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U.S. Startups Fail to Attract Expected Crowd of Small Investors (bloomberg.com)
184 points by vanderfluge on May 19, 2017 | hide | past | web | favorite | 161 comments

Crowdfunding appears to be a terrible deal for retail investors:

* VCs survive by maintaining portfolios of companies in which 1-2 in 10 survive (most VCs fail to generate returns that beat the public markets). This means more than that you need 10 companies --- it also governs the kinds of companies you can invest in. Despite being a message board in part dedicated to startups, it feels like very few of the relatively specialized people here understand why VCs don't back quietly, steadily profitable companies.

* VCs compete for access to dealflow. The very best startups don't need to crowdfund and will usually get better terms from VCs. Moreover, there are logistical hassles with adding retail investors (in any form) to your cap table. All this is compounded by a signaling problem, where taking crowdfunding taints your company in the eyes of future VCs. So there's a huge adverse selection problem.

* Retail investors are given a deceptive view of the outcomes for startups. We all know most startups fail and zero out their investors (any S&P 500 component that did that would generate nationwide headline news for weeks). But more startups fail than we think, because many (maybe most) startup acquisitions are really managed failures.

There are probably more reasons than this.

I think equity crowdfunding is structurally broken, and more likely to hurt people than to do anything for our technology market.

Will VCs make better investments, on average, than retail crowdfunders? Probably. That's their job after all.

Does that mean the law should protect crowdfunders from themselves? That I'm not so sure about.

I can think of no more "Rich Get Richer" law than the accredited investor law [1]. It literally says: if you aren't already rich, you don't have access to this entire set of opportunities that could make you rich.

This was less of an issue when we had a healthier IPO market. With more companies staying private now, and more of the actual IPOs coming later when there's less growth left, how can we continue to deny retail investors (read: the not-rich) access to the best opportunities?

Many of us on HN can start tech companies to gain access. Maybe the person down the street can't do that, but once in a while they might have valuable insights into an industry or the people in it, insights that others (yes even VCs perhaps) lack. Saying "sorry, you can't play this game" seems immoral to me. How can we give regular folks -- non-rich, non-tech people -- access to the same opportunities? If not the current crowdfunding laws, then what?

[1] https://en.wikipedia.org/wiki/Accredited_investor#United_Sta...

> I can think of no more "Rich Get Richer" law than the accredited investor law [1]. It literally says: if you aren't already rich, you don't have access to this entire set of opportunities that could make you rich.

Or alternatively "If you aren't already rich, you don't get marketed at by people offering opportunities so bad they've been passed on by high-risk investors who underperform the returns the non-rich get on less risky asset classes despite working full time on managing their investments whilst having significant power to induce exits in their favour." Or rather, the general public actually does have the opportunity to invest in startups if introduced by genuine friends and family but random mountebanks don't have the right to run slick campaigns to dupe non-rich people into believing that Startup X is a good place to put life savings despite offering lower expected returns than a roulette wheel and zero liquidity. I mean, it'd be nice if the law was as restrictive on more blatant attempts to scam like penny stock pump and dumps and MLM, but it's difficult to argue the general public would be better off for having comparatively sincere people beguile them with Powerpoints involving hockey stick curves.

It's not a "Rich Get Richer" provision when it's obvious that on average the poor will get poorer from random startups being able to present themselves as investment opportunities to them.

That makes sense and all, but the definition of accredited investor is tied to net worth and not knowledge. Which means that maybe you can't scam poor people, but there are plenty of gullible rich people with net worth over the $2 million in liquid assets or whatever it is these days.

Maybe treat being an accredited investor like a driver license and not tie it to your net worth?

The difference is that when a millionaire loses $100k, they're not going to feel it the way someone who's taken out a second mortgage would.

Much easier to develop a roughly accurate heuristic for assessing people's ability to afford to misjudge risk or liquidity than to develop a roughly accurate heuristic for assessing their ability not to make such misjudgements.

How about a terms-based knowledge test, like getting a driver's license? The US loves standardized testing!

Driver testing is run at the state level. The US hates federal organization.

I don't know what other financial services the Accredited Investor Rule deprives ordinary consumers of, but to the extent that it deprives them of access to VC investments: it's increasing their wealth. Most VC firms fail. A significant chunk of assets under VC management are there as part of a hedging strategy for a much larger portfolio; it's not parked there with the expectation that any one person's retirement can depend on it.

> I don't know what other financial services the Accredited Investor Rule deprives ordinary consumers of, but to the extent that it deprives them of access to VC investments: it's increasing their wealth.

By that same logic, we should deprive engineers of the ability to start companies, and push them instead towards AmaGooBookSoft. We would undoubtedly be increasing their wealth.

>By the same logic...

It's a very fair point.

I just wanted to note something about this that is part of a broader pattern of something I notice about HN posters. They will generally argue in favour of personal liberties, and even go so far to do it based on principle, but only when it comes to a case where liberties they personally care about are taken away. There is a contrast between this argument for liberty based on principle--which is by definition libertarian ideology (but note: not necessarily US Libertarian Party followers)--and the pattern of anti-libertarian rhetoric seen around here sometimes in threads where it comes up.

It seems perhaps there is a disconnect: people appear to generally care a lot about their liberties when suddenly it comes the ones they care about being taken away, and they will be argued for them based on principle. However When others generally want liberties they care about, then, that's apparently a different story.

Sometimes it is different person being attracted to different topic. E.g. libertarians like to argue when it is easy for them to defend their opinions and are silent when it is harder.

Moreover, most people opinions are not systematically based on ideology - they are based on their own observations about what worked well in their opinion.

I think you've confused positive with normative arguments: you're rebutting a normative argument I did not make. I'm simply describing a fact: the Accredited Investor Rule is not excluding average people from processes that, like the rich, would make them richer.

Why not to create a massive crowd-funded or publicly traded VC fund? (as opposed to crowd-funding for a single startup)

Thus more people could expose themselves to VC but in a diversified manner. Also, more capital would be available for startups.

Someone has to get paid to do that, so now the premise of equity crowdfunding has been reduced to: in the best case, you can crowdfund another venture capital firm, and pay a tax out of your returns that wealthy investors don't have to pay.

And, again: most VCs fail! A lot of money is invested in VCs not in the expectation of those investments being lucrative, but instead in the hopes that VC returns are uncorrelated with the public markets. But no retail investor does that.

> And, again: most VCs fail! A lot of money is invested in VCs not in the expectation of those investments being lucrative, but instead in the hopes that VC returns are uncorrelated with the public markets.

Are there meta-VC's that treat VC funds like startups and invest in multiple VC funds with the understanding that most will fail? That is, can you confirm my suspicion that it really is turtles all the way down (or up)?

Fund of funds exist. They typically become LPs in PE funds and Hedge funds. Their value add is that they provide fund selection for sovereign funds / pensions / endowments that feel that they do not have the expertise to become LPs directly in the right funds (I find this value add to be bs, but I guess I'm unfamiliar with how clueless someone directing a random sovereign fund could be).

Larger VCs will become LP in smaller upstart ones to have better visibility into earlier stage companies [1].

