There’s a New Way to Crowdfund Capital, Will It Catch on?

Two new portals have people talking — so what’s all the buzz about? It seems that Upstart and Pave have transformed the familiar donation/reward-based crowdfunding model into something new.
Using these websites, entrepreneurs are able to post ideas, achievements, qualifications, and other critical information about their ambitions, and in-return, receive funding. The difference, however, is how these funders are rewarded. Think of it as “temporary-equity”, or as others refer to it as the “human capital contract”: each funder receives a small percentage of the individual’s earnings over a set period of time. So in order to crowdfund capital, individuals are essentially placing a market value on their own heads.

Currently, Upstart has funded 40 people at over $500,000. For the time being, the portal is restricted to accredit investors. In saying this, the target demographic for campaigners seems to be recent American graduates, using crowdfunding to pay-off student loans. Pave targets a similar audience, labeling users as creative prospects — entrepreneurs, artists, and students 18 years or older. At this moment, both sites operate without interference from the SEC, but since this is a matter of equity-based crowdfunding, further review may be given in future months.
On Upstart specifically, an individual can offer up to 7% of their income in return for funding. Investors, on the other hand, have been said to expect around an 8% ROI. For both parties, the long-term model is still unknown and how it pans out will be interesting. To think of it in comparison to a bank loan, this method is a trade-off: higher interest rate (potentially) vs. flexibility. Even at 1%, an individual could lose well over 10% of their income to a dozen backers. In saying this, there is an expiry date for pay-back and payments need not to be made in years of no income.

Over the past few weeks, many sources have received negative feedback on this topic; but it is hard to deny that individuals have been able to successfully crowdfund capital in this way. What are your thoughts on Upstart and Pave’s crowdfunding twist?