When Slava Rubin’s father, Mark, died of a rare bone marrow cancer in 1993, the Internet was a nascent tool to a few scientists and universities. It lacked widespread adoption or usefulness, and it certainly didn’t strike Rubin as an avenue to spread awareness.

But 13 years later, after graduating from the Wharton School of business and making connections as a strategic consultant for Fortune 500 companies like Goldman Sachs, the pieces fell in place for Rubin to form “Music Against Myeloma,” a nonprofit that raises awareness and funds for myeloma research by hosting an annual music festival in New York City.

The first event in 2006 was a success, raising $10,000 dollars, and today the organization has donated more than $60,000 to the International Myeloma Foundation.

“I didn’t know how to make something from nothing,” Rubin admits when discussing his “netroots” campaign. But the success of Music against Myeloma produced a chain reaction of entrepreneurial insights for Rubin, and in bits and pieces he put together a new alternative for financing any project, from mom and pop grocery stores to the next Google or Facebook.

In 2008, he founded San Francisco-based IndieGoGo, a crowdfunding website that allows users to submit proposals—oftentimes film and art projects—and solicit donations to aid their completion. Examples range from funding the health-care documentary Escape Fire, which premiered at this year’s Sundance Film Festival, to giving a vacation to Karen Klein, a 68-year-old school bus monitor who was harangued by children in a 10-minute viral video. The goal was to send Klein on a nice vacation for $5,000, but outrage over the rotten kids she’s forced to deal with has led to more than $656,000 being raised.

“Sometimes it really does take a village,” Rubin says.

The crowdfunding business model is technically an old idea. The Statue of Liberty lacked funds for a platform to stand upon until Joseph Pulitzer’s New York World newspaper persuaded the public to contribute the necessary funds—more than 120,000 people donated an average of 0.83 cents. More recently, the practice of crowdsourcing—the simple idea that many people can overtake the work of traditional professionals—has given rise to user-generated media like YouTube and Wikipedia.

Crowdfunding’s attempt to capitalize on this trend has led to disagreements if this is a positive step for entrepreneurs and the economy at large.

Last week, the battle lines in the debate were drawn at an event titled “Crowdfunding: Disrupting Traditional Funding Models,” which was hosted by the MIT Stanford Venture Labs (VLABs). Among the panelists were Rubin; Carl Esposti, founder of Crowdsourcing.org; Ryan Caldbeck, CEO of crowdfunding site CircleUp; and traditional investment folks like Daniel Zimmermann, partner at WilmerHale, and founder and board member of Health Tech & Sand Hill Angels Don Ross.

As Ross sees it, crowdfunding projects could have “some coexistence” with traditional funding vehicles, but in the end it’s “not a very good overlap.” He expects a nightmare getting traditional investors like VC or Angels to work on capitalization tables with scores of, basically, anonymous Internet investors.

Further, the well-known “due diligence” requirements for getting startup dollars, where investors try to determine the market value of the project and the execution abilities of the core team, would likely be compromised by the open crowdfunding model, Ross argues.

But “the average small business in America is actually started on less than ten thousand dollars,” Rubin counters. He adds that the current model for getting this modest amount is “fundamentally broken.”

“Instead of a world of transactions it’s a world of relationships. People want to be part of what they’re actually buying or participating in.

“It’s for people to decide; not one person in a suit, typically using a risk model which is 20 years old that has no idea how the market is evolving.”

Of course, Big Brother could end up making the decision for everyone.


Angels & Demons

This year, the direction of crowdfunding took a turn toward the free market, as the federal JOBS Act passed through the U.S. House and Senate with a crowdfunding provision and was signed into law in April by President Obama.

The language, which will have to be converted into a set of investor rules by the SEC, currently allows equity investments in projects through crowdfunding. The legislation requires crowdfunding websites like IndieGoGo to register with the SEC and restricts an individual’s investment in crowdfunded companies based on net worth or income. For example, an investor making less than $100,000 annually can kick in no more than $2,000 to a crowdfunded company. But the legislation doubles the number of shareholders a private company can have before it’s considered public, from 500 to 1,000.

Crowdfunded companies can raise up to $1 million annually under the provision, which could result in the augmentation or even replacement of traditional “professional” investment routes like VC, just as Wikipedia did with Encyclopedia Britannica.

The crowdfunding provision has generated a maelstrom of debate, and the head of the SEC, Mary Shapiro, openly voiced skepticism of the provision, saying it would weaken investor protections and be a “step backwards.”

The SEC currently has 270 days to make necessary regulatory modifications to implement the crowdfunding provision, but Shapiro went on record saying 18 months was more appropriate for “regulations of this magnitude.”

Echoing Shapiro’s doubts, a smattering of economic experts suggest that, despite the JOBS bill’s attempt to stimulate job growth by lowering hurdles to entrepreneurial investment, the “crowd investing” provision will create more problems than it solves. This has led some Silicon Valley attorneys to start giving their startup clients stern warnings about intellectual property poachers.

“If you have a system set up to sell securities to unaccredited investors, in relatively small amounts, to fund risky new ventures, that’s a gigantic flashing sign to attract the worst scumbags on Earth,” says Antone Johnson of Bottom Line Law Group, which works with early stage mobile and web startups in Silicon Valley.

But as the economy remains somewhat stagnant, the future seems ripe for open funding models that sidestep the traditional system.

“We’re trying to democratize the funding process,” Rubin says, “where anybody in the world is able to raise money for absolutely any idea without judgment. Crowdfunding will become very much the norm.”