
Ask PG: Can you start a HN crowd-funding venture? - tstegart
Just thinking how much fun it would be to have a Kickstarter-like fund but with real equity. Maybe the HN community could pick its own YC applicant each season that gets into YC if the HN community funds it. We could see how valuable the wisdom of the crowd is when it comes to real investing. :)
======
pg
I don't think crowdfunding is good for startups. For startups, having large
numbers of investors is bad, and having inexperienced investors is bad. So
having a very large number of inexperienced investors is the worst scenario
possible.

The right way to get money from large numbers of people is to sell them your
product, like Inpulse did, not to sell them your stock.

~~~
muhfuhkuh
"For startups, having large numbers of investors is bad"

But isn't investment about spreading risk? The more risk you spread, the less
founders would have to a) give up in ownership and b) answer to anyone but
their own vision.

I think the reason why kiva (and even prosper) works is that risk is spread
widely to individuals with common vested interest and enough skin in the game
to make it sting but not be completely in-shambles devastating; as opposed to
rich people trusting a richer VC to make them foo% return and putting it all
in Color.

"The right way to get money from large numbers of people is to sell them your
product, like Inpulse did, not to sell them your stock."

What if the product isn't one? What if it's a service like Facebook or (gasp!)
Instagram? If you believe in a vision, and you want to contribute to it
monetarily -- perhaps even see a _return_ on that money -- why is that bad?

~~~
Mz
It seems to me that giving up less ownership and having more freedom to answer
to their own vision and no one else is not some automagical formula for
success.

I have had the freedom to do that with my own websites. In spite of audience
interest which led to their creation, they have dismal traffic, are not
profitable, and have helped only a paltry few people. Having that kind of
"fuck you" decision making autonomy was critical to my ability to get well
when doctors claim it cannot be done but it has not been a good basis for a
business model. I am currently working on getting feedback to change that. It
is clear to me I need more connection, not less, to make a viable business
model. Yes, I am leery of the type of connection which can be strangulating
but I am also leery of being so autonomous as to be isolated.

I remember someone posting here with an anonymous account who expressed
similar concerns because he had $400,000 in savings and was thus free to
pursue his vision to his heart's content. He worried he would go broke before
he got his act together and created a solid business model simply because he
didn't _have_ to before that. "Duke Nukem Forever" comes to mind as well.

------
brudgers
I'm curious as to how people think Ycombinator would benefit from such a move.
To me, it looks like a distraction at best and has a huge potential for the
appearance of conflicts of interest.

I will speculate that crowd source funding is more likely to generate
headlines for dissatisfied investors from the middle class than for successful
ones. The economics of startup investing require a sufficient pool of capital
to:

1\. Have access to quality opportunities. 2\. Sufficiently capitalize each
opportunity. 3\. Invest in a large number of opportunities so as to increase
the odds of hitting a homerun.

Few people have that much money. And crowdsourcing will attract both people
with little inhibition toward spending other people's money and investors
without the knowledge or resources or inclination to conduct due diligence.

To put it another way, real investors have a track record already. They don't
need crowdsourcing.

~~~
tstegart
But real investors also need capital, or it helps to have more capital. Crowd
funding is a way to lower your risk. The big investor organizes the venture
and finds opportunities. They put less money in but still get the same payout.
The tiny investor gets less of a return on their money, but gets an
opportunity to invest at a stage they are normally shut out of. They're paying
for the opportunity essentially.

~~~
brudgers
> _"Crowd funding is a way to lower your risk."_

A large number of naive investors as partners increases the risk of an
investment.

It's the reason that professional investors tend to put together deals with
other investors they have previously worked with. It's the reason they form
groups.

As I've said, crowdsourcing will attract dumb money. Smart money will tend to
prefer not to become legally entangled with it. People with lower inhibitions
will enjoy a feeding frenzy.

Don't misunderstand me. There will be widely trumpeted crowd source success
stories.

It just won't change the fact that most people will lose their investments -
heck that's even the rule for smart money investing in startups.