[1] Bessemer, Emergence, Social, and Sapphire are LPs in Saastr Fund http://www.saastrfund.com/strategic-partners-1/

Most VCs raise money from things like pension funds, which manage a lot of money, and I believe invest in multiple vcs.

They Usually invest a very small amount of their money in this sector, usually a fee percent at most.

> pay a tax out of your returns that wealthy investors don't have to pay

Can you expand on this?

Trust. A crowd-VC-fund would have two options: either delegate decisions to a few powerful administrators or put everything up for direct voting.

Administrators would be terribly prone to be influenced by more or less open kickbacks, because what they could potentially skim would far outweigh their personal investment or any piece tag you could put on whatever little reputation they might have. A conventional big name VC won't ever be impressed be the CEO of the startup he funded meeting him at a fancy restaurant, not so sure about the representative of some hypothetical crowd-VC subreddit. And keep in mind that most methods used to keep regular investment funds accountable cannot be applied to VC investments.

The "everything up for a vote" path has a trust problem as well because that kind of popularity contest is totally unpredictable. A perfectly rational crowd today could tomorrow decide to go all in on a fake startup promising the energy revolution based karmavoltaic modules. All it would take is some vocal minority that is good at agitating everybody else into submission through the online arsenal of strawman tricks, shaming, tactical trolling and the like.

Again, selection problem. Most VCs can do a raise on their reputation and not have to deal with quarterly reports; most funds are 5-10 year closed. Great VCs wouldnt want to deal with the hassle of going public and reporting losses every year for five years straight. Also, startup valuations can be....creative.

Allied Minds [1] is a publicly traded VC fund (LON:ALM). It is a bit unique in the sense that, in addition to doing traditional VC equity investments, they fund technologies at very early stages and build companies aroud them.

[1] http://www.alliedminds.com/

> Why not to create a massive crowd-funded or publicly traded VC fund?

Because then you need to find someone with the skill to be a VC fund principal who is satisfied to work as an employee magnifying other people's capital rather than magnifying his own.

Or, have a fund run by someone without the requisite skill.

This is specifically not allowed under the JOBS ACT. I wish it were. I'd dedicate my life to it.

It's illegal, at least in the United States. Why? Because venture capital is considered too risky to be marketed as a public security. There are VC ETFs sold on the Hong Kong market.

Investment companies usually have a different legal structure than a typical startup and are subject to different regulations. You could however start a conglomerate, like Berkshire Hathaway, that invests in startups like VCs do.

So a "fund" wouldn't legally be allowed to raise money using equity crowdfunding. But a "conglomerate" that invests in startups structured as a C-Corporation could raise money through equity crowdfunding. Hope my reply helps!

I can see this working for a few niche markets that fall in between the gaps of kickstarter and VC. One market that immediately comes to mind is microbreweries. Small to midsize microbreweries have pretty good margins because they are usually selling their beer directly out of their taproom (as opposed to distributing their product, which results in a few other people taking a cut of your sales). But expanding to the next size up can be fairly capital intensive (relative to the size of the business) and there are not a lot of ways to finance that. My guess is it's a lot of friends and family money, or 'scraping the barrels' for cash in the company. Some breweries have managed it through kickstarter. But kickstarter seems to work better for product focused companies with a pre-order dynamic.

The advantage of crowdfunding would be that you can offer some upside to your supporters (M&A[1] or maybe dividends?). Assuming you are already established and are trying to take it to the next level, you can generate support for your crowdfunding campaign by advertising to your existing clientele. They already have a connection to the business and that can also result in creating a small army of brand ambassadors.

There are probably a few other niche businesses out there that could follow this playbook. Use existing local support/community to help fund expansion. One possible hang up is that there would need to be a path to an exit or some type of return. With the microbrewery market, as mentioned below, M&A is happening, but for other markets that don't have that, I would be interested to know if dividends are a possibility.

[1] There is a decent amount of M&A activity going on as the major beer companies try to maintain market share as the micros take over.

There's embedded survivorship bias here that is distorting your analysis. The median successful microbrewery does a fine, if quiet, business. But most new business starts, especially in the food and hospitality sectors, fail. Lots of attempts at microbreweries never find a market fit, or are unable to execute with sufficient margins to stay afloat.

Kickstarter works because nobody funds a Kickstarter with the expectation that they'll be able to return to those funds later to fund college, a house purchase, or a retirement. That's not the case with equity crowdfunding.

Oh, I am in no way claiming this isn't a risky investment. But I have seen a trend in the microbrew market where a lot of these failures[1] tend to occur as they try to expand. The general pattern is they load up on debt to fund expansion, but hitting even a few bumps during that time (slump in sales, construction delays) can send things into a tailspin. As mentioned in the previous post, the economics of these taprooms are really good (500-600% markup, costs about $1 to make a pint, which they then sell for $5-$7), so microbreweries don't quite face the same pain points that restaurants do (super thin margins). But expanding operations tends to be a huge pain point, because unlike a restaurant, you need to build out the new brewhouse, and then there is a lead time before your brewhouse is pumping out beers (the more sought after beers these days require a decent amount of fermentation/aging). So if you took out a risky loan to finance the expansion, as you can imagine, it only takes a few small things to go south before the whole operation tanks. But if you finance the expansion using equity, you would probably have a lot more flexibility as you don't have to worry about default.

My thought is that crowdfunding could be a good financing option for someone like this[2]. They have already established themselves, but are trying to get to the next stage. If I was local beer fan, I might support them on kickstarter, but if they offered a crowdfunding option, perhaps with some perks like an annual tasting, than I would probably be a lot more enthused. Also keep in mind, that a lot of specialty microbreweries already have 'fan clubs' that cost a few hundred dollars a year. In return, you get access to limited releases. It seems like a creating a 'lifetime fan club' for a few thousand dollars would be doable, with the added bonus that the supporter gets some equity.

[1]http://www.sfgate.com/food/article/San-Francisco-s-popular-M... [2]https://www.kickstarter.com/projects/findlaybrewing/findlay-...

BrewDog is an increasingly bizarre case study in the microbrewery/crowdfunding space. Their 'Equity For Punks' money- raising efforts received a wide range of legal opinions in different jurisdictions.

Pretty sure no one expected -- given their very loud anti-'sell-out' rhetoric -- that they would sell a 22% stake for £100M to a private equity firm (TSG Consumer Partners) and actually deliver a serious return to said 'punks.'

Edit - 'Serious Return' per BrewDog's own reporting at anywhere between 2,765% and 177% depending on the 'fund' you invested in (https://www.brewdog.com/lowdown/press-hub/tsg-deal)

Oh wow! I am only mildly familiar with them (mostly been hearing about how they have been trying to enter the US market). I didn't realize they crowdfunded. But yeah, this is a really good example of why microbreweries could be a good niche for crowdfunding. Operating your own brewpubs is a really good business because of the markup, but the challenge is in the expansion phase.

Also, looks like they are offering another round of equity in the US[1]. I was under the impression that crowdfunding was limited to $1M, but looks like they are raising $50M under 'Regulation A+'. Not sure what that is.


>> VCs survive by maintaining portfolios of companies in which 1-2 in 10 survive (most VCs fail to generate returns that beat the public markets). This means more than that you need 10 companies --- it also governs the kinds of companies you can invest in. Despite being a message board in part dedicated to startups, it feels like very few of the relatively specialized people here understand why VCs don't back quietly, steadily profitable companies.

