
So far, equity crowdfunding hasn't matched the hype - jackgavigan
https://www.bloomberg.com/news/articles/2016-11-07/you-too-can-invest-in-a-startup-likely-to-go-bust
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ChuckMcM
This is just data that matches previously expressed intuition. There are
literally millions of un- or under- funded ideas out there that want to be
companies.

When you realize how much money the various public lotteries bring in every
day, you can see that any idea that can skim off a nominal amount of
"disposable" income from people who wish they were rich is going to do just
that.

This is why I have always been opposed to loosening up the regulations around
crowd funding investment. At least with a gizmo you get a gizmo, but for 99.9%
of the people who have crowd-funded companies (according to the article, 1 in
1000 have been sold) do not have any return at all.

The part that annoys me is that it creates what is essentially a legitimate
place for con artists to practice their skills, and enrich themselves, with no
recourse for the investors. And as a result any "good" that might have come
from allowing deserving companies to get access to a new pool of capital, you
end up with a few bad apples enriching themselves and soiling the waters for
everyone.

~~~
theWatcher37
Crowd funding makes sense however when there is large consumer demand for a
product deemed impossible or otherwise not desirable by major established
players.

Star Citizen is a great example of this as major publishers had no desire for
a truly PC-centric next-gen space sim with very large worlds (4+ billion KM
per face) and nested physics grids.

Sure the end product is behind schedule but people backed it to break new
ground, and that's exactly what it's doing.

Something like SC would never be made under traditional funding models

~~~
tptacek
Crowdfunding for products makes a lot of sense. But this article is about
equity crowdfunding, which is crowdfunding not for presales of a product, but
for return on investment. That makes substantially less sense.

~~~
jjeaff
Well if you say so, it must be true.

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anton_tarasenko
Lending Club almost went broke in the late 2000s when it experimented with
real P2P lending. Defaults on the loans chosen by lenders went up, so Lending
Club had to improve its underwriting model and effectively exclude the lender
from the decision making process.

Equity crowdfunding is the same as P2P lending but more volatile (since equity
is a claim on everything what's left after paying everyone else). It's harder
than lending. And we haven't seen successful examples of P2P lending yet.

Another thing is, we had crowdfunding in 1929. It turned out badly, so now we
have the SEC and many restrictions on equity offerings.

~~~
akg_67
I believe you meant "Prosper" and not "Lending Club". LC never allowed lenders
to set the rates, it was Prosper. LC started out as Facebook app for lending.

Equity crowdfunding was hobbled by SEC equity crowdfunding regulations
influenced by special interest groups. The restriction on max amount non-
accredited investors can invest to very low amount doesn't help investors in
diversifying across lot of companies and make follow up investment in winners.

Also, equity crowdfunding platforms haven't done the favor to the industry by
creating poor investor-unfriendly terms like no direct claim/ownership of the
company, no voting rights, no access to ongoing financials and inability to do
follow up investments. A better structure would have been that followed by
angels/VCs.

~~~
pmorici
The fundamental problem with equity crowdfunding is that there is always going
to be a huge imbalance of power between the company and the investors. In
traditional VC investing it is much closer to equals and one might argue that
the VC's even have the upper hand. That's why you see those investor
unfriendly terms in crowdfunding, when you are just one tiny fish of 1,000 you
have zero leverage. Not only do you not have anything the company needs,
people with 1,000 bucks are a dime a dozen, but it's also unlikely you would
go to any great cost to hold them accountable since it would cost too much to
do so.

~~~
unclebucknasty
Get experienced people to rate investments in a manner similar to that for
debt.

~~~
endymi0n
The same experienced people that gave triple A ratings to junk bonds before
the crash?

Snark aside, if you happen to halfway accurately solve the problem of rating a
startup's risk and potential, better keep it to yourself and go down as the
most successful VC in history.

~~~
unclebucknasty
Ha! Well, it definitely wouldn't be perfect, but an experienced VC knows quite
a bit more than the average crowdfunder in assessing risk, threats,
opportunities, valuations, etc.

Given that the biggest gripe about crowdfunding is that the green amateurs
must be protected for themselves, a little guidance there might help to close
the gap. No omniscience required. Just a starting point.

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api
An adult can also go to a casino or buy lotto tickets, activities not only
statistically guaranteed to be losers on average but designed intentionally to
be so. At least startup crowdfunding might fund some cool stuff.

BTW why can't VC funds be traded on the stock market? Seems like that might be
a better way to allow public participation. You could buy some Sequoia, A16Z,
etc. and let pros make actual picks.

~~~
BWStearns
I don't think there's any actual prohibition on that. I suspect that the
transparency requirements for public listing would be the barrier since
venture funds trail hedge funds in secrecy by a sideways glance.

~~~
sah2ed
> ... venture funds trail hedge funds in secrecy by a sideways glance.