------
garethsprice
For background, the JOBS Act that was recently signed removes a ton of
regulation from the funding of small companies and specifically allows the
creation of "funding portals" that allow non-accredited investors (ie. regular
people) to invest up to $10k/year in startups.

Seems like a "curated fund" where organizations like YC pick the companies and
crowdsource funds would be one of the better applications of the new legal
permissions (the potential "worse applications" being boiler rooms pushing hot
new photo sharing startups to midwestern pensioners).

However, it's not like YC and other funds are hurting for cash so what's the
incentive for PG to need to crowdsource funds in tiny amounts like this when
they have plenty of institutional funding? The limits are 2,000 investors and
$10k/investor for a max of $20m of crowdsourced funding per company (assuming
every investor makes $100k+ and maxes out on one company which would be
stupid).

It'd be like Scrooge McDuck stepping outside his money bin to pick up pennies
off the street.

I'm _very_ interested to see how established VC firms react to JOBS Act. It's
not like startups are finding it difficult to get funding right now, so
doesn't this just create a subprime market for companies that the big players
have no interest in? Coupled with the lifting of advertising restrictions and
the appeal to amateur investors, this seems like the potential makings of the
next big bubble...

~~~
mseebach
> It'd be like Scrooge McDuck stepping outside his money bin to pick up
> pennies off the street.

OT, but that's a pretty bad example, because he does do exactly that. A lot.

~~~
garethsprice
Hah, sorry, not watched Duck Tales for a while. It's still an irrational act
;)

~~~
Mz
My recollection: He will go so far as to put bubble gum on a stick to retrieve
coins through a grate because it nets him $400/year _tax free_.

------
chrisaycock
> We could see how valuable the wisdom of the crowd is when it comes to real
> investing.

Dot-com bubble, real-estate flipping, tulip mania...

~~~
pgroves
I don't think it can be a bubble when up until very recently it was illegal
for 'crowds' to invest in private equity deals at all. How can there be over
investment from small investors when there is currently zero investment from
small investors?

~~~
garethsprice
The act removes restrictions on advertising of securities. It's specifically
designed to get amateur investors to put money into small startup companies.

Hence, there will be large amounts of advertising aimed at encouraging the
mass population to put money into risky investments that the mass population
(seeing Instagram/Facebook/etc) think will make them rich beyond their wildest
dreams.

Historically, this does not end well.

~~~
vibrunazo
> Historically, this does not end well.

Could you expand?

~~~
scott_w
"Dot-com bubble, real-estate flipping, tulip mania..."

Add the 1930s crash to that.

~~~
pgroves
...CD ladders, reinvesting dividend portfolios, index investing, life
insurance, health insurance...

advertising securities to the general population isn't guaranteed disaster.

------
eggbrain
Crowdfunding a startup feels really "gimmicky" for YC -- just because someone
raises a lot of money doesn't mean the product is great -- I believe there was
a very bad RPGMaker game recently that received $20k worth of funding with
barely anything done and stolen assets.

I'd like to think that VC's and the judges at YC have quite a lot of
experience knowing who to pick, what characteristics to focus on, among other
things. I also think money is one of the least important factors into joining
YC, as what's more important is the mentoring, along with the network you
become a part of. Finally, PG and the other mentors have put their name behind
YC, but when you start to allow in companies that win popularity contests, you
diminish the brand.

I do like the idea, and it's why I've helped people build websites that can do
this (although I need to wait for the JOBS act to finish its evaluation by the
SEC), and I've also signed up for Wefunder, a site dedicated for stuff like
this. I just don't think this is a good fit for an incubator with the prestige
of YCombinator.

~~~
tstegart
The important part is not the money, its the opportunity for people like me to
invest in growing companies. The money is just the way the risk is
transferred.

Obviously, I would want the crowd sourced company to be a part of YC. The
mentoring and the contacts are what make their companies successful.

But all that work takes energy and costs money, so we (the HN community) has
to assume the risk. PG could structure it so that YC gets a stake in the
company we fund. YC puts in the energy and the mentoring, and in exchange gets
a stake. We put in the money and assume most of the risk.

Its a low-risk way to fund another applicant. I say low risk because there
still are risks, namely that having more investors spells trouble and there
are legal costs associated with us. But that's not a hurdle, merely part of
the equation into how the profit would be distributed.

