3c hapter - Index of

Crowdfunding
Pennies from Many 127
Crowdfunding is an approach to raising money that aggregates small
sums from many individuals via the Internet. Think social networking
meets fi nance. This sort of person- to- person fi nance (P2P) was popularized
by sites such as Kiva.com, a microlender, and Kickstarter,
which lets people donate to creative projects. More recently the focus
is on profi t- making P2P consumer lending, small business lending,
and small business equity investing. By eliminating the middleman,
borrowers pay less interest and investors get higher returns. What
could be more democratic than that?
Crowdfunding is attracting both sophisticated and amateur
investors who are looking for alternatives to the volatile stock
market and the anemic interest rates for savings, bonds, and CDs.
For entrepreneurs, it is a potentially critical new source of funding
at a time when venture capital and bank lending are on the wane.
“The question is, what’s going to fi ll the gap?” says Armstrong.
“Crowdfunding is one of the few emerging models that could.”
This sort of direct, person- to- person lending harkens back to
the way transactions were handled for millennia, before our mediated,
securitized fi nancial system took hold. It’s family lending to
family, neighbor to neighbor. Tom Stearns of High Mowing Seeds
lending to Pete Johnson of Pete’s Greens.
The Internet and social networking have supercharged such
P2P fi nancing with new power, scale, and potential. The concept,
in its modern incarnation, was fi rst popularized by Kiva,
the microlending web site created in 2005 by Matt Flannery and
Jessica Jackley, to let people make small loans to goat herders,
street vendors, and fi shmongers in developing countries.
The Kiva founders took their inspiration from Nobel Prize
winner Muhammad Yunus and his Bangladesh- based Grameen
Bank, which, in the late 1970s, pioneered the idea of making
microloans to the poor. Grameen showed that lending to those
considered unbankable could be profi table and, in fact, a better
risk than many wealthy borrowers in the developed world.