One market that has always seemed immune to disruption (as popularized by Clayton Christensen in the Innovator’s Dilemma) has been the market for money itself.

While all sorts of companies were being disrupted – by fledgling competitors introducing lesser-featured products no one really wanted – those who financed the disruptors gained most. Venture capitalists and investment bankers reaped the benefits when those fledgling companies’ innovative features finally moved into mainstream markets.

But those days of benefitting, while remaining immune to, disruption are done. Because of crowdfunding, Christensen’s heartless yet proven principle is finally turning its steely gaze toward the very way capital is allocated and accessed. However, I’m going to argue here not just for the popular notion of crowdfunding as backing “projects,” but as backing people, too.

#### Dave Girouard ##### About Dave Girouard is co-founder and CEO of [Upstart](https://www.upstart.com/). Prior to that, he was President of Google Enterprise, where he built Google's cloud apps business worldwide – including product development, sales, marketing, and customer support. Girouard was also a Product Manager at Apple; SVP of products & marketing at video search company Virage; an associate in Booz Allen's Information Technology practice; and a software developer at Accenture.

First, the facts: A total $2.7 billion was pledged by individual donors through crowdfunding last year, according to reports by research firm Massolution – up 81% from the year before. This space is only going to heat up further when SEC rules for the JOBS Act are released this year, paving the way for equity crowdfunding.

Let’s start with Kickstarter as the obvious crowdfunding example. The company was founded by three guys with no previous finance experience. The target return for investors who back development of new products – from objects to movies – on Kickstarter is … nothing. Backers are instead rewarded with early access or other in-kind rewards.

Given these facts, the idea that crowdfunding could be disruptive to the venture capital industry may have caused uncontrollable giggling in the VC conference rooms of Sand Hill Road. But what skeptics fail to realize is that the motivations of crowdfunding “investors” are different: These are not quant investors looking to maximize financial returns while minimizing risk and volatility.

They don’t want to pour money down the drain, obviously, but their motivations differ substantively from those of traditional financial investors. Crowdfunders and angel investors, while not purely philanthropic, share the common desire to participate and be involved in the creation of something new.

Put another way, *it’s more about cause than cash *(a phrase I picked up from Kiva co-founder Jessica Jackley). And that desire is the disruptive “feature” of crowdfunding. It’s the kind of feature that even Christensen couldn’t have predicted when looking at technology companies of yore.

>It’s more about cause than cash.

I witnessed first-hand the disruptive power of such features when I lead the Google Apps team for several years. “You can’t even do footnotes!” shouted Microsoft CEO Steve Ballmer to two Gartner analysts on stage. What he didn’t realize was that consumers and businesses weren’t adopting Google Apps based on existing features (like footnotes); they wanted bold, new features such as real-time collaborative editing and access from any browser.

Venture capital firms’ response to crowdfunding is not dissimilar to Ballmer’s response, though in this case it’s more finely veiled. Some of the most prominent VCs proudly admit they’ve outsourced high-risk early-stage consumer investing to angel investors entirely, so what’s not to like about crowdfunding? But it’s a tell-tale sign of disruption when such incumbents focus on their most lucrative customers while disruptors pursue the less desirable ones at the lower end of the market.

>If Sand Hill Road doesn’t always get it right … what hope does Aunt Sara have of generating positive returns in her quest to finance the next Facebook?

In the VC world, this means writing bigger checks for later stage venture deals; they’re increasingly leveraging their brands and reputations to gain access to less risky deals rather than betting on their ability to identify world-changing ideas and teams at a very early stage.

In the crowdfunding world, no company better represents the disruption underway in capital markets than Kickstarter. But there’s more to crowdfunding than just Kickstarter. Besides popular platforms like Indiegogo, there are a growing number of Kickstarter-like companies. Meanwhile, startup-funding companies like AngeList and Funder’s Club are turning everybody (for now, only accredited everybodies) into angel investors.

When the JOBS Act rules are finalized, these online platforms will let virtually anybody become an angel investor. There’s one big concern, however: If Sand Hill Road doesn’t always get it right … what hope does Aunt Sara have of generating positive returns in her quest to find and finance the next Facebook?

Perhaps the disruptive feature of participation and involvement isn’t enough to generate a mainstream asset class. We need more.

This is where, I’d argue, investing in people – not just projects and companies – can change the game. Predicting success for a newbie startup is notoriously difficult. But investing in people is one of the only ways to get a risk/return/volatility investment profile that actually works. It’s a model that could also appeal to quant (not just cause) investors as well.

>Such a model allows a person to “borrow” from his or her future self.

Besides amusing, isolated examples like the man who sold IPO shares in himself, companies like Upstart (which I founded) and Pave make it easy for people to invest in other people.

Why is investing in people a safer bet? Because there are clear – and measurable – signals reflecting their accomplishments and hinting at their potential. It’s not unlike the logic used by big companies or universities faced with countless candidates, by recruiting firms and talent agents, and others. By using data and algorithms – in this case, a sophisticated regression model that considers variables like school, area of study, standardized test scores, internships, job offers – we can statistically predict a person’s future income.

Such a model allows a person to “borrow” from his or her future self.

In this way, platforms that crowdfund people assist in allocating capital to individuals who are statistically more likely to do compelling things with that capital. (For us, the model is simple: Backers contribute toward a person’s funding goal and receive in return a small slice of that person’s income for 10 years.)

Making more capital available to more of the world – as long as it’s offered on fair and reasonable terms – seems to be a universal good. In purely economic terms, current crowdfunding returns are considered mere rounding errors in the capital markets of today. But newer, smarter, and more efficient forms of financing will certainly drive lower returns for incumbents.

The real disruption and impact of crowdfunding won’t be understood for a decade or more. We’re only at the beginning. But it’s no longer an indie experiment, either.

Editor: Sonal Chokshi @smc90