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How the Web disrupts and democratizes finance

April 30, 2014
   
   

Four leaders in the online finance revolution spoke at the Crowd Capital and Online Finance panel. Peter Williams, founder and CEO of ACE Portal; Naval Ravikant, cofounder and CEO of AngelList; Slava Rubin, CEO and cofounder of Indiegogo, andRon Suber, president of Prosper Marketplace, provided their perspectives on the financial disruption taking place online and the growth of their platforms in the past few years. Doug Atkin, senior managing director of venture investments at Guggenheim Partners, also provided insight into the financial democratization occurring online.

Panelists discussed the inefficiencies and frustrations in the marketplace that led them to build innovative financing models. These irritants included the difficulties of raising capital online, the inefficiencies of connecting entrepreneurs to capital, and the archaic processes that large banks employ in connecting qualified institutional buyers. 

Moving platforms online cuts out the middleman, produces efficiencies in managing transactions, and expands each platform’s network of investors, borrowers, and customers. The “What problem are you trying to solve?” question resonates throughout the sector.

Panelists pointed out that change can happen quickly. Suber commented that consumers are just beginning to learn that these platforms exist as millennials are changing the way customers shop. Prosper, for instance, has been able to dramatically reduce the time it takes to receive a loan because the online platform is able to validate the customer, assign them a rate, and send the loan to the market composed of retail and institutional investors who are comfortable doing business through the Internet.

Rubin remarked that the 1990s brought the U.S. consumer online commerce, the 2000s brought social networks, and the next decade will be known as the era of crowdfunding and disruption of the entrepreneurial sector. Companies are using Indiegogo’s platform to market their products “not because it’s cute” but because it is profitable to do so. The platform lowers costs, mitigates risks “and gives you insight into where the market is going,” Rubin said.

For Ravikant and Williams, shifting transactions online improves transparency, while opening up the market to additional investors. No one needs to “pound the pavement” in certain geographic regions, because potential investors can access the market from almost anywhere.

Education, awareness, and understanding are vital to the growth of innovative platforms, panelists said. The more investors and borrowers can be made aware, “the more we can grow,” Rubin said. Williams and Atkin also pointed to the symbiotic relationship between investor and investment bank and the difficulty in convincing both of the benefits of alternative financial platforms. “It’s a difficult nut to crack,” Atkin said, “but I think it will be cracked.”

Being transparent with data and allowing public access can potentially generate significant interest in alternative platforms and shift consumer sentiment. At AngelList, for instance, Ravikant noted how young, up-and-coming entrepreneurs are taking their savings and investing in startups in the hopes of an eventual payoff.

On issues of platform risk and the potential for fraud, all panelists agreed that bad actors will inevitably cause problems. Ravikant was quick to point out that AngelList “has never had a single case of fraud on our platform,” while Suber described Prosper’s operations in evaluating loan-seekers and the more than 500 pieces of data that the credit and risk teams review on each borrower.

Questions then turned to the Jumpstart Our Business Startups (JOBS) Act, specifically on general solicitation. Panelists noted that the investor’s burden of proof is “quite high,” while Williams mentioned that the institutional investment world will likely use general solicitation as long as disclosure requirements are kept to a minimum.

On Title III, Ravikant cautioned that the proposed rules “will create significant adverse selection” and the rules “need to be rethought.” He also noted that equity crowdfunding is legal in the UK “and things haven’t blown up.”

On state blue sky laws, Rubin said he would not be surprised if there is movement toward standardization rather than having to register offerings separately in each state. “There’s no reason why you wouldn't want it to be standardized,” he said.