I literally 'LOLed' reading that. That's an especially apt characterization.

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tptacek
I've written before on HN about why I think equity crowdfunding is
structurally disadvantaged and generally a bad idea for consumer investing:

[https://news.ycombinator.com/item?id=9874468#9875770](https://news.ycombinator.com/item?id=9874468#9875770)

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zby
There is an information asymmetry between the investor and the executive. The
traditional laws were designed to diminish that asymmetry - crowdfunding wants
to workaround these laws to make starting companies easier - but it does
nothing to address the problem of information asymmetry.

To be more concrete - it is very easy for the executive to extract value from
the company - some of them are blocked by law, but most are about just
slightly overpaying for something (most notably their own salary) - which will
always be on the margin and impossible to control by laws.

Traditionally there are a few models for the investor to beat the asymmetry:

1\. Become involved in the company - this can work only if you have a big
stake in the company (with dispersed ownership you get collective action
problems) and the company is a big stake of your activities (you cannot get
involved much in many companies).

2\. lend not buy equity (and require collateral etc)

3\. The laws for public offerings - with all the strict accounting and other
ways to information disclosure

4\. Investing in startups. This is a small special case where investing can be
something between becoming fully involved in the company operations and being
a small shareholder of a public company. Startups goal is to grow a 100 times
or die - so small continues extractions by the executives are ruled out.

I think most crowdfunder proponents think it should fit in 4 - but probably
the difference between 4 and 1 is not that big.

Update: Just after posting this I realized that the information asymmetry is
just one aspect of this - and it really is about principal-agent problem.

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peternilson
Of the few success stories listed they mention Camden Brewery getting bought
for double the amount that online investors put in.. So the online investors
got double their money as a payout? If that is the case I don't even know how
that count as a success. If investors knew at the time the potential payouts
were something like 2:1 they should have stay well clear of that bet.

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tlrobinson
Well, yesterday I heard a radio ad for an IPO...

[http://www.punchtvstudios.com/index.php/en/punch-tv-
studios-...](http://www.punchtvstudios.com/index.php/en/punch-tv-studios-
news/120-punch-tv-studios-announces-50-million-raise-for-its-first-round-of-
funding)

Not sure that was an intended consequence of the JOBS Act.

~~~
pryelluw
I can't believe this is real. 50M shares at $1. Might as well be a raffle.

How you make your money matters more than how much you make.

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mjohn
> Wool In The Gang, a supplier of knitting kits, was acquired for about the
> same price that investors put in; Crowdcube backers got a gift certificate
> in lieu of payment

This really surprised me, but it appears that investors had a choice between
receiving cash or gift certificates worth more according to a Crowdcube blog
post ([http://blog.crowdcube.com/2016/08/30/over-5-million-has-
been...](http://blog.crowdcube.com/2016/08/30/over-5-million-has-been-
returned-to-investors/)):

> Investors will receive their initial investment back plus a 5% return or a
> Wool and the Gang gift voucher, which would give them a 20% return on their
> investment.

Nonetheless 5% return on such a risky investment doesn't seem great.

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aminok
While equity crowdfunding may not have matched the hype, technology
crowdfunding where people provide capital in exchange for a cryptographic
claim on a digital token that provides (or in the case of preorders, may or
may not one day provide) functionality within a distributed blockchain-based
platform, is exploding in Ethereum.

~~~
lsseckman
Can you provide examples here?

~~~
aminok
In the Wikipedia page on highest funded crowdfunding projects, you can find
six that are Ethereum based:

[https://en.wikipedia.org/wiki/List_of_highest_funded_crowdfu...](https://en.wikipedia.org/wiki/List_of_highest_funded_crowdfunding_projects)

Many more are in the works.

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dominotw
don't you have to be an accredited investor [1]. I certainly don't qualify to
be one, i suspect lot of people don't either.

1\.
[https://en.wikipedia.org/wiki/Accredited_investor#United_Sta...](https://en.wikipedia.org/wiki/Accredited_investor#United_States)

~~~
wmf
The rules were changed recently so that non-accredited investors can invest in
certain situations; that's what the article is about.

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meddlepal
Gambling with a more legitimate name.

~~~
dublinclontarf
You don't think people should be allowed to gamble?

~~~
meddlepal
How did you come to that conclusion? I'm just saying let's call a spade a
spade.

That said I think gambling is a regressive social problem and tax that should
be restricted to people that can afford to waste the money or time.

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samnwa
The problem is that companies doing crowdfunding still have too much leverage.
They set the valuation, the terms, etc. A 3rd party should set the valuation
and it should likely be at a discount to traditional VCs.

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richard___
The less sketchy version of this is buying equity from the private market for
startups that are already seeing big upward trends (e.g. Uber)

~~~
throwawaylalala
How do you do this?