You're assuming all VC funds are like SV/NYC type funds. Most VC funds in FL (and I'm assuming most of the US), are small funds that invest fewer than 10 times a year, and take large equity positions in companies that are steadily profitable (but will NEVER be crazy big). They prefer companies that are making profits over companies that have growth potential, low risk low reward funds.

You aren't describing venture capital. By definition, venture capital is high risk and therefore must potentially have crazy big returns.

That sounds more like PE than VC.

And whilst PE might be ostensibly lower risk than VC, PE firms' ability to not lose money depends entirely on their ability to actively restructure companies and find a buyer, two things retail investors have no chance whatsoever to do

Oh I agree that equity crowdfunding is generally a bad idea for all involved.

> There are logistical hassles with adding retail investors (in any form) to your cap table.

Sure, but do they outweigh the advantages?

Consider that Mormonism is the fastest-growing (by percentage) world religion. And that Bitcoin is the best-performing investment of the last decade. And that there are so many billion-dollar MLM companies.

Don't forget fees. Intermediary fees and compliance costs (e.g. to draft a proper PPM and retail-ready subscription agreement) are--in my experience--2 or 3 times similar costs for a traditional VC round or venture bank loan.

Well until now retail investors were shut out of opportunities reserved for VCs even if they only wanted to risk small sums they could afford to lose. Crowdfunding seems like a godsend for the small indie film industry where it's hard to get attention from major investors but donations from friends and family may be insufficient to raise a budget.

I realize the prior rules were there to protect investors from losing their shirts, but simply excluding people without changing the problematic behaviors in the marketplace means that it's harder than ever for small investors to accumulate any kind of meaningful investment capital.

I think while most understand why VCs behave the way they do, there's a general understanding that a well run non-traditional fund where investments are made in well-run companies like Basecamp, for example, would over the long run beat the returns of the gambler style that's so prevalent right now. I don't know if that has ever been tried before, if not then we need to wait for the Warren Buffet of tech investing to prove us right or wrong.

There's no evidence that a portfolio of Basecamps would beat a portfolio of Twitter-hopefuls, and a lot of reasons to think it wouldn't. Most companies fail. They fail when they're carefully run companies on organic growth paths, and they fail when they're reckless moon-shots.

There's an important fact I think people here miss. We tend not to consider a quiet, well-run small organic tech company that generates great salaries for a team for 10-15 years a "failure". And, in the sense that it's lucrative and pleasant and enriching for everyone directly involved, it isn't. But if it doesn't ultimately generate liquidity for investors, it is, for those investors, a failure. Startup investing isn't a charity run by pension funds for the benefit of software developers and product managers, or even for the users who enjoy the products built by those teams. For investment to make sense, it has to generate returns --- not just steady ticking returns, but enough to offset all the other failures.

Companies like Basecamp are great. Incidentally: they're the only kind of company I ever think about starting! But we shouldn't kid ourselves that they should attract investment dollars. Reckless moon-shots are intrinsic to the model of investment-funded companies.

Crowdfunding appears to be a terrible deal for retail investors.

Probably. It's too soon to have hard numbers, but once we see 3-year returns on JOBS act IPOs, we'll have a sense of whether this is a good idea. Historically, it's not, which is why there are "blue sky" laws.

Arn't Investment Trusts a form of crowdsourced investing.

I have done quite well out of my PE trusts got a divi from Electra that is almost the same as my initial investment and have rolled that over into pershing square as an arbitrage play on the FSE 250.

Its almost like crowdfunding a record label (remember those?), with the investors thinking they're getting a piece of Madonna or Michael Jackson record sales. It's a hits driven business, the returns are extraordinarily long tail.

Disagree. I sure wish I could have got some equity (bundled via some proxy) along with my purchase of an oculus rift.

>"VCs compete for access to dealflow."

I am unfamiliar with this term, can you say what that is?

In this context, dealflow equates to opportunities to invest in startups. To have 'dealflow' means you've got access to a pipeline of promising, stage-appropriate startups looking for capital.

I believe in other contexts it simply refers to being in on deals; I think I've heard it elsewhere, too.

[Edited to add second paragraph, generalizing a little bit.]

This is anecdotal, but I chatted with a VC for a while at an event and he said their firm will not invest in anyone who did equity crowd funding, on the theory that it signals a weaker company. If they were stronger, they would have raised proper VC.

I think the existing VC investment structures hate the idea of crowdfunded VC as it threatens their model, which is personal connections and an old boys (and girls) network which allows more favorable terms for investors, especially for first-time founders.

I hope that crowdfunding becomes more normal. Not every idea has to have billion dollar potential, which is what most VC's are looking for.

I was a VC. I think it is mainly that it is a very weak signal. A good VC or a select group of high quality angels does help a company get itself in order, so raising money from a large collection of distant angels tends to be a signal that the quality of the company must be low - as they should have tried to raise from high quality individuals first.

A company with crowdfunding will have to display stronger metrics than a company with strong angels / VCs.

Imagine two companies come to pitch, both are identical in every way. One has crowdfunded a $1M seed, the other got a check from Andreessen Horowitz and the CTO of LinkedIn. Which one do you put your money in? Even the potential deal flow from those individuals helps hedge your bet.

As a side note I think that this relationship of quality and crowdfunding is true (though not always by any means). I have seen fraudulent behaviour by companies misrepresenting their data to a group who are, by a VC's standard, very unsavvy investors. This company was certainly not able to raise money from a VC, but raised two $M+ rounds on a crowd funding site. However, I have also seen good companies who don't have an 'in' to the VC world raise money in this way.

as they should have tried to raise from high quality individuals first.....got a check from Andreessen Horowitz and the CTO of LinkedIn

Exactly the point the parent was making. Those are big time contacts. Somebody outside of the valley now has a chance to get $1MM(!!!!) of seed money for their idea without having to relocate and schmooze and network.

I'm as big a proponent of real world social skills as anyone, but this removes a significant barrier to entry for a lot of would be entrepreneurs.

Also, wouldn't a large number of crowdfunders indicate a better product-market fit?

I actually am torn on the subject. I'm not a VC, but I do invest heavily and regularly track various companies. That being said, I recognize my opinion might mean little, but...

Product-market fit is definitely a good sign a company is on the right track in terms of product. However, 99% of what makes a company successful is execution. A crowd funded campaign on Kickstarter doesn't need to even be possible[1] or it can be completely silly [2]. It doesn't need to show a 100x growth, nor does it need to exist.

On the other hand a VC will do vetting, to make sure the team is right to execute to solve a problem. Let's put it this way:

* A VC invests in a team to solve a problem

* Crowdfunding invests in a product/idea

A VC is a much stronger signal.

[1] https://www.kickstarter.com/projects/gnut/kickstarter-open-s... [2] https://www.kickstarter.com/projects/elanlee/exploding-kitte...

A VC is a much stronger signal.

Well, VC's think so anyway. Given the success rate of VC funds, I'm not sure that's actually true at all.

> A VC is a much stronger signal.

Sure, like all the folks that were in on Color and Clinkle, right?

> * Crowdfunding invests in a product/idea

I would expand this to state that crowdfunding would fund product/idea but not product/idea fit with market.

