The Power and the Peril of Our Crowdfunded Future

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Kiva co-founder Jessica Jackley on the rise of "Kickstarters for XYZ"

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Since Kickstarter launched in April of 2009, we, the crowd, have funded a quarter of a billion dollars worth of art projects, small businesses, tech gear, etc. Some of these, like the Brydge, a beautiful iPad accessory, and gTar, a guitar-iPhone hybrid that recalls Guitar Hero, have raised hundreds of thousands of dollars. Others, like the Pebble, an iPhone-integrated wristwatch, have raised millions. The average project walks away with approximately $5000, and just under half of the projects on Kickstarter meet their fundraising goals and get the money. The company has ignited a movement in technology to create copycat crowdfunding platforms that will fund a huge range of ideas.

EiRbug.jpgThe Jumpstart Our Businesses (JOBS) Act, which President Obama signed into law in April, will ease regulations on securities in the United States, enabling small businesses to raise funding from non-traditional sources. This legislation, along with Kickstarter and others' accelerating growth, has opened the crowdfunding floodgates. According to a recent report, more than 400 crowdfunding platforms were operating at the beginning of 2012, and several hundreds more are expected to seek accreditation by the end of the year. Nearly $1.5 billion was raised via crowdfunding platforms last year alone.

It seems there will soon be platforms to raise money for almost anything, from the local bakery you hope to start in your neighborhood, to your high-technology startup idea, to donations for a church mission trip. What will such an economy look like? To answer that question, I spoke with with my colleague Jessica Jackley, who co-founded Kiva, a microcredit site that has enabled more than $325 million in loans from over 700,000 people since it launched in 2005. She also served as CEO and co-founder of ProFounder, a tool that provided a platform for small businesses to crowdsource investment from their community. She is also an investment partner with Collaborative Fund.*

Can there be a Kickstarter for everything? Why do we need banks for anything, if we can create systems to crowdsource loans? (Or investment banks, if we can crowdsource investments, or foundations and government grants if we can crowdsource donations?)

Jackley: Not all things can or should be crowdfunded. Crowdfunding is a great fit for certain types of endeavors, projects, businesses, or anything else -- and there is a bias (from funders/backers) toward ones that have certain qualities. ... The ventures that keep things light and fun, easy to understand, that have a compelling story, a sexy retail product, will have an easier time getting people to rally around them and contribute. A start-up doing something that's difficult to communicate or doesn't offer any kind of retail product will have a tougher go at it. I'm not saying this is always a good thing -- sometimes, these qualities (fun, retail, sexy product) have little correlation with what will make a business succeed in the long run. The most relevant information isn't always highlighted, or if it is, it isn't always what people pay attention to. The same concept goes for grant-based platforms and the social sector; anyone who's worked in fundraising for a 501c3 know that it's exceedingly difficult to fundraise to cover certain costs. It's not sexy to fund overhead, for example. It's not as fun to pay rent for a nonprofit's office space. So we have to remember that there are worthwhile causes and worthwhile businesses that won't appeal to the crowd.

This seems to line up with your Kiva philosophy: crowdfunding as a way of validating, or manifesting, an emotional connection to an individual or a narrative. It certainly makes sense when the return is largely non-monetary, so for hyperlocal or non-profit funding channels. But what if the money was really good? If there were a platform for crowdfunding, say, boring infrastructure cashflow deals, I would invest in a thousand of them if I thought the portfolio would perform better than other indexes. Wouldn't I?

Jackley: You should! Maybe I will too! There are so many different kinds of motivation for investing or giving or parting with your money in whatever other way, and plain old financial return is obviously attractive. But people are not always rational and are not just looking for that. Investors in big and in small deals tend to invest in people and in stories that resonate with them. On Kiva, hundreds of thousands of people have given up financial return to lend $25 interest-free in exchange for the feeling of participation in someone else's story, of empowering an entrepreneur. They are buying an experience, a role. They're willing to make 0 percent interest to get a feeling of participation and support someone they connect with and believe in. Many of those who contribute for social returns more than financial returns might also want to invest some of their money in other ways, for financial return, maybe even in boring infrastructure cashflow deals.

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Kanyi Maqubela serves as entrepreneur-in-residence at Collaborative Fund. He was previously a founding employee at Doostang and field director at One Block Off the Grid. He is from Johannesburg, South Africa.

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