Crowdinvesting is the byproduct of two strands of disruption: technical and cultural. We explored the technical disruption in the first part of this series. Specifically looking at low-end disruption, a pattern codified by Clayton Christensen over a decade ago that’s been witnessed across countless industries since. Let’s briefly summarize this technical disruption in context of investment crowdfunding:
Entrants (crowdfunding platforms) start at the bottom of the food chain and target an industry’s least profitable customers (small capital placements, low frequency)
Entrants innovate their business models (zero retainer, success driven) and systems (online, centralized, automated, direct to investor, minimal physical overhead) to serve these customers
With more attractive business models, and more efficient processes, entrants then move up the value chain to compete for the more profitable customers (larger capital placements, higher frequency), directly challenging and disrupting incumbents
FundingCircle, a debt-based platform in the UK, gives viewers a first-row seat to this technical disruption. Launched in 2010, it’s crowdfunded more than $185 million for growing, job-creating small businesses, currently at a rate of ~$500,000 a day. Versus 6-12 weeks at a conventional bank, borrowers, on average, are securing loans in 12 days. The most striking statistic comes from a recent survey conducted by Nesta: Of surveyed businesses that have used FundingCircle,77% said they will go back to FC for future capital needs. This points to one conclusion: FundingCircle is providing—and they’re not alone!—a fundamentally better way for businesses to raise capital.
Parenthetically, as for how they entered the market: they started with a maximum loan size of £250,000; upped it to £500,000; and just recently, they raised the ceiling to £1 million. This is the technical disruption. And whether it be equity, debt or royalty-based structures—from main street small businesses, to tech startups, to film producers and artists— it’s fundamentally improving how businesses and individuals raise capital.
But we’re not here to talk about the technical side again. On to the second strand of disruption: Cultural. It’s less visible, more difficult to define and quantify, and will take longer to mature. But I believe its implications rise far above the technical side alone. It’s taking place today. It’s accelerating. And it’s affecting not just investing, but consumerism as we know it.
A new kind of consumer is behind this cultural disruption. This consumer is defined by her perception of value, and she is placing ever more weight on the meaning of goods and services, and not just their utility. First, we’ll break out this idea ofutility versus meaning. Then we’ll look at this changing consumer, who’s re-imagining retail today, and waiting to do the same to financial services tomorrow.
We can look a good and prescribe two kinds of value: utilitarian and meaningful. Utilitarian value is made up of the tangibles. For example, do these shoes fit? Are they durable? Stylish, and comfortable? Utilitarian value is a commodity; interchangeable, and replaceable. We can always buy an identical pair of shoes. Most things only have this utilitarian value.
But every so often there’s something more. There’s meaningful value. It’s created by the intangibles. Beyond their utility, do these shoes mean something to me? Reflect who I am, what I believe in—or is there an experience, or story behind them? Maybe they’re made by a startup in Kenya, and my purchase is supporting sustainable job-creation. Or I purchased them from an artist on Etsy, whose personal story deeply resonated with me. Meaningful value isn’t not a commodity, it’s personal and unique.
It sounds esoteric, if not idealistic, but it’s very real. It creates true, quantifiable economic $ value. And if we look, we see it all around us.
Imagine you’re strolling through your home. Glance around. What do you see—what do you own— that holds special meaning? Maybe a painting from your college roommate, a lampshade discovered on a date night downtown, or a coffee mug purchased from a favorite coffee shop while studying abroad. How do you value these things? Not only by the price you paid—their utility—right? They’re worth more.
Let’s say you paid $100 for your roommate’s painting. How much is it worth to you? In other words, at what price would you be willing to sell it for today? Maybe $500? If at all? There’s a story behind it… Every so often you glance at it and think back to your memorable experiences. It means something to you… and this meaning creates value.
The value is increased by 400%, from $100 to $500, almost entirely by one thing: meaning. This is a hypothetical example of course, but think about the meaningful things you own. You may have paid X. But is their value not Y? Oftentimes, many multiples of what you paid. Meaning is an enormously powerful value-creator.