I dunno, the vetting of SV teams leads to pretty strange signaling behaviour of wannabe startups.

I think this bias is mistaken--because VC's use their network as a filter, it falsely equivocates strong business/strong founder with individuals who landed on a social graph that happened to have VC connections.

Biases like this are market inefficiencies that can provide outsize returns for those who learn to look past it.

In order to fight that bias, a startup would need to turn down a check from a big VC name (Sequoia, a16z, KPCB, Benchmark) and choose crowdfunding.

Until that happens, the implicit assumptions is that the startup tried shopping itself around to first-tier VCs and angels, failed, tried to go to second-tier VCs and angels, failed, so crowdfunding is their last resort.

Alternatively, a crowdfunded startup scorned by VCs needs to make a really nice exit or achieve a very impressive unicorn valuation.

It's basically a filter that tolerates false negatives.

Figuring out a way to create that VC/Angel connection implies abilities and characteristics that they pattern match to past success. There may be high potential teams that cannot pass this filter but will still succeed, but the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more, especially when you consider VC math needing 100x-1000x return potential from each of their companies.

It's just like the FaceGooAmaSoft hiring filter we're familiar with that is designed to prioritize low false positives at the cost of having a higher false negative. (skilled programmers who aren't interested in the contrived coding quizzes or can't do them well will be a false negative in the hiring process)

>"the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more"

This is backwards. Funding a company that goes nowhere is far smaller an error than turning down the next SpaceX.

A fund only has 10~20 bets it can make though. That likely influences the human decision making (could still be suboptimal).

Afterall didn't A16Z catch some criticism for not investing a large enough sum into Instagram (which iirc had 500x returns or something) to make a large enough difference to the fund?

A16Z didn't invest more in Instagram because of a portfolio conflict; they had already invested in Picplz, and decided they couldn't continue to back Instagram (which was Brbn, a social check-in app, when they invested).

A costly adherence to their own ethical rules, but it reinforces how seriously Andreessen Horowitz takes portfolio conflict.

source: https://bits.blogs.nytimes.com/2012/04/20/how-andreessen-hor...

True, but is "my buddies' buddies" the smartest filter you can apply to increase the chances of finding a company that can return the fund?

I totally agree. One could argue that one way to view the value proposition of YC from a VC perspective is that they apply a smarter filter than "the buddy system."

I can talk as a startup who took institutional capital. Our investors have been super hands on, board meetings every month, and if I need to talk to them about something or get help with a company problem they are never more than a day or two from being able to give me a few hours.

It's helped a lot. In my mind we are much, much better off for having their guidance and assistance.

If you crowdfund, you aren't getting that. You are weaker relative to the companies that did. Doesn't matter if you were stronger initially, the company that got institutional capital (especially first time founders) is going to have training that gives them a huge edge.

Having been on both sides of the fence, there is no question to me that good institutional capital will make a better team. Smart money goes a long way.

> One has crowdfunded a $1M seed, the other got a check from Andreessen Horowitz and the CTO of LinkedIn. Which one do you put your money in?

If it's a consumer product, probably the former. It means they can market and hustle. If it's an enterprise or B2B product, probably the latter.

Edit: with the caveat that I would only put my money in the former if they have shipped. There's a lot of vaporware in places like Kickstarter and crowdfunding markets. VCs and knowledgeable angels are more likely to be able to see through that (but as we've seen, they're not perfect either).

What happens when the crowd funded company tells you that the cap on their note was 2x that of the A16Z backed one and they chose the route of less dilution at a stage where they were searching for product market fit?

The follow on investors probably want to know why A16Z and other VCs competing with them for deal flow thought they were less valuable than people who hadn't met the founders...

(I mean, "frankly, we wanted the most money for the least equity and if that was dependent on the public having more inflated expectations than VCs so be it" is a perfectly valid answer from the point of view of running a startup, but it's still an adverse signal if the investors most informed about your company at the last investment round were those willing to offer the lowest price for your shares)

I don't really understand this logic. If you are trying to determine which company (all else being equal) is more likely to be successful, would you not take the company that has validation already from a population that is more likely going to be using whatever it is that you are pitching? Essentially you are saying that getting funded by a big name is more indicative of success than consumers who will be using the service/product/etc.

The VC crowd in Silicon Valley prizes themselves as great out of the box thinkers while, in reality, they are intellectually lazy and quite conventional.

Even as a founder I can understand why VCs might be reluctant. Investors accumulate control of a company over each round of funding. This enables them to rest easier that their money isn't going to be mismanaged. The investor-bloc's influence is predicated on the reasonableness of the other investor partners, if they don't see eye to eye then their votes don't have influence. An equity crowd is not a strong partner for the investors. Just the opposite it leaves more control in the hands of the executives because they have the direct communication channel to them.

Historically and empirically, does this VC influence and control result in better-run and more-successful companies?

Crowdfunding nukes VC's downside protection. VC funds invest through preferred stock or convertible debt for its downside-protection features. If that downside protection comes at the expense of unaccredited investors, the risk that one of them sues or a regulator gets involved on their behalf goes up. That could easily neutralise or even outweigh the benefits of the protection.

This isn't limited to crowdfunding, by the way. A cap table of a hundred $10,000 cheques (I've seen these), even if all are from accredited investors, will have a harder time raising venture capital than one with a handful of early backers.

> A cap table of a hundred $10,000 cheques (I've seen these), even if all are from accredited investors, will have a harder time raising venture capital than one with a handful of early backers.


Doesn't sound impossible to me. I was involved with a company at one point that routinely hit its customers up for small-time investment. Never saw the cap table, but I'm sure it was loooooong.

(I originally wrote "doesn't sound crazy," but in fact it sounds totally crazy. Just not impossible.)

> Not every idea has to have billion dollar potential

If I'm going to seriously join a crowdfunding investment, I'm going to be thinking like a VC. I would happily join a smaller "lifestyle" company as an employee or cofounder, but I probably wouldn't give them much money. I expect 9 out of 10 of my investments to fail, so I also need to look for those 10x opportunities.

On the other hand, if it's just a token amount like a few hundred dollars, then I'll throw some cash at a Kickstarter or whatever. But then you can't say I really invested in anything.

Let's say you invest $500/yr at $50 a pop in local businesses, as part of a club. This seems like an amount of money you might be okay essentially gambling with.

Let's imagine that fund spans a moderate size metro (2mil people) and 0.1% of people are willing to join once it gets "big".

2000 people by $500 is $1mil a year. If you figure seed money is $20-100k for a small business, you're creating 10-50 small businesses a year in your local area. (Possibly more once you're good at it and can leverage SBA and venture resources to help match your capital.)

That's not a ton, and would definitely work better if you could nudge participation up to 1% or raise the average funding amount (or get another funding stream, or tax breaks, etc), but I think generating that local entrepreneurial churn can only be a good thing.

I'd pay $50/mo to see several new businesses a year get started around town, just for the added cultural value small businesses bring.

This is an interesting concept. I think the implementation would be very tricky though. The most important implementation detail is whether the investments are chosen by the investors, or by a manager or management committee of some kind.

