Thursday, March 08, 2012

Capital Markets in the Information Age: The Advent of Crowd Funding

I believe that the information age will also introduce material changes in the capital markets. And part of such changes may have emerged through crowd funding, which according to the,

signifies as the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations.

And social media networks are likely to serve as major platforms for crowd funding with Facebook leading the way.

From the Wall Street Journal,

Facebook Inc., with an eye toward future business relationships, wants to be friends with more social-media start-ups.

So it is going after those start-ups' investors.

Facebook's new fbStart program is open to early-stage business investment groups, also known as "seed funds" and business "accelerators," that have social-media developers in their portfolios. Developers at companies supported by the fbStart partner firms will get an advanced look at new tools and features Facebook is creating for its site. In return, Facebook hopes that some of those start-ups could eventually build a business around its platform.

So far partners in the fbStart program include Seedcamp, sFund, 500 Startups, TechStars, and Y Combinator, among others, a Facebook spokesman said.

In documents filed for its initial public offering last week, part of Facebook's pitch to potential shareholders is that it can serve as a platform for other companies, and ultimately take a percentage of those companies' revenue. Since Facebook first opened up to developers in 2007, a growing number of start-ups, such as social-gaming firm Zynga Inc., have built almost their entire business around the social network. Other examples include BranchOut Inc., a professional network, and Color Labs Inc., which provides live phone-based broadcasts to Facebook friends.

"We've been asking Facebook for ways to get better access and advance information for our companies, and this is their way of doing that," said David Cohen, founder and chief executive of TechStars, a Boulder, Colo., start-up accelerator that has helped nearly 100 new businesses raise more than $125 million since 2007.

About half of TechStars' portfolio of more than 80 active companies are expected to make use of the program, he said, ranging from ventures that develop entire platforms on Facebook, to others that incorporate social-media tools and features from the site.

Most of the 70 start-ups in 500 Startups, a $30 million seed fund and business accelerator in Mountain View, Calif., use the Facebook platform in one way or another, said Christine Tsai, a 500 Startups partner. With fbStart, "they're putting a lot more manpower behind working with us in a more formal way," she added.

As internet based crowd-funding grows, we should expect incumbent financial institutions to integrate them or if not social media networks will likely get a larger slice of the capital markets.

The internet has been validating the great F. A. Hayek’s knowledge revolution through the forces of decentralization.

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