Funding Circle Raises Series B Funding

Thursday, President Obama will sign the pro- crowdfunding JOBS Act into law. Once signed, the SEC will have 90 days of rule making, and then the SEC will open the draft for 90 days of comments.

Already, competition in the space is heating up. Just days ago, UK-based Funding Circle raised a $16 million dollar round to presumably move into the US market once the pro-crowdfunding law is enacted. Funding circle raised Series B capital from Index Ventures and Union Square Ventures (USV). Notably, USV was also one of the first big names invested in Kickstarter.com, a potential indirect competitor to Funding Circle. It appears Funding Circle will directly compete with established players in the P2P debt lending marketplace like Prosper and LendingClub.

Crowdsourcing.org, the industry website, has also developed a crowdfunding accreditation for platforms. Accreditation is awarded based on passing marks in operational transparency, security of information and payments, platform functionality, and operation procedures. So far 7 platforms have received their ribbon of accreditation.

Crowdfunding offers value for both business owners and investors alike. First, for Entrepreneurs, Crowdfunding (in its different iterations) is a powerful alternative to raising money from Banks or VCs. US IPO offerings have declined significantly since the passage of Sarbanes-Oxley (SOX).  The JOBS Act seeks to reverse some of the negative regulations that have adversely affected US IPOs. Second, Everyday investors will have more options for taking advantage of potentially higher (albeit riskier) returns on their capital that would otherwise be sitting in low risk-low growth financial instruments.

JOBS Act Looking for Senate Support Tuesday

American Jobs Act

Tuesday marks another important milestone for Crowdfunding Legislation. The Senate is set to vote on the JOBS Act which promises to liberalize small equity markets and change the regulatory structure that prevents equity funding platforms to operate currently.

Entrepreneurs want it. Investment is difficult to attract. According to a January 2012 report by the Kauffman foundation, a $750 Million funding gap exists for start-up businesses. Investors are ready to take their money out of banks with low interest rates; however, the government still has not made the necessary regulatory changes.

A few road blocks stand in the way.

Senate Democrats are worried that liberalizing small equity markets will invite corruption and fraud. To some degree they are right. Allowing freer access to capital will entice those looking to launder money and abuse the system for personal gains.

What policy makers don’t seem to understand is that internet users understand that fraud is possible. The problems arise when users are not notified about the fraud. Policy makers cite Enron-style scandals and the recent financial meltdown as reasons for the delay in passing this bill; however, there is a difference. Both instances caused calamity because they were billed as “safe and lucrative” financial investments. However, due to the institutional structure, the reality of the situation was shrouded in obscurity and complexity.

Surprisingly and refreshingly, online financial lending sites have been transparent regarding notifying users of fraud. One example that comes to mind is Kiva. I read a case study from one of their founders who addressed this issue directly. The Kiva management team found out that one of their partners in Africa was funneling Kiva funds to the management rather than the borrowers. As soon as Kiva learned of this misallocation of resources, Kiva management immediately notified site users of the improprieties and issued a formal apology. Importantly, it seems as if online financial sites have been playing by a different set of rules, those that are more transparent and honest. I believe the reason for the increased transparency is a function of the difficulty in developing and maintaining trust. These types of platforms cannot operate if that trust is not developed, so it is more a matter of the self interest of the business that all lines of communication stay open.

Transparency of operations and developing a platform with exceptional safeguards to protect investors and entrepreneurs have always been paramount to the Davka Team. The key is information. Obviously, the more information an investor has regarding a venture helps determine. Davka safeguards investors through a partnership process similar to Kiva, as well as a multistage funding process that requires transparency from ventures. We need the opportunity to showcase our process.

In short, I would be pleasantly surprised if the bill was passed in the Senate in a form acceptable to be passed back in the house.