I think you would have problems doing this with investors doing the decision making; I would imagine you'd need to spend at least 10 hours per company invested to make a remotely informed decision; people aren't going to want to spend hours making a decision about a $50 investment. If you get the time commitment much lower, it will probably be a huge magnet for fraud.

With a manager-based decision making process, I don't think the JOBS act affects the legality much. You'd probably need to house the decision-making in a registered investment company, which will probably cost you at least $50k/year in compliance costs. Getting even 1 remotely qualified manager would probably cost you $200k/year. I don't know that people are going to be as excited about the idea when they hear the expense ratio is 25%/year.

To make it work, it seems to me you would need a national-level parent organization to amortize compliance and legal costs, and (qualified) volunteer decision makers.

If you look closely, my numbers don't quite add up -- $50/mo is $600/yr not $500/yr.

I was guesstimating about $200k/yr in operating expenses (and that's with a lot of volunteered expertise, as you note).

But structured as a social-purpose non-profit, with everyone paying in being a member who elects a management board, who allocates the money as they see fit (perhaps with some constraints chosen by members), I think this actually bypasses a large amount of compliance work -- if you never return the money, and are strictly a non-profit investing in local businesses which rolls returns in to future investments -- because the members aren't actually making investments: they're paying for a non-profit's operational funds to support local business ventures. Structuring this way also makes for a better case to get donated expertise, eg from local lawyers and investors, and probably makes your tax situation a lot better.

You probably need some rules about earning lifetime membership after a certain pay-in, and definitely some about conflicts of interest (eg, funding member's ventures) but those are more technical details.

It's not a good financial investment vehicle, in that even in the best case you'd almost certainly have negative returns and in the worst, you'd have no returns at all -- but if your goal is changing the function of the market to support local enterprises and you're willing to pay in to make that happen, I think it'd function excellently. (Of course, you only really need to seed one or two Starbucks to have the whole portfolio right-side up again, even after decades of total losses. So at a generational level, it might work as a financial instrument as well.)

Worth noting, even as a non-profit, there are ways to "return" the money besides the value of the businesses started if you do find yourself with extra funds -- investments in local parks, schools, art programs, etc. It'd never come back in currency returns, but I expect "investors" would see tangible value in their lives, quite possibly exceeding the monetary value they put in.

tl;dr: It's easier if you structure as a one-way investment in your community, and collect dividends from the output of a vibrant community.

Ah, I didn't realize you were talking non-profit. That's actually a relatively established model: http://cdvca.org/

I would prefer a for-profit one, but due to many of the concerns you point out about compliance (and that you can no longer get donated labor), I don't think you can make it work (you end up spending too much on compliance and management relative to the size of the fund). Amortizing the costs across a national fund substantially changes the incentives and control structure -- which replicates many of the problems I have with current investment mechanisms. (And you'd still run in to issues where every state has special snowflake rules about certain things.)

The reason is I think you really need to focus on localization of such funds to make them effective -- metro scale ones. You can probably make the financials work by simply eating the overhead on that scale, but not on one trying to turn a profit, but paying for labor. Losing 17% of your investment every year to overhead is simply too rough, because you'd need to generate 20% returns.

You could do it, but it would substantially change the nature of the investments you could make and the size the fund would have to be to operate. There's a certain charm to funds in the 1-10 million dollar range making small investments in 10-100 businesses. (And I believe helps combat some of the problems involved with corporations, by intentionally distorting the market by "losing" money purposefully and recouping the value from the social change.)

I was (obviously) unaware of CDVCA, but even there, it seems like they're mostly a broader investment scale and set up as a traditional venture fund (ie, looking to connect traditional investors with high growth potential ventures) as opposed to operating a continual flux of small, local businesses at (likely) negative returns funded by the local populace at large. (I poked around the NYC one, for instance.)

That said, they likely have worked out some of the legal hurdles involved.

not sure if this helps but I think if you "work more than 500 hours a year" at the business your considered an active investor. Kind like a partner at a law firm.

That just means you should be looking for more equity when you invest in a smaller business. If you get 10* the equity you can achieve the same investment outcome with 1/10th the exit value, and a $100m exit is a lot more likely than a $1bn exit.

I imagine a 5M company is even more likely to succeed which is on lower end of selling to private equity.

> I expect 9 out of 10 of my investments to fail

You are probably better off taking your money to Las Vegas and playing blackjack. At least there you only lose 6 out of 10 investments.

Clearly the expected value should be higher investing. You don't win blackjack by playing more games, but you can improve returns by spreading out your investments.

Spreading out investments does not improve expected return which is just a ratio to the invested amount.

Fair enough, maybe I should've said it reduced variance? Good for power-law investments, trending toward zero for house-edge blackjack.

Accredited investors/VC (disclaimer: I am neither, but co-founded a VC-backed startup) are often wary of crowd funding because of the idea that with more investors, the more headaches that can occur with additional capital raises. Having a big cap table doesn't make company operations easier. I honestly don't know how valid those viewpoints are, but that's what I've heard.

I believe it. I also know that Realtors aren't too fond of For Sale By Owner houses. I suspect this comes down to a similar effect.

> I also know that Realtors aren't too fond of For Sale By Owner houses

This scares agents because a wide-spread DIY real estate industry kills all of the middlemen (themselves)

This is an interesting conversation to have here really.

'Never ask a barber if he thinks you need a haircut'

Yeah, it's kind of 'meta'.

Though the interesting thing is, Y Combinator is interested in basic income. That's effectively like crowd-seeding, which makes all the 'cut out the middleman' stuff more practical.

If you're expecting 'disruption' and embracing it, and you see disruption coming for your own livelihood, the sophisticated response is to try and find a place for yourself in the new situation, rather than stop things from changing at all. In that light, Y Combinator looking at ways to cut out SV incubators could be prescient.

It's like with me: I run a very functional small recording studio as part of my business, and it's well on the way to handling the live recording of traditional bands and their instrumentation. Yet I'm a lot more interested in finding unusual ways to support electronic genres (a strikingly different skillset).

It's funny here too, because I would assume that crowd funding would put you on a more conservative path. I like the Idea of taking $100k seed money an building a company that turns a profit. Not one that IPO's and makes us fuck you money, just one that pays back my investors at better than market, and pays my employees.

But you're signing up for a lot of work, not a sprint, and that's kinda the antithesis to 'changing the world' without making a profit then going to IPO.

I don't want to gamble on something, I want to build something with a less sophisticated valuation model where the revenue plan is clear from the start.

I don't see why this is an issue though, just promise quarterly updates and clearly state rights on future raises for existing investors. They can follow-on or not. All of these issues can be solved, it's just more excuses. It should be easier to have 100 investors who all agree on everything than 4 investors you have to baby and cajole and manage their whining because they feel entitled to personal service.

That assumes that the company proceeds through successive rounds with an upwards trajectory. If the company falters and takes a down round the initial investors may disagree with the direction or even sue.

If the company needs to be recapitalized or restructured under a time crunch, tracking down 100 loosely involved investors and getting them to sign the deal may not be feasible.

Probably would have been better to have arbitration instead of lawsuits written into the law. (to make it work not for investors)

The way AngelList (and I think FundersClub, too) handle it is to set up an LLC. The investors are then partners in an LLC, not direct shareholders.