~~~
ssharp
I would assume that YC's resources are more limited at the energy level than
the money level.

------
adyus
The law that allows this to actually happen has been signed last week I
believe. The barriers to investment have been greatly reduced, and with HN's
collective wisdom, a PG-backed crowd-investing venture would steer clear of
scammers and actually thrive.

Voted up.

~~~
wtvanhest
The SEC is still reviewing the crowd funding portion before anyone can utilize
it. Crowdfunding equity in startups has major governance problems that will be
very difficult to solve.

I'm genuinely confused how people think it is a good idea to open up a class
of investment with no controls. Why not just buy stocks where the companies
have transparency and solid corporate governance?

~~~
adyus
And the SEC is right to do so. One of the provisions of this new law is that
companies seeking unqualified investor funding (i.e. crowdfunding) are not
required to disclose their finances for up to five years after going public.

As to simply buying stocks, IANAFinance Guy, but I believe there is an upper
limit on the amount you can invest before having to be certified as an
investor. Could anyone contribute a proper explanation of that?

~~~
wtvanhest
As a non-accredited investor you can invest as much cash as you want in public
companies. The crowd funding portion of the bill restricts non accredited
investors to (I believe) 10% of income or 10,000 per year for risky start up
investing. Further it requires investments are made through a platform.

Personally I am worried that 10000 is way too much for an asset class this
risky.

------
dlevine
The JOBS act makes this technically possible, but there are a number of
roadblocks that would need to be surmounted before this could happen. First of
all, any crowdfunding platform that plans to do this would need to register
with the SEC. In addition, the crowdfunding site needs to do pretty thorough
diligence on the companies listing equity and any major shareholders of those
companies. Both of these provisions are mandated by the law.

Overall, it will happen, and there are people trying to make it so right now,
but it's going to take a little while to sort everything out fully.

------
benologist
I think this would make HN a very boring place - if the community has a vested
interest in whatever batch or whatever startups the bias is going to shift
from mostly interesting content to mostly YC content.

------
kmfrk
Well, I don't know if this is the way to do it, but there have been times
where my mind has been blown by projects submitted to HN where I wanted to
communicate my utter amazement at what they had accomplished. I remember the
time where a guy was offered a job by _joshu_ in the comments for his
submission.

Maybe we could start it out as a crowd-pledging venture where the community
can pledge a commitment to contribute to the success of a product without the
need for the creators' consent. If the creators accept the commitment, they
can hash over the details with the committers subsequently.

One way to go about it would be to create a separate "pledge" economy from
karma that still utilizes HN's default interface (for, say, karma>1000). Very
flattr-like, I guess.

------
eatmyshorts
Problem: Crowdsourcing-for-equity quickly will result in >500 investors. This
requires a C-corportation (not an S or an LLC), and requires full SEC filings
and regulation. This means the company will be going public with no product,
customers, or otherwise.

Honestly, I think there's a role for a Kickstarter-like fund for startups (as
opposed to Kickstarter's focus on creative projects). Still no equity--the
"prizes" generally would be promises of receipt of future products. But
without equity, there's none of the legal wrangling associated with going
public.

For new companies, such an entity would give: 1) market validation based on
the number of financial contributors, 2) market research based upon feedback
of pre-sale customers, and 3) relatively strings-free funding. In fact, I
thought heavily about announcing my current project on Kickstarter until I
read their terms and conditions. I'd definitely be using it to fund a new
company, and funding one that would be difficult to call "creative".

