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The Next Big Thing in Funding Innovation

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Once upon a time there was a financial sector. And, there was a technology sector.

The financial sector was the place burgeoning tech ideas went to get the money needed to make their innovative and entrepreneurial ideas a reality.

For years technology entrepreneurs relied on large, bureaucratic, traditional financial institutions to get their capital.

All that changed after the financial crisis in 2008. The symbiotic relationship between capital providers (the financial sector) and growth businesses (the technology sector) became strained, making it harder for small businesses, start-ups and entrepreneurs to secure financing.

2013 is marking a new chapter in this modern day fairy tale: It's the year we're seeing the technology sector BECOME the new financial sector and filling the gap for all those companies that previously relied on traditional sources for funding.

Why now?

There are several reasons why 2013 is the year that alternative and specialty financing start-ups will become mainstream sources of financing.

1. Technology makes it possible. The internet has created inexpensive publishing and networking platforms whereby people can showcase their ideas and work. Social media allows them to access immediate feedback and a doorway to influencers and key contacts in an unprecedented way. By this time last year the world internet population had doubled over the five preceding years. Simply put, this wasn't an option in 2008.

2. Entrepreneurial spirit is supported. As we see more and more success stories of startups that now command huge market share, there's been a bandwagon effect -- many more people want to become that next big thing created out of their college dorm. The potential success is no longer deniable.

3. Necessity is the mother of invention. Ok, this one is hardly new, but, we're seeing it in action. If entrepreneurs can't get funding they need in traditional ways they'll find other ways -- in fact they'll create them, and they are because they can.

What we're seeing now, sprouting up all over the globe, including in Canada, are innovative financial services start-up companies providing funding options supported by new uses of technology to help entrepreneurs access capital in creative ways.

These include:
Peer-to-peer lending such as Lending Club and Prosper that are helping sole proprietors and new entrepreneurs secure funds to get a new project going by relying on their personal credit profile. This platform enables individuals to lend small amounts of money across various projects to diversify risk and help specific individual projects.

Crowd-funding such as Kickstarter, Indiegogo and CircleUp that tend to be aimed at start-ups or smaller businesses and ask supporters to help get an idea off the ground or fund a specific growth project. Investors may be rewarded with product samples or discounts, album downloads or acknowledgement on the website or somewhere else online. Contributors via Kickstarter and Indiegogo do not have any stake in your business. CircleUp works differently in that accredited investors receive equity stakes in return for their capital investment.

Online Personal Asset Lending such as Zillidy that offers loans leveraging the value of personal items such as jewellery, watches and precious metals, similar to the way an entrepreneur could tap the equity in their house through a home equity line of credit. A borrower can typically get funds within 24 hours and since personal asset lenders focus on the value of the asset to determine the loan amount, there is no background or credit check, no impact on the borrower's personal or business credit score and no impact on an entrepreneur's ability to get additional financing elsewhere.

Merchant advance companies such as Advanceit.com that will provide loans secured by future credit card sales and take repayment in small daily amounts based on daily sales. This is a good source of funding for restaurants, coffee shops, grocery stores, pharmacies and other retailers who have consistent daily credit card sales. This type of funding is relatively easy to monitor and enables a company to get cash based on its future sales, instead of its past sales.

Online lending platforms such as On Deck Capital, Fundation, and Kabbage that leverage data in order to understand performance and deliver fast, flexible loans to small businesses.

While it took a few years after the financial crisis for financial services start-ups to get their business models refined to the point where they can come to market they are here now, and these alternative financial services technology companies are becoming viable and increasingly common sources of financing for entrepreneurs and small businesses.

What all these lending platforms have in common is their reliance on technology and the shifting of power back to the business owner and away from the lender. The availability of funds is dependent on persuasive marketing, ownership of valuable items, connections to people, or enthusiastic market acceptance of an idea. Not exactly the stuff a traditional long form application is made of.

This is game changing stuff. Simply put -- you have an idea? You want to start or build your business? Well now less than ever do you need a bank to make that happen.

No one can ignore the rapid pace at which technology has advanced, connectivity has grown and traditional financing models are being worked around.

As more people use the internet, our global connectivity rises and with it people able to get the word out faster regarding their business and/or innovation. The technology itself has created entire careers and market niches that didn't exist 6 years ago.

While these careers and their accompanying services are new, what isn't new is that the traditional banking structure is risk-averse when it comes to providing financial backing to the new and unproven. But in 2013, no one is waiting for them to see the results or get comfortable with the idea.

No doubt many a brainstorming session is taking place behind the walls of established banking institutions as they try to determine the future viability of their traditional model.

Perhaps the conclusion to this fairy tale will be when the technology sector funds the traditional financial sector's pivot to a more user friendly, accessible funding model.