See that pale, awkwardly tall kid to the right. That’s me four years ago :-), standing with the owners of a small tailor shop in Vietnam. The owners are sisters who have been running the shop together for more than thirty years. Meeting them was a great experience. And while I paid only $20 for each shirt, their worth to me today is much more.
We’re increasingly seeking out these meaningful things. Not necessarily by flying to Vietnam, but by choosing to couple our experiences, passions and values with our consumption.
A New Kind of Consumer
It’s certainly not only utility factors—price, convenience, etc.—motivating more and more people to shop at farmer’s markets. It’s the experience. An opportunity to support and engage with a fellow person, not just a corporation.
It’s not the hours of gameplay or quality of graphics, often inferior to their Blockbuster alternatives, that’s motivating individuals, en masse, to fund videogames on Kickstarter. It’s the opportunity to participate in the development process; to be a part of something.
These are just a couple examples of this new consumer, a consumer who, extraordinarily biased towards meaningful value, is rapidly growing in number, and influence.
It’d be easy to say she’s generational, marked up to Millennials being more “socially driven.” I read this quite often. But I disagree. There’s something else pumping blood to the heart of the change.
The Change: It’s the Supply, Not the Demand
I believe we all hold the innate desire to connect more meaningfully with ideas, people and communities. This desire, this demand, is part of our biological fabric. It’s not that consumers today want more meaning than consumers three decades ago; it’s just that it’s become markedly easier to acquire.
And it’s this newfound supply—technology driven—that’s driving the cultural disruption. Ten years ago, it would have been difficult, if not impossible, to purchase a watch from an artist I personally engaged with. But now we have Etsy, Kickstarter, and many other marketplaces that are enabling consumers to find greater meaning in everyday things, from shoes, to watches, to housewares.
As the choice between utility and utility + meaning becomes frictionless, consumers will increasingly choose the latter. The aggregate size may be small, maybe 1, 2% of total consumption shifted, but even a small shift stands to realize significant individual, and societal, impact.
Just think, x many years down the road, you’re deciding between two brands of shampoo while walking the aisles of Target. Whether through Google Glass or an electronic label, you see which has a lower environmental footprint, and is more sustainably manufactured. Maybe even the wages of line employees. Which will you choose?
Retail is undergoing a transformation as this new consumer, informed and empowered, is eschewing the Old for the New. And she’s not stopping just with the things she buys. Next, the things she invests in.
Our Public Markets—Devoid of Trust, and Meaning
A monthly poll by Chicago Booth indicates that fewer than 1 in 5 Americans trust the stock market today. Should we be surprised? It’s a marketplace overrun by speculators. Gamblers. It’s stacked against the retail investor.
Watch just a few seconds of this video. It been slowed to show the high-frequency trading activity in Johnson & Johnson’s stock (JNJ) over a period of 1/2 second on May 2, 2013.
This is what Wall Street has turned our public markets into. This isn’t investing. It’s gambling. This isn’t human. It’s machine. And it’s been manufactured piece by piece to deliver outsized wealth to those who run it, at the expense of those who don’t.
But what can we do? Where else can we go with our assets? Checking accounts generate negligible yield. And we’ll be lucky if Treasuries beat inflation. The fact is, we, and by we I mean the 98% of us who are unaccredited, are held hostage to our public markets. Today, we don’t have an alternative.
But crowdinvesting changes this. It creates the alternative, and invites us in to our private capital markets. Markets that offer not only trust, but also meaning.
The Rise of the Meaningful Investing
The technical disruption is big. But the cultural disruption is bigger. By no means do I see a mass exodus from the public markets. They’ll always provide a critical source of liquidity at scale. But even a small shift to private markets, re-allocating 1, 3, 5% of assets, will realize a large impact.
Is this belief naive, overly idealistic? I don’t believe so. It boils down to a single question.
In 5 years, when a rising generation of investors can frictionlessly invest in an asset class that means something to them—that they trust—will they? Will they invest in the companies whose products they love; the startups they read about and follow; the indie films that inspire them, and the musicians that move them; the local restaurants they drive by each day; and, when given the choice, will they choose to invest in the communities and causes that define them, and in the places they call home?