

Crowdfunding is Great, But is it Right For Startups? - polarslice
http://bostinno.com/2012/02/09/crowdfunding-is-great-but-is-it-right-for-startups/

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vsl2
I'm all for giving people more liberties to do what they want with their money
and I see nothing worse about letting people invest their money in whatever
startups they want, though a reputable investment mechanism should be
established so as to minimize the risks of scams, etc. There are many other
ways for a fool and his money to be parted (casinos, lotteries, booze,
overshopping) and those aren't illegal.

Going back to the reputable investment mechanism, I think this is needed not
only for investors, but also for startups. No startup company wants to deal
with thousands of different ownership voices - its better to have a
concentrated voice (e.g. VC fund manager) raising only the largest issues.
Rather than encouraging individuals to invest (like Kickstarter), give all
individuals the ability to invest in funds created to invest in specific
startups (e.g. Turntable fund, Pinterest fund).

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dchmiel
So creating a fund that has a clear investment strategy of investing in a
particular startup. How about creating mutual funds that invest in startups in
general. It'd allow for diversification of multiple startups and give founders
one concentrated voice. That way retail investors can get exposure to startups
as venture funds are beyond this investor class.

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wtvanhest
Venture Capitalists are basically mutual funds that invest in startups. The y
get most of their investment from pension funds who are investing for a large
chunk of Americans.

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dchmiel
I guess I was looking to see if there could be a more direct approach to it.
Your pension fund invests in multiple assets classes and in multiple
industries because of diversification. With a mutual fund that strictly
invests in startups individuals with small amounts of money could gain access
to the startup market in a direct way but still with professional money
management. It essentially would be a VC fund composed of retail investors
where traditional VC funds are composed of institutional (pension funds, etc)
and high net worth individuals.

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wtvanhest
I don't know if you will ever see this response because I took so long to
write it but you do have a point. The casual investor cannot invest in venture
funds. One problem with funds like this is that they could end up going to
zero if they miss everything or could invest in businesses which are not sound
to help their friends.

In an effort to prevent this type of mistreatment of investors it is harder
for them to raise money from individuals. In my opinion, the returns to VC
firms on the average (not just the home runs) are not worth the potential
losses.

But, the reverse argument could certainly be made and it will be an issue that
I'm sure is discussed long in to the future.

 __*One area that most people are not aware exists is the area of fund manager
vetting and analysis. This is mostly done by institutional investors and is
something the average retail investor would have a lot of difficulty with.

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rsmiller510
It seems like of course you should be able to do this, but the article brings
up some valid concerns. Still, I think it's a bit condescending to say to
people we're just protecting you when most of us understand the risks involved
with a startup. Most aren't Facebook. Most are the company you never heard of
because it failed after 6 months.

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jonnathanson
_"...most of us understand the risks involved with a startup."_

With all due respect, I think that's a dangerously optimistic assumption. If
anything, the tech bubble of the '90s showed us that most people clearly _do
not_ understand the risks involved. (And that was with publicly disclosed
companies!). Even some ostensibly very sophisticated people, like Wall Street
traders and bankers, were unable to parse the tech landscape back then -- to
say nothing of the legions of retail investors who jumped into the fray.

I think there needs to be a give and take here. If we're going to allow retail
investment in private companies, then private companies who open their shares
to secondary retail markets should have to have some sort of public disclosure
of financials, performance, and trading volume[1]. You really can't have one
without the other, or else you're inviting speculative bubbles and other such
clusterfucks. I can almost guarantee you that 9 out of every 10 retail
investors in America would blindly -- _blindly_ \-- leap into startup
speculating. The results wouldn't be pretty.

[1]Thereby blurring the line between public and private, but that's a whole
different can of worms.

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WillyBoy
Understanding the risks and ignoring the risks are two entirely different
things... The current law basically says that anyone without $1 million and
$200k in the bank is too stupid to invest in a startup but someone with that
money is smart enough to. If they don't have to make those disclosures to
people with lots of money now, why should they have to make them if they're
crowdfunded (where people actually stand to lose less because the risk is
spread over a larger pool)? I could see an argument for making those
disclosures even with the system as it is now, but that argument is something
entirely separate from the crowdfunding argument.

Edit: It seems I missed your "can of worms" comment. I guess I just really
don't like the fact that the US govt has and is continuing to treat its
citizens like they're mentally incapacitated. Now a lot of us do behave that
way, but I don't think it's the government's place to try to change that
behavior. The market will do that when they lose their money. If they don't
learn their lesson, that's their own problem.

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jonnathanson
_"but that argument is something entirely separate from the crowdfunding
argument."_

True, but I'm actually less worried about the danger to individual retail
investors, and more worried about the externalities to the system imposed by a
mass influx of speculative crowdfunding -- externalities that can easily wipe
out the retail investors, even if their losses aren't concentrated too heavily
in any one company.

 _"The current law basically says that anyone without $1 million and $200k in
the bank is too stupid to invest in a startup but someone with that money is
smart enough to."_

There are two ways to look at the meaning of the current law. The first is
that yes, the law views net worth as a proxy for sophistication, and therefore
those without high net worth are deemed "too stupid" to invest in private
companies. The second interpretation is that those with net worth in excess of
$1 million (or whichever benchmark we choose) are capable of absorbing
speculative losses, while others are not.

I agree with you that crowd-pooling gets around this issue, and it's
interesting in that respect. But I still think it opens the door to too many
unintended consequences.

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WillyBoy
Well written article for explaining to someone new the "risks"/rewards of
passing crowdfunding legislation.

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bo1024
Sorry, but I'm confused. Historically, wasn't this the whole point of going
public?

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WillyBoy
Going public is incredibly expensive and is only worth it if you're needing to
raise $50million+. A small company therefore doesn't have access to the public
markets nor do the public markets have access to the small companies that make
this country strong.