> The investors are then partners in an LLC

Pedantically, "members" not "partners"; an LLC is not a partnership.

Seedrs also does it like this.

I'm on a few email lists from these crowd funding sites and the prospects that get emailed to me are less than stellar.

Totally 100% agree with you. I'm hoping that higher-tier entrepreneurs start to use it, but I don't see this happening

> If they were stronger, they would have raised proper VC.

I think that is really the most important part. A lot of people sophisticated enough to have their interest peaked by the opportunity probably figure the deals being offered are (more or less) the deals already rejected by traditional and more sophisticated channels. If established but private companies (e.g. Lyft) were doing late stage rounds through this type of a marketplace I think demand would be much greater. The problem is those companies probably don't have a lot to gain by doing it that way.

Now my assumption on quality may be wrong but that sentiment seems like an important hump for these marketplaces to get over.

Another issue is legality. Dispute with thousands of investors vs one or two investors.

I wish the crowdfunding platforms well but, in the end, there is an inherent tension between the core idea of crowdfunding and the idea of investor protections under the securities laws.

U.S. securities law give two broad choices to issuers trying to raise money: take your company public or do a private placement. With the former, you can deal freely with all sorts of investors, in any number and with whatever background. With the latter, you deal with sharp restrictions on the number of investors you can deal with (if unaccredited) and on the qualifications of investors for investment in such offerings (accredited, unaccredited, etc.).

Conceptually, crowdfunding tries to straddle these two worlds when it offers true equity (as opposed to promotional giveaways only) in the ventures. It seeks to broaden the number and type of investors who can invest in a startup venture while simultaneously trying to protect prospective investors from dishonest or otherwise improper offerings.

Problem is: the larger the number of investors and the more latitudinarian the standards for who qualifies, the more it looks like an unregulated public offering and the more it becomes susceptible to all the problems that brought public offerings under strict regulation in the first place.

So today we have a hybrid that theoretically tries to open up startup investment to all sorts of small investors but that practically attempts to keep a whole variety of restrictions in place to ensure investor protection. This hybrid is what is failing to gain popular appeal. There are too many restrictions needed to ensure investor protection to make it a fluid vehicle for small investors to invest and to make it attractive for startups to use it as a means of doing their funding.

Thus, the technology is there today to facilitate a robust crowdfunding marketplace but the law is not there for traditional reasons of investor protection. And so the current efforts sputter along akin to how an otherwise intriguing startup might seem to have almost unlimited potential but never quite seems to gain traction.

It took five years to get the regs in place to support the statute that put this funding mechanism in place. That is slow because the issues (in my view) are intractable. Will another five years make a substantial difference. In my view, no.

But who knows? My free market side says do away with the investor protections and let it rip. But the lawyer in me says, no way - such a free-for-all will likely cause many to be duped and few to prosper. It is not an easy choice and that is why I think this will ultimately remain sputtering along with highly uncertain prospects of effecting true change in the investment landscape.

And, I think equally importantly: even if you could overcome the regulatory obstacles to put retail investors on an even footing with institutional investors in the eyes of the law, VCs would retain market-bending advantages, and there's little the SEC can do about that.

In the same sense that retail investors are urged not to try to outcompete professional investors by picking stocks, equity crowdfunders are in direct competition with VC firms. VC firms are staffed by professional investment bankers who build relationships with pension funds and endowments that give them access to enormous amounts of money. They understand --- because it's their job --- how to manage portfolios in which most of their investments will be zeroed out, and so they can negotiate better deals.

This seems like a vicious cycle of adverse selection.

Genuinely curious, been looking into it recently - what're the problem with unregulated public offering? Things i can think of are insider trading, misleading information, ponzi scheme, etc.

Add "Our business model consists of paying salaries to ourselves, using investor funds."

The regulations that public firms are burdened with are intended to make it possible for investors to figure out if these kinds of shenanigans are happening at your company. Private firms are exempt, because only sophisticated investors can invest in them, and they can do their own due dilligence/can afford to lose their investment.

If your crowdfunded startup is willing to provide enough information for your investors to be able to figure this out, you may as well take it public.

Swat said the practice is still in its infancy. Wefunder, StartEngine and SeedInvest are the primary crowdfunding platforms, and many founders aren’t aware that equity fundraising is an option.

This, and some people (like me) probably just got tired of waiting for the SEC to do their part, and quit paying attention to the whole thing. When the JOBS Act first passed, I was pretty excited. Then something like 3 years went by and you still couldn't do crowd-fund equity fund-raising. By then, the whole thing had pretty much dropped off my radar.

I think as information about this percolates through the ecosystem, it will become more commmon place. But right now there's a lot of uncertainty and doubt surrounding the whole thing, and I expect that's hurting adoption.

> some people (like me) probably just got tired of waiting for the SEC to do their part

Yeah, same. Last I checked, the rules they did come out with were pretty restrictive. This article almost makes it sound easy, but if you read the full text, it basically comes down to "If you can raise money from any other source, like VC, private equity, institutional investors, or angels--do that instead because it's easier."

You can read them here: https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051...

The SEC pretty much said to congress, "Nope, we know better" and they've effectively killed the bill by dragging their feet for 5 years and then coming out with guidance that kills the intent.

Maybe there can be a new bill that takes "crowdfunding" out of the hands of the SEC? Not sure how you would word that exactly, but some kind of exception that removes their jurisdiction? Maybe even not classifying them as public companies? (SEC has no jurisdiction over private companies).

Sadly, the SEC is fairly correct on this one. At least in terms of the history of finance.

If you let companies raise either a lot of total money or a lot of money from one person the incentives to make a company are less than simply get good at raising money and then skim as much as possible. Then run for the hills or repeat.

I agree with you historically.

> the incentives to make a company are less than simply get good at raising money and then skim as much as possible

I worry that, with the rules the way they are, the only people who will use them are people that are trying to do this. For instance, the company the OP is about. If you make it actually easier to raise money, more legitimate companies (that want to spend less time on raising money and more time on the company) will use that system.

The internet and reputation effects are enough, I think, to mitigate the valid downsides of past experiments with "very free markets".

I don't think internet reputation effects are enough at this stage. The SEC's fear of everyman investors getting taken advantage of appear well-founded. Just yesterday Kickstarter started a program aimed at addressing the provenance of high profile flops that were funded and then skimmed: https://techcrunch.com/2017/05/18/kickstarter-launches-tools...

I thought the whole deal with startup investing was: Invest in a few dozen companies and hope you get one hit so big it makes up for all the others, which you expect to all go down in flames.

That can work if you have millions to spend and the time, connections, and access to pal around with dozens of founders, looking for the good eggs. For a "small investor" who has a small fraction of a middle-class paycheck to spend and access only to the web, it would just be the most boring form of gambling ever invented.

Who "expected" a crowd of small investors for this, exactly?

My hope for crowdfunding would be that it would be exactly like you describe: spend the time, connections, and pal around with people doing projects, but the only difference would be the dollar amounts. $1,000 here, $10,000 there, on things like performances, food carts, etc. Stuff a VC would never touch because the max payout is like $50k.

But for a small investor to make 10 ~$5k investments, and get back principal plus $50k over the course of a few years that's pretty good. And they can do it in their own community on projects that don't make sense for someone in New York or SV to even know about.

