Peer 2 Peer Angel Investing: The Future of Funding Startups?

I have a friend who is staring her own business. It’s a for-profit social impact enterprise. As a result, the financial returns she aspires to achieve are lower than a typical startup’s, and she’s struggling to attract investors. Creating an enterprise that aims to generate social benefit as well as financial benefit requires a specific type of investor that is rare. That is to say, there are few entities willing to make a large investment in a company without the potential of a large return on investment. But there are lots of people interested in making social change, and in backing it financially. Most people make some sort of charitable donation each year. Perhaps these people and their social change-seeking dollars could be channeled towards people like my friend.

a new model for individuals to contribute financially to social change organizations

In the spectrum of how an individual can invest in social impact organizations, donating is the first step…simply giving money away. People who donate get a tax write-off and a warm feeling in their cockles.

Microfinance is the next step in the spectrum. Instead of giving money away, investors seek to make back what they invest, perhaps with a modest return. Kiva.org has taken Microfinance to the masses with a peer to peer (p2p) model. Through Kiva, anyone can invest in a small business in the developing world. Individual’s investments are pooled with other investors who choose to invest in the same company. Investors do not receive interest, Kiva simply provides a way to make an impact through low risk, short-term loans. Like simple donations, lending through Kiva is still charity. The idea is that a person’s dollar goes farther because it will be repaid and can subsequently be reinvested. The impact per dollar also has the potential to be higher with Microfinance because the people who receive the money are striving to help themselves rather than rely on donations. Give a man a fish and he’ll eat for a day, teach him how to fish he’ll eat forever.

P2P loaning is a relatively new phenomenon. Kiva has an interest-free, social impact model, but there are other services with a traditional interest model (Prosper, Lending Club). But something that seems lacking in the mix is an opportunity for an individual to make an equity investment. In the traditional startup world, this area is typically reserved for Angels, high net worth individuals who make large investments. For example, the first Angel investment in Google was $100,000. Why shouldn’t every individual have an opportunity to make an early-stage equity investment? The response is probably that normal individuals wouldn’t be willing to make large enough investments to impact a startup. But what about as part of a pool? There seems to be an opportunity to follow the model of P2P lending communities, but with equity investments.

P2P Angel investing seems like a logical progression of the new P2P financing trend. I think it makes sense for startups of any kind, but particularly for startups like my friend’s, for whom traditional Angels and VCs are even harder to attract. Right now, the tools are lacking, and there seems to be an opportunity for a new community/website dedicated to the idea.

Give a man a fish, he’ll eat for a day, invest in his fish market startup and you’ll both eat forever!

For more info on internet-based P2P lending, a good place to start is: http://www.transcapitalist.com/

  1. Anonymous’s avatar

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  2. innovance’s avatar

    Congress just passed a bill to make it easier for startups to use crowdsourcing as a means of fundraising:

    http://www.portfolio.com/business-news/2011/11/03/house-passes-two-bills-to-help-startups-raise-capital#ixzz1eNE8mEYz

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