3c hapter - Index of

Pennies from Many 131
It’s a win- win. By the end of 2010, more than $400 million in
loans had been originated on the two sites alone. Next up: small
business funding. As Trampoline Systems showed, crowdfunding—that
potent combination of social networking and fi nancial
technology—has the potential to revolutionize the way we invest.
The latest sites—such as Funding Circle in London, ProFounder
in California, and Grow VC in Hong Kong—provide a platform
for bringing together investors and entrepreneurs. As with consumer
P2P lending, both parties benefi t. By cutting out the middlemen,
entrepreneurs can obtain funding at more attractive
rates and terms than offered by banks or VCs, while individuals
gain access to potentially lucrative investment opportunities and
businesses they care about.
There’s another major benefi t. By design, crowdfunding is
the antithesis of Too Big to Fail fi nance, where a handful of powerful
fi nancial institutions can bring the economy to the brink of
collapse and send the credit markets into a deep freeze. In a P2P
network, there are no systemically important points of failure:
Funding is dispersed across many individuals, who spread their
investments in small increments over many borrowers to mitigate
risk. It’s the same principal that makes a distributed electricity
grid less vulnerable to blackouts, or a distributed computing system
less likely to be taken down by the failure of one server.
Who could argue with that?
The Securities and Exchange Commission, for one. The watchdog
agency, for now, regulates the nascent crowdfunding industry.
This emerging fi eld requires close supervision, but there is the
danger of going to the other extreme. The fact is, our 1930 s- era
regulations are woefully unsuited for the Facebook age.
Growing Pains
Prosper.com provides a cautionary tale. When it launched in 2006,
it was hailed as an eBay- like marketplace for loans, where any
American could lend to any other American. Underscoring that
promise, the San Francisco–based startup raised an initial $20 million
from eBay founder Pierre Omidyar’s social investment fund,