* 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.
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 . 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?
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.
Maybe treat being an accredited investor like a driver license and not tie it to your net worth?
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.
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.
Moreover, most people opinions are not systematically based on ideology - they are based on their own observations about what worked well in their opinion.
Thus more people could expose themselves to VC but in a diversified manner. Also, more capital would be available for startups.
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.
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)?
Larger VCs will become LP in smaller upstart ones to have better visibility into earlier stage companies .
 Bessemer, Emergence, Social, and Sapphire are LPs in Saastr Fund http://www.saastrfund.com/strategic-partners-1/
They Usually invest a very small amount of their money in this sector, usually a fee percent at most.
Can you expand on this?
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.
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.
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!
The advantage of crowdfunding would be that you can offer some upside to your supporters (M&A 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.
 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.
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.
My thought is that crowdfunding could be a good financing option for someone like this. 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.
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)
Also, looks like they are offering another round of equity in the US. 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.
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.
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.
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.
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.
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.
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.
I am unfamiliar with this term, can you say what that is?
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.]
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.
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.
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?
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 or it can be completely silly . 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.
Well, VC's think so anyway. Given the success rate of VC funds, I'm not sure that's actually true at all.
Sure, like all the folks that were in on Color and Clinkle, right?
I would expand this to state that crowdfunding would fund product/idea but not product/idea fit with market.
Biases like this are market inefficiencies that can provide outsize returns for those who learn to look past it.
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.
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)
This is backwards. Funding a company that goes nowhere is far smaller an error than turning down the next SpaceX.
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?
A costly adherence to their own ethical rules, but it reinforces how seriously Andreessen Horowitz takes portfolio conflict.
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.
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).
(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)
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.
(I originally wrote "doesn't sound crazy," but in fact it sounds totally crazy. Just not impossible.)
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 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.
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.
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.
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.
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.
This scares agents because a wide-spread DIY real estate industry kills all of the middlemen (themselves)
'Never ask a barber if he thinks you need a haircut'
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).
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.
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.
Pedantically, "members" not "partners"; an LLC is not a partnership.
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.
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.
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.
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.
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.
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).
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.
> 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".
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?
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.
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.
* 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.
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.
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.
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.
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.
So i think your index fund performs quite poorly.
Basically you're hoping that a single success covers the losses of the failed startups in its cohort.
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.
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.
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.
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.
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.
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.
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.
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.
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).
Raising the minimum wage would be good for crowdfunding.
I'm a little surprised this void hasn't been filled.
Oh