The democratisation of financial capital

April 22nd, 2011

Faultlines

Which business, which industry, which NGO or political organization, democratic or otherwise has not been touched by the impact of our most recent communications revolution? In a breath it seems, businesses defined by their socialness, community, and peer to peer interactivity have erupted in complete violation of the orthodoxy of traditional business, and how that business is made: controlled access to stuff, to information. This is the Gestalt Switch –  today people are using communication technologies to get what they want and need from each other rather than through existing organisations and institutions. Why? Because those institutions have been recognised as being unable to deliver on their promise to society. Because they abuse their position of power, because they lose sight of why they were there in the first place.

So why is access to financial capital any different? In No Straight Lines: making sense of a non-linear world, I make the case and argument that as our world has become increasingly unfair, to the point whereby that unfairness is highly corrosive, people will take action, political action, dramatic action, action with consequences. It is no accident that today, communications tools are being wielded as powerful agents of political change. As much as everything ‘digital’ has affected our world, the point is we are in a social revolution not a technological one. And, as much as we have seen profound change in certain areas of society, the owners of monetary power (banks, venture capital, financing) have seemingly been unaffected by the disruptive energy of a non-linear world until now, other than by their own doing. But what the banking crisis demonstrated is how dysfunctional finance and money markets have become, not only in venture funding and lending but in pensions, the managers of which know they will never be able to properly pay back to society.

So at either end of people’ lives; the creation of jobs and then a happy retirement, the system which should support that has failed. Its not failing, its failed. So where do the new entrepreneurial companies that create the new jobs come from? How will we finance our retirement? We need novel ways to make this all happen.

In the same way that Martin Luther used Gutenberg’s printing press to reform the church, organisations such as GrowVC, or Profounder or Kiva or Zopa, or Kickstarter, to name but a few, are also part of this challenge to financial hierarchies and their positions of power that now serve themselves rather than society at large. And this process is starting to accelerate, (see the Startup Exemption Petition)

Disruption does not ask permission

So disruption does not ask permission, and it never comes from the centre, the future of investing and the kickstarting of innovation requires radical new ways of funding and this will have a significant impact on society. This innovation will flatten  powerhouses of financial capital and if the idea proves as exciting as the ideas explored and brought to life in the writings and pamphlets that led to the French Revolution, then that idea will spread. As Tony Judt wrote in, Ill Fares the Land, (review)

By the time the revolution broke out, this new language of politics was in place, and in so doing discredited everything that had gone before it.

And once you have stormed the Bastille, you don’t go back to your day job. Who is an entrepreneur? Who is an investor? Who has the right to be either? Such perspectives are as skewed as the myopia of those that whinge about professionals and amateurs, and how the internet has destroyed culture. The question to that is who owns culture and who makes it? What we are seeing is a decoupling from the belief systems that have defined our world for generations.

In this process of the democratisation of venture funding, and the creation of a new innovation eco-system (to accelerate deal flow, that creates more companies and that creates more jobs), it has been reported back to me that some American’s believe this could be the re-invention of the American Dream. And Ross Dawson suggests, that a significant shift in capitalism could be coming. As head of vision at Grow Venture Community (GrowVC), I have watched these developments with great interest. I think, in the same way that micro loans work in many countries, rather than pointing to such financing models as ‘only for the really poor’, there is a more fundamental dynamic at work here, that participatory human systems when connected by the connective tissue of communications media can do some extraordinary things. It also I think breaks down the false barriers between who can and who cannot engage in wealth and value creation. This false distinction has corrupted many in their greed, consequently hurting society per se. As John Kay wrote, “Capitalists, are capitalism’s worst enemy – and particularly the market fundamentalist tendency which has been in the ascendant for the last 20 years”. And yet many in the finance and banking world cannot accept even though they were bailed out by states around the world paying millions in bonus’s is fair. In the same way Ann-Marie suggested the starving in the streets of Paris ‘eat cake’, the financial institutions has become detached from understanding their role in the wider society (read here for a selection of posts that explores these issues). So change is gonna come,

Ross believes,

While we supposedly live in a capitalist society, the potential is for new and more open structures to create far better use of capital than we have today. A more fluid form capitalism could transform business and how individuals create value.

The Wall Street Journal,

Federal securities regulators are weighing demands to make it easier for fast-growing companies to use social networks such as Facebook and Twitter to raise money by tapping thousands of investors for very small amounts of shares. The Securities and Exchange Commission is looking at adapting its rules to encourage Internet-age techniques for small companies raising capital. The issue is part of a wider review by the agency into whether to ease decades-old constraints on share issues by closely held companies.

The use of “crowd-funding” techniques has spread in recent years from artists looking to fund creative works to entrepreneurs trying to expand their firms. In a typical example, a company looking to raise $100,000 would use an Internet site to invite investors to buy as much as $100 of shares each.

If all goes well, small companies can raise cash relatively cheaply, while investors get a stake in an innovative business with limited downside risk. The SEC is now considering calls to relax its rules to make it easier for companies to use crowd-funding without having to undergo the full panoply of disclosure and other legal requirements required by the securities laws for share issues.


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