One sector that has traditionally appeared resistant to disruption, as highlighted by Clayton Christensen in the Innovator’s Dilemma, is the financial market.
While numerous industries faced challenges from emerging competitors introducing less desirable products, those who funded these disruptors often emerged as the primary benefactors. Venture capitalists and investment bankers enjoyed prosperous returns when these nascent companies’ innovations finally captured mainstream consumer interest.
However, the era of being immune to disruption has concluded. With the rise of crowdfunding, Christensen’s renowned principle now targets the fundamental processes of capital allocation and access. This discussion extends beyond merely viewing crowdfunding as support for "projects"; it also emphasizes backing individuals.
Let’s examine the numbers: Individual contributors pledged a remarkable $2.7 billion through crowdfunding last year, representing an 81% increase from the previous year, according to data from Massolution. This growth is expected to accelerate further as SEC regulations related to the JOBS Act are established, thereby facilitating equity crowdfunding.
Taking Kickstarter as a prime example, it was established by three individuals without prior financial experience. Interestingly, investors backing new product developments on Kickstarter expect… nothing in terms of financial returns. Instead, they receive early access or various non-monetary incentives.
Despite this, the suggestion that crowdfunding could disrupt the venture capital landscape might provoke laughter in VC boardrooms. Skeptics often overlook the distinct motivations behind crowdfunding; these funders are not conventional investors focused on maximizing profits while minimizing risk. They seek engagement and involvement in the creation of new ventures.
In essence, the focus is more on purpose than profit—a notion echoed by Kiva co-founder Jessica Jackley. This intrinsic motivation serves as the disruptive force of crowdfunding, one that even Christensen may not have anticipated when analyzing historical tech companies.
During my tenure leading the Google Apps team, I observed the transformative potential of such motivations first-hand. The competitive landscape was characterized not by existing features—like the ability to include footnotes—but by the demand for innovative capabilities such as real-time collaboration and browser-based access.
The reaction of venture capital firms to crowdfunding resembles the defensiveness exhibited by tech giants like Microsoft. Many prominent VCs have increasingly shifted to late-stage investments, outsourcing the higher-risk early-stage consumer investing to angel investors. This shift signifies disruption when established players concentrate on their most lucrative customers, while innovators target those in the lower market segments.
When it comes to crowdfunding, Kickstarter exemplifies the significant changes occurring in capital markets. However, it is far from the only player—the rise of platforms like Indiegogo and emerging startup funding avenues such as AngelList and Funder’s Club is notable. These platforms are democratizing angel investing, making it accessible to a broader audience.
Once the rules set by the JOBS Act are implemented, nearly anyone will be able to participate as an angel investor. Yet, a pressing concern remains: if established investors on Sand Hill Road face challenges in identifying winners, what chances do everyday individuals like Aunt Sara have in seeking sustainable returns while trying to finance the next major tech breakthrough?