~~~
kaitocracy
I wanted to point out that depending on how rulemaking goes in the SEC this is
not necessarily true: the SEC is considering allowing all crowdfunding
investors (people who have invested under the crowdfunding exemption in the
JOBS act) to be bundled together into a single entity, thus easing the
transition from crowdfunding to a Regulation D deal and possibly eliminating
the need for a company to incorporate as a C corporation.

In addition full SEC filings are not required under the new crowdfunding
exemption.

------
arikrak
I doubt YC would be interested in this, and there's no reason to tie such a
venture to one news site, like HN. However, the JOBS act will allow for many
crowd-funding ventures to get started, and SecondMarket, WeFunder and maybe
Kickstarter will join in.

Any company that does this will need to take various safeguards to prevent
fraud or unqualified people from raising money. KickStarter and LendingClub
seem to have been doing OK managing related issues, but it will be harder with
actual investments.

It will also be interesting if crowd-funding expands to crowd-companies, so
people also contribute to a startup like they contribute now to open-source
software. You will probably still need a core team of people committed full-
time to the venture.

------
ssharp
I'm not sure what benefit this would have to the YC partners, unless they have
an unwanted barrier to funding more applicants because of lack of money, which
I doubt. While it may be fun (and profitable) to crowdsource-fund at the seed
level, why would YC give its services to a company they have no stake in for
the sake of making the HN community money?

I'd see more value if the HN community itself were to pool together money and
invest in the various classes, though this benefit may be completely negated
by what the Start Fund does.

~~~
tstegart
The benefit would be the return on investment, just like any other start-up
they fund. In this case, their investment would be the time and effort they
put into mentoring their companies and the legal fees they put into launching
the crowd-funding. The return would be whatever they wanted it to be. The HN
community would mostly have the capital at risk, not YC.

------
solnyshok
I would rather see crowdscreening of YC applications. Letting people apply for
HN screening about 2-4 weeks before YC deadline, discussing application's
strong/weak points, etc here on HN. You can do it here adhoc, but more formal
approach with voting, might help to narrow down 3000 applications to 1000 or
so.

~~~
poppew
We had a similar idea that we executed on during Mega Startup Weekend recently
that was a lot of fun. It is similar to crowd screening in a sense, but really
is more of a crowd sourced business idea validation engine. Imagine if there
was a community / website where you could pitch your idea, have people vote on
it and refine it. You could release your idea to as small or large a group or
circle that you felt comfortable with. The goal would be to build a "tribe"
around your idea that helps you refine it and validate it. We wanted to bake
in the whole lean startup methodology into it. For example we had a step in
the process called "assumption junction" where the tribe would list all the
assumptions in the business idea and rank them by risk/importance. The
community would then be tapped for building/refining surveys as well as for
distributing the surveys or taking them themselves. Imagine if ideas where
refined and validated by hundreds if not thousands of people before a single
line of code was written. We called the idea "The Darwin Project", where only
the strongest ideas survive.

This really jibed with coders we surveyed as they would love to be approached
with ideas that are validated before they wrote any code. This could be a tool
that finally empowers the non-technical business guys to vet their idea, get a
critical mass behind it, and finally build enough value in the idea itself to
build a team around. If anybody is interested in pursuing this I can put you
in touch with the team that is running with this concept.

------
ph0rque
I'm hoping that with the passage of the crowdfunding act that will take effect
in early 2013, we can all do what Yuri Milner and SV Angel are doing, and
invest in all of the YC startups (or selectively invest in particular ones).

~~~
nbashaw
That law doesn't mean you can invest in any privately held company. True,
there is a lower bar to entry, but the startups need a reason to want you to
invest in them.

~~~
rbn
This is sentence alone means that there is going to be another full blown tech
bubble. Lower bar for entry to invests in startups. just like lower bar to get
a home loan.

------
handzhiev
I like the idea but don't see why YC will want to start it. Perhaps that could
be done by someone else.

Add: there are already equity based crowdfunding sites - for example
Symbid.com

------
richerd
Today is a bad day to ask PG. YC interviews just started.

------
PhilipDaineko
I have searched for a PG answer but haven't found it. So PG hasn't answered
this question yet

