Crowdfunding. The revolution is just beginning.
A couple of years ago, the term “crowdfunding” was relatively unknown. Today – largely thanks to Kickstarter – it’s become a household word and a pretty well-understood way to aggregate capital for funding a project, a loan, or even equity.
Recently Tivix helped to develop the brand-new SolarCity Solar Bonds platform (enabling individuals to purchase renewable-energy bonds), the new Crowdstreet platform (a venture-funded company bringing the crowdfunding model to commercial real estate), plus we've built a couple consumer financial service platforms for other clients (which are protected by confidentiality agreements).
Financial services platforms obviously require pretty rigorous engineering – given the security and regulatory requirements – and Tivix has developed some special expertise in this area.
The are several benefits to the crowdfunding model. Three salient ones are:
– Access to the long tail – traditionally, fundraising had process friction (and regulation) that made it impractical to solicit small amounts from individuals. Today the friction (and regulation) has been lowered dramatically.
– The "Wisdom of the Crowds" effect can perform some of the functions that traditional credit/risk departments perform (if you are considering investing in a crowdfunded project that already has a million people backing it, then you can assume that your risk is lower and you benefit from distribution of risk).
– What economists call disintermediation (what the rest of us would just call “getting rid of the middleman”). Instead of depositors putting money into a bank at a low rate and the bank loaning it back out at a high rate, borrowers and lenders are matched-up without a bank being involved (and both individuals come out ahead on the deal).
In many ways, this revolution is just beginning. Forbes said crowdfunding was a $5.1 billion sector last year, which is a very small slice of the overall financial services pie. The 2012 JOBS act lifted the ban on general solicitation of securities, which is a complete game-changer allowing the crowdfunding model to be applied to equity capital (aspects of it are still pending before the SEC).
As the trend continues, I expect that financial services marketplaces will continue to be disrupted in ways that will benefit everyone except big banks (and no one is crying any tears for them).
It’s exciting for us to be in the middle of helping to build several of these revolutionary platforms, and the best is yet to come.