Twitter’s initial public offering, valuing the micro-blogging site at about $11 billion, is an incredible achievement for a company that started in 2006 as a way to send 140 character status updates to friends via text message. In just a few short years, Twitter and other social media firms have forever changed how we communicate.
Another seismic shift that facilitated Twitter’s public offering is the law that allowed it to come public. Twitter filed its IPO paperwork confidentially, under a provision of the Jumpstart Our Business Startups Act, a 2012 law that allows startups to sell equity shares to the public with less costs, red tape and headaches than was previously the case. Among other things, the JOBS Act was intended to reverse the steep decline in IPOs seen over the past decade.
In the coming years, we could see a new wave of IPOs from another batch of disruptive companies, this time in finance, where a revolution is quietly taking place in how we lend, borrow and invest our money. Just as Twitter, LinkedIn, Facebook and other social media firms brought us closer together, allowing more collaborative communication, these new finance companies could reduce the need for the average American to rely on large corporations for their cash and capital needs.
Most people think crowdfunding is a way of helping out a good cause or an interesting project in exchange for a T-shirt or DVD through websites such as Kickstarter. Some sites such as IndieGoGo are philanthropic and connect people with causes that they believe in and want to support.
But innovations in crowdfunding as a result of the JOBS Act will fundamentally change how individuals and small companies raise capital. And in my experience with technologies that bring people closer together, these changes have lasting implications.
Back in the 1990s, when I was chief executive at the upstart electronic trading platform Instinet, shares were typically bought and sold by floor traders in colorful jackets, shouting and gesticulating at specialists to haggle over price. People told me that we would only ever be a bit player. Now, electronic trading is dominant, trading volume has grown exponentially, transactions are less expensive and the shrinking NYSE trading floor is little more than a theatrical backdrop.
Just as electronic trading changed the face of stock markets and Twitter and Facebook shook up traditional media, crowdfunding can change how businesses raise capital – something that will create jobs and enable a new generation of U.S. companies to grow.
To be sure, crowdfunding is in its infancy. But its initial success in one particular area — peer-to-peer lending — is democratizing the way individuals borrow and lend money. Through exchanges such as Lending Club and Prosper everyone from hedge funds to individuals with some savings to invest can effectively become the bank. Borrowers get access to interest rates that are lower than would be available from credit cards or from commercial banks. And with bond yields so low, investors can access a marketplace for loans that are vetted for creditworthiness and can gain average returns in excess of 7 percent. It’s a compelling opportunity that allows retail investors to invest in instruments which have long been the sole purview of large institutions.
Some have criticized crowdfunding, saying investors will be unable to diversify and that investing in such opportunities will be open to rampant fraud and will be as fraught with risk as a casino. But that view is naïve and misses a central tenet of capitalism – that markets are devices for the efficient allocation of capital. Those companies that succeed will be the ones that put in place quality controls to ensure fraud is kept to a minimum and allow risk to be spread among diverse pools. In the end, reputation will be as important to these new companies as for any company on Wall Street.
In the coming years crowdfunding can do so much more than peer-to-peer lending – everything from allowing small American companies to sell shares to individual investors to offering commercial real estate deals to the public. As the opportunities are met with the companies that will grow to meet the challenge – buoyed by investments from the vast U.S. middle class – this new more collaborative, social form of financing will help America embark on a new age of crowd-funded innovation.
Douglas Atkin has been an investor, entrepreneur and senior executive in the financial technology industry for over 20 years. Doug began his career at Instinet where he rose to become the company’s chief executive officer, leading its successful IPO in 2001. Atkin now heads Guggenheim Partners’ venture investing business.
posted from :http://www.forbes.com/sites/ciocentral/2013/10/31/creating-jobs-in-finance-through-crowdfunding/