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Equity Based Crowdfunding

February 2, 2018

When people talk about “equity based crowdfunding”, they are usually referring to shares. There is debt-based crowdfunding (Kiva), perks-based crowdfunding (Kickstarter), donation-based crowdfunding (GoFundMe), and equity-based crowdfunding (WeFunder). But when I say equity based crowdfunding in the title of this piece, what I am referring to is the potential of crowdfunding to deliver more equitable or inclusive outcomes in the allocation of capital.

Along with climate change, I personally believe that inequality is the issue of our generation. It’s why Bernie Sanders is calling for a revolution. It’s why Donald Trump is in the White House. And it’s why I work at Kiva. Since 1978, CEO pay has increased 1,000%, while the pay of the typical worker has increased 11%. The net wealth of the top 10% of households has doubled, while that of the bottom 10% of households declined (and the median stayed flat!). The Forbes Top 400 have more wealth than every Latin American in the United States combined. And while I can borrow money at very low rates and hold a checking account for free, the millions of Americans who live paycheck to paycheck face exorbitant interest rates from payday lenders and have to pay money every month for the privilege of giving Wells Fargo their money. We have a progressive taxation system, and most people agree that’s “a good thing”. But our finance system is egregiously regressive, and trapping people in a downward spiral of steepling debts and miring poverty.

At Kiva, we believe entrepreneurship can help tackle this problem of gross economic inequality – by building wealth and creating good jobs in low-income communities throughout America, and the wider world. But the problem is that access to capital for entrepreneurs is also intensely inequitable. Despite representing 12% of the population, and 7% of small business owners, African-Americans represent only 2% of SBA loan volume, and only 1% of Venture Capital. 77% of VC funding goes to 3 states (CA, NY and MA), and only 4% of loan volume goes to women-owned businesses! Just as several studies have shown that being an applicant of color makes it harder to get a job, so being an entrepreneur of color makes it harder to get a loan.

And this is where I see huge potential in the democratizing force of crowdfunding.

Just as Hilton concentrates accommodation in downtown hotels, or Microsoft Encarta concentrated encyclopedia content curation in the hands of a small number of editors, so our current financial system centrally concentrates lending decisions in the hands of “kings” (loan officers at banks, algorithms at online, “P2P” lenders, etc.). Don’t hear me wrong. I like staying in Hilton Hotels. They have comfy beds. And FundingCircle are experts in underwriting small business loans. I am sure their algorithm is very sophisticated. But our current financial system is not resulting in equitable outcomes around the allocation of small business loan capital.

I don’t want to replace these kings, but I do want to complement them with a more decentralized and democratized financial system – which is usually called crowdfunding. If AirBnb is democratizing hotels, and Wikipedia has democratized encyclopedias, then crowdfunding represents the democratization of finance (obviously, the stock market is a time-honored manifestation of crowdfunding, but it has historically only been available to very large, established businesses – another way the dice are stacked against the mom and pop shop on Main Street). If lending decisions are made by fewer white men, and more women of color, then perhaps more women of color will be approved for loans. If Kiva’s lenders are more risk-tolerant than conventional lenders, because they are motivated by philanthropy rather than profit, and because they are lending in tiny $25 increments rather than large $25,000 chunks, then perhaps our democracy can vote “yes” to an ex-offender with a dream, where an autocracy decrees “no”.

That’s the idea in theory, at least. In practice? It’s hard. We’ve only made $20M loans through our Kiva U.S. program over the last six years. To 4,000 entrepreneurs. As a non-profit we struggle to raise capital, so we can grow our team only very slowly, and our loan volume only very slowly as a result. Our repayment rate is much lower than conventional lenders – firstly, because we’re still new to this game and we’re resource constrained; but secondly, because it turns out kings have more expertise and training than individual citizens in a democracy. (In my personal opinion, recent empirical evidence demonstrates that democracies can effect unfortunate decisions at polling booths too(!). But hopefully that doesn’t mean democracy is the wrong system. It just means that we need to keep working at refining how our democracy operates).

But on the bright side, over 80% of our loans last month went to entrepreneurs of color, and over half have gone to women owned businesses. We are lending to borrowers with a median household income of $45,000, capitalizing early stage enterprises deemed too risky even by other non-profit microlenders, and we have charged precisely $0 of interest and fees on our $20M of loan volume. We’re genuinely connecting small business owners with the hundreds of generous Kiva lenders who are crowdfunding their loans, and then going on to become their customers, business advisors and brand ambassadors, and thereby reimagining a finance system based on people, not profit. Democracy is hard work. But its fruits are worth laboring for.

For democracy to work, people have to stand up and vote. Feel free to do that here.

Kiva

Contact Information

Fels Institute of Government
University of Pennsylvania
3814 Walnut Street
Philadelphia, PA 19104

Phone: (215) 898-2600
Fax: (215) 746-2829

felsinstitute@sas.upenn.edu