1) Most of the microlending is essentially aimed at being charitable, and is practiced in the third world. Most venture capital is 0-for-2. This is like comparing VC funding to consumption of chicken breasts.
2) Kiva et al get good press. They probably wouldn't if people knew the microscopic default rates were caused by local partners' automatically rolling over loans which go delinquent. This creative accounting just papers over the problems (and we will, inevitably, see a reckoning here.)
3) I don't see American entrepreneurs taking 100% APR debt anytime soon when many of them can do far, far better with consumer credit (which is itself a poor option for business financing, most of the time). (Oh, they didn't mention that in the microlending presentation? Must have slipped their minds.)
4) There are significant regulatory hurdles in front of microfinance in the US. Prosper, one American startup in the space, got essentially shut down by the SEC. They're also legally capped at about 30% a year for interest, which is unlikely to cover defaults if you aim at the sort of customer Prosper did.
5) I don't think loans in the $5k ~ $25k region would really help most startups that much. They're small enough that it is doable with familial resources for most people who are middle class. (The traditional first resort of startup funding.) They're also small enough to be covered by personal credit, which would take the average working professional about a day to arrange (quite possibly at painful rates, but not 30%).
And unlike selling equity they leave the entrepreneur holding the bag if things go south, which is the major reason we don't tell everybody and their dog "Put the business on your credit card!"
I wonder what new forms/stages of funding will become available as micro-lending becomes a more widely accepted form of investment.
I wonder if you could build some sort of "micro-lending" pool. A fund for investors in the 20-200 dollar range. (pulling numbers out of thin air)
While slightly riskier than traditional micro-lending the individual financial burden is light. It's a numbers game of course, if such a company had a good enough selection process it could be a good investment.
I believe there is no limit of sellable ideas, only a limit to how many can be found and exploited, and only a very practical limit to how small a profitable venture can be.
It would be very nice to see a vast sea of startups and an economy driven by a higher volume of investors that thrives on change, new ideas and a thorough profit-motivated vetting process. I believe such an economy would be much more resilient.
I'm with you. This seems like it would be better classified as 'Awesome' than 'Scary.
The more money and avenues available for owners to have available, the better. VC is not going to be eliminated by microlending, and anyone who thinks so is crazy. VC is 90% about the expertise/network, and 10% about the money. Microlending is 100% about the money. Both are valid in different situations.
You're half right on that. I probably should use the word "unbelievable." It's either a good thing or bad thing. We can freely give to others in third world countries; however, current SEC Reg D rules that we cannot invest in companies that are struggling down the street. We must be accredited.
While it's good, it can also be viewed as a bad thing.
Forgive me, but I still dont get why its a bad thing.
From your comment, it sounds more like you believe the 'accredited investor' rules are bad. These are pretty readily bypassable if you know how, but how does that relate to the quantity of microlending -- becuase potentially only a few can participate? I'm not trying to be argumentative, just understand your point of view. I see no downsides.
From what I understand (I am not a lawyer), you can bypass 501 if the investors LLC-ify themselves and are active members in their own LLC before investing.
Startups cant do this, becuase its not on their end, its on the investors end. And most investors dont want to deal with all of this hassle.
But the main point is, I dont believe you have to Qualify 501 for organizations who invest in yours, only individuals. Hence the bypass.
All that said, Ive never actually done this, so who knows.
I still think you can get around this with active vs passive. I personally have had investors use LLC's who have less than $5mm in assets, but we set them as an active investor. This was done by an attorney with expertise in the area.
The risk here is that if you screw anything up, you taint the company that issued the stock in ways that make it hard to get investment in the future, and that expose it to legal threats. I'd love to hear more about how you pulled this off, but my real point is, there's no "cut-and-dry" way to invest safely in a small private company through an LLC.
The only downsides I see are from the venture capital perspective. I view microlending as being a form of investment that can actually work--that people will actually pump money into. I see this as an upside for microlending; however it's a bad thing for our economy and venture capital because it's an indication that we're lending to others, but not allowed to EASILY invest without being accredited.
I agree, but you're using this word "EASILY", and from what I can see it is basically "IMPOSSIBLE" for a startup to tap the pool of upper-middle-class professionals for investment capital, even though most startups and many professionals would be a good match for each other.
From my perspective, because usually I don't find many want-to-be angels who don't meet the qualifications and can supply the amount of funding I would be willing to deal with.
I'd rather deal with 3 people giving 200k than 30 people giving 20k. The downside of relaxing the accredited investor rule is the con artists will come out of the woodworks to get blind, senile grandma to invest in "amazing business opportunities". Personally, I think the rules are about right as they are. See above about LLC bypass if you really have a current need and can convince your non-accredited investors to go through the hassle.
See above, and then consider that if people could invest $500 in your startup, someone else could build a business creating a liquid market in startup equity, which you could then tap for funds in an arbitrary amount.
But I'd rather deal with loans than equity if the equity doesnt also give expertise. The type of quick equity fund you describe would likely have to offer convertible debt (ie lending) or force the risk of being crammed down regularly. And without the expertise, there is no downside for the entrepreneur to screw these $500 investors out of their money regularly.
So if you are already lending (convertible debt->equity) then how is this different from microlending?
Regardless, I see your point about flexibility, I just personally cant see it as all that much more useful than microlending for either side.
Microfinance is for financing very small businesses predominantly in rural areas of developing / under-developed economies. While, VC is.. well, VC! This is YCombinator website, you know better than me about VC here.
1) Most of the microlending is essentially aimed at being charitable, and is practiced in the third world. Most venture capital is 0-for-2. This is like comparing VC funding to consumption of chicken breasts.
2) Kiva et al get good press. They probably wouldn't if people knew the microscopic default rates were caused by local partners' automatically rolling over loans which go delinquent. This creative accounting just papers over the problems (and we will, inevitably, see a reckoning here.)
3) I don't see American entrepreneurs taking 100% APR debt anytime soon when many of them can do far, far better with consumer credit (which is itself a poor option for business financing, most of the time). (Oh, they didn't mention that in the microlending presentation? Must have slipped their minds.)
4) There are significant regulatory hurdles in front of microfinance in the US. Prosper, one American startup in the space, got essentially shut down by the SEC. They're also legally capped at about 30% a year for interest, which is unlikely to cover defaults if you aim at the sort of customer Prosper did.
5) I don't think loans in the $5k ~ $25k region would really help most startups that much. They're small enough that it is doable with familial resources for most people who are middle class. (The traditional first resort of startup funding.) They're also small enough to be covered by personal credit, which would take the average working professional about a day to arrange (quite possibly at painful rates, but not 30%).
And unlike selling equity they leave the entrepreneur holding the bag if things go south, which is the major reason we don't tell everybody and their dog "Put the business on your credit card!"