Bloomberg, apparently. It's just like day trading: sure, you might get lucky, but you have to know or have something the rest of us don't to get consistent returns. Just invest in an index fund.

Not only that, the ones that are can be quite scammy.

Highlights from this startup raising money:

-Advertised with TV commercials by former Seinfeld actor

-$160k in assets, raising $50million at >$200million valuation

-CEO was formerly barred from leading companies by the SEC due to security fraud

-The management team has a few more planned IPOs in the biomed and aeronautical industries, and has a graveyard of past businesses that got investor money and went bankrupt.


Hmmm. I'm an accredited investor. I'd have to be crazy -- or altruistic -- to invest in a typical SaaS / software / Sili Valley startup via crowdfunding.


* Waste: Absurdly high cost of living in places with startup culture means labor costs must be excessive or you can't get the people you want.

* Focus: Not every software-style startup has Joel Spolsky or another leader with his kind of focus.

* Unicorns. For investors they bring to mind the mid-20th century play by existentialist Jean-Paul Sartre. "No Exit."

If I'm going to be altruistic I'll put my money into paying off student loans for young friends, to give them the freedom to make altruistic choices themselves.

None of those reasons are exclusive to crowdfunding, though. I get that there are few good investment opportunities and a lot of cruft, but I wouldn't list the same reasons. For me the biggest issue is vision: All startups hope are chasing money, but some are chasing it to the exclusion of everything else. They don't see a different future, a better future; they simply see themselves richer. Funding such startups isn't even altruistic. The opposite, it's enabling a broken culture.

"You can't the people you want" is itself a problem with these companies: often the people they want have credentials suggesting better suitability to academic or applied research when the job the need done suggests "average CRUD developer" credentials are just fine.

This is, in fact, one reason I find the obsessive focus on the Valley as far as VC and other investment mechanisms a little perplexing. These companies have a giant misunderstanding about many aspects of software business, from basics like "who is best to hire" (as opposed to "how to hire the best") to really basic engineering processes and marketing. Maybe the point (from their perspective) of getting VC capital is to get the other benefits that come from it: a network of folks who (should) understand these things.

I've been following the equity crowdfunding sites, and here are a few observations on why it seems disenchanting.

1. A lot of companies seem to be lifestyle and not startups; they don't plan to grow 7% a week.

2. Many companies aren't raising for the first time and are looking for a bridge or 2nd or 3rd seed round.

3. The cap on the notes is way too high.

4. Many sites incentivize by offering T-shirts and other crap. The purpose is investment so the sites should optimize around investment education and not what reward you can get for just a few hundred dollars more.

In the end it is going to be hard to even 2x overall investment. I suspect most people will just lose their money.

I would be willing to buy into a crowdsourced VC fund- I give money to the fund for a slice of it, which in turn vets and invests in early stage startups. They hit a big payout, my slice becomes more valuable.

The thing is, I don't want to do any work. I want someone else to do the vetting and the paperwork to invest. Obviously, they get a bigger piece of pie.

Basically, I want an index fund for early stage startups. It would be high-risk, but it's the same risk (in principle) as VC firms have.

This is what AngelList essentially does with their newly launched AngelFunds platform. You back an operator (typically other entrepreneurs) as basically an LP and they invest your money for you: https://angel.co/angel-funds

It's different from AngelList syndicates, which have been around for awhile: https://angel.co/syndicates

With syndicates, you get access to the deal flow of the person's syndicate you support, but you still have to decide to back each individual deal and for how much yourself. It still takes some work on your end.

In case anyone's wondering... the benefit of a syndicate as a startup is that it allows you combine smaller investors into one combined entity on your cap table. If you were to just take a lot of smaller checks, you might end up with dozens, if not hundreds of individuals you now have to do paperwork for, collect money from and thereafter manage on your cap table indefinitely. Syndicates make the process much faster and easier to manage.

We did a syndicate for my startup, Tettra: https://angel.co/tettra

Using a syndicate we were able to add ~10 smaller angels to our round that we probably wouldn't have otherwise brought in. The interesting thing now too is that probably about half of those people are some of our most helpful investors.

This was legal even before the JOBS act. A registered investment company is an accredited investor, and is allowed to sell shares to individual investors. Several companies have tried the business model, none (to my knowledge) with great success. See https://dealbook.nytimes.com/2012/08/29/gsv-capital-placing-...

Iirc VC as an industry loses money (or has poor returns), with the top 10 firms dominating the returns and some small number of startup firms posting great returns (iirc this is from a Jason lwmkin's post)

So i think your index fund performs quite poorly.

Are there any viable ways to open the top-10 for investment by bug funders ?

I suspect that what you're seeing is basically than the large firms are successful enough and funded enough so they don't need more money that they "negotiate" themselves 100% of the value. What can you bring one of the top-10 investors that they don't already have, such that they'd be willing to share the benefits with you?

No they are oversubscribed. They won't take our money even if we beg them.

I think Syndicate Room is about to (or already does?) offer something like this.

Isn't that essentially a hedge fund specializing in startups?

Angelist does that

Why do you say it would be high-risk?

Early stage startups are high-risk, due to how many early stage startups fail. A collection of early stage startups inherits the risk.

Basically you're hoping that a single success covers the losses of the failed startups in its cohort.

As an investor, consider the following:

1. They give you very little information. Sometimes just sales numbers or some "traction" metric and a para on future plans. They talk about their unique angle but not about their challenges.

2. You put money in and you get very infrequent updates. Sometimes something along the lines of "sales are ok" or "sales fell" without much detail. It is treated as a favor to you, not an absolute right as an investor.

3. If they need to raise funds again, suddenly they become more chatty.

4. As an investor, my alternative is: public stocks! A lot more information, a lot more liquidity. For the large stocks you're competing with geniuses at hedge funds but the smaller stocks usually have less competition.

Yup. And this is because if you're a startup and you take investment from these "small investors" I can't recall the actual classification (class 3 maybe or something like that?) VC and accelerators simply won't touch you. So there's no point. And then, if you're a "small investor" and you had, say, $5,000 to kick toward a startup for speculative investing, the VCs simply say that it's not enough money and they're just not interested in your small change.

And this is because if you're a startup and you take investment from these "small investors" I can't recall the actual classification (class 3 maybe or something like that?) VC and accelerators simply won't touch you. So there's no point.

Sure there is, if you never planned to seek VC funding anyway. I'm sure there are plenty of companies that just need a little money to get over the initial hump or two, and then plan to rely on organic growth. If you're not worried about being a "moonshot" and don't have huge capital expenses (eg, manufacturing a physical product, drug trials, etc.) then this could quite possibly work for you.

I was chatting with a startup that recently raised £1m crowdfunding as their second round. They were really happy with their choice and not having VC strings attached. I think an undervalued aspect of this is how powerful crowdfunding can be in creating a few thousand early product evangelists (who have vested interest in the company).

And I think TheDAO - though it was too early /fragile, had a half-baked voting model and got too big too fast - was onto something. I think cryptocurrency based equity/ dividends and decentralised, crowdfunded companies will definitely happen at some point in the future.

