A rock monster tries to save a village from destruction.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

The Best 71-Second Animation You'll Watch Today

A rock monster tries to save a village from destruction.

Video

The Case for Napping at Work

Most Americans don't get enough sleep. More and more employers are trying to help address that.

Video

A Four-Dimensional Tour of Boston

In this groundbreaking video, time moves at multiple speeds within a single frame.

Video

Who Made Pop Music So Repetitive? You Did.

If pop music is too homogenous, that's because listeners want it that way.

Video

Stunning GoPro Footage of a Wildfire

In the field with America’s elite Native American firefighting crew

More in Business

From This Author

Just In