I'm not seeing AngelList syndicates listed here, which is probably the most obvious way for a small investor to invest in a startup; you still need someone to do the diligence and find the companies to invest in, but I could put my money into an "Index Fund" led by dozens of smaller investors, which seems to be the most logical way to do something like this.

As for direct crowdfunding, I would be comfortable angel investing if I knew someone was doing the due diligence, but no way am I putting my money into a startup blind, or spending the time to do that due diligence myself.

After that, the signaling risk and additional regulatory complexity behind this type of crowdfunding is likely a bad thing for a company, and likely mostly filled with companies that can't raise by traditional means, so you have an adverse selection problem and you're making it worse.

I think Naval and AngelList could change that, but there's quite a long ways to go.

This isn't an accurate assessment or headline.

The accurate headline or assessment is "Equity Crowdfunding sites fail to attract legitimate, investment-worthy startups"!

I've seen the startups posted at the crowdfunding sites and they look terrible / borderline scammy e.g. a site that's not growing and doesn't have much going for it raising at a $25 million valuation.

Part of the reason is that there's a big gorilla in the room and it's Kickstarter! If you have a great product, it's better to take it there than to an equity crowdfunding site -- at Kickstarter, you get pre-orders, gauge demand, get actual buyers/users, and don't lose any equity or have those legal complications. It's much better than equity crowdfunding.

I also think AngelList should be evaluated as I bet it's enabled a lot of brand new folks to get into angel investing.

I don't know why investors would be interested. There's really no innovation happening at the startup level anymore.

There was a time when you would hear of some interesting startup that had a huge, grand vision of the future. But the last ten years have brought us startups like Facebook and Snapchat -- and that's just not very inspiring.

I, for one, am looking forward to the next economic correction and Sili Valley implosion, so that the froth will clear away and all that will be left are those fighting for a vision instead of scheming for a profit.

The main problem for investors is the principal-agent problem - simply that the managers of the company will use the funds invested into it for their own advantage instead of advancing the company. There are degrees of this - from blatant fraud to slightly overpaying themselves or making deals with their friends instead of best offerers. It is impossible to entirely stop this - but there are ways to diminish the impact.

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 that red tape involved: the strict accounting, governance rules, information disclosure rules, etc.

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. This relies on the theory that startups goal is to grow a 100 times or die - so small continues extractions by the executives are ruled out.

The crowdfunding initiatives, try to reduce the red tape involved in a public offering of equity - but they don't even try to address the problem that the bureaucracy addresses in the first place.

The problem is supply side. Crowdfunded companies are giving the platform 5-10% of the capital raised. Why crowdfund and have a whole bunch of investors on your captable and give up some of that money AND deal with the compliance cost of you're strong enough to get it from angels/seed VCs. Current regulations force a broken model.

The problem with equity crowdfunding right now is that most of the tech startups aren't raising money through the portals. What percentage of the YC Summer 2017 batch do you think will go on to raise money through the equity crowdfunding portals? My guess is that few, if any, of the YC Summer 2017 companies will raise money through equity crowdfunding. And this is a huge problem for potential equity crowdfunding investors. Equity crowdfunding investors simply do not have the opportunity to invest in large number of the best startups. Go check out the types of companies raising money on the funding portals, most aren't tech startups. You'll find all sorts of bullshit companies, everything from board games to restaurants!

I went to a workshop and asked a the guy what benefit does the investor have to buy shares of Tom's Tire Shop. The guy said it is just like buying Apple or Microsoft, and blah, blah, blah. No it is not like buying Microsoft. There is no way to liquidate your shares.

I think that if they actualy want a crowd to do this that they have to improve discovery of not only the ability to do this and the companies that want to be crowdfunded. Up until know I vaguely knew that the JOBS act contained this wording (and I presumed that something changed about the JOBS act) which was false. The other part is discovery which could be helped by either partnering with Kickstarter or making an independant website that would do this.

On the other hand it could be that Kickstarter is performing crowdfunding to the point that the technique of using the Jobs act is not needed. Adding up 2 or 3 large kickstarter projects and you get the total amount raised. Currently Kickstarter has funded around $3 billion dollars.

Small dollar amounts, but not necessarily "few" in numbers of people. Granted, I'm not particularly interested in crowd-funded equity, but crowd-funded interest-free charitable loans that Kiva has been doing in the U.S. have been steadily growing. https://www.kiva.org/lend/kiva-u-s

Growing at the bottom may not produce eye-popping changes right now, but could have some great long-term effects for re-invigorating small business growth (which has been on the decline in the U.S. as I've posted elsewhere).

What would the numbers look like if the authors hadn't excluded ICOs? Given that this is where the majority of the small-dollar equity crowdfunding is going, it seems weird not to include them.

Another slice of the explanation for this can be found in the ceiling there is on crowdfunding: Your investors aren't people with deep pockets; it's those who generally don't have even one full extra paycheck in the bank. When they give you $20, that may mean they don't see a movie with their S.O. that weekend, etc. The money pool is much shallower.

Raising the minimum wage would be good for crowdfunding.

Another reason for Small Investors to stay away is the senseless tax hassle. I didn't invest because I had any ambition to get wealthy, I just wanted to "give back" and help some ambitious young entrepreneurs get started. Now I'm filing complicated tax forms for money I'll never see because those young companies made 10$ in interest from the money sitting in a bank.

I looked into investing a small amount in crowdfunding, but there are very few platforms offering it and the companies seemed to be raising money at overpriced valuations. It would be nice if crowdfunding could grow, since ordinary people could get a share of large growth and they could also offer certain unique benefits for a company the raising money (e.g. help with marketing).

My problem has been that I haven't seen a single deal that I felt had moderately favorable investor terms.

I wonder how they are letting people know about this. I wasn't aware this was possible and I still had in mind that you had to be "credited" investor, even as a Hacker News reader, somehow this was flying under my radar. I don't expect a lot of people to know about it.

Turns out only the rich have enough money to invest. Everyone else is living paycheck to paycheck.

I've had a look at a few of these startups that were trying to raise money this way, and none of them seemed very promising. I'm not going to give money to something just because it's there, it has to be something I truly believe in.

Honestly I thought there would be some marginally ethical VCs that would team up with similar salespeople to scale up this type of investing.

I'm a little surprised this void hasn't been filled.

Startups have an enormously high risk profile. I'm simply unable to come up with enough money to spread around enough startups that my expected ROI will beat an indexed fund.

I think the huge win here will be things like Kickstarter. Just takes one oculus to inspire folks. I could have potentially made 40K off my $400 investment.

Oh, and a free rift!

Small investors lack the biggest benefit of a good VC – good connections. $120k from 12 non-F&F investors = 12 people to bother you without much benefit.

ICOs are wildly popular (granted, not all from U.S., but crowdfunding seed capital is proving successful for the right "idea spaces")

Why not to create a massive crowd-funded or publicly traded VC fund? (as opposed to crowd-funding for a single startup)

Fidelity does this (FBGRX, FDGRX) and GSVC has been around (top investments are Palantir, Spotify and Dropbox) http://gsvcap.com/portfolio/

So I'd guess that demand for high-risk investment of the kind is well-served by existing instruments, and even if Schwab or Vanguard have evaluated a possibility of launching such fund, they have not pulled the trigger yet.

VCs will always do much much better, they have the connections to do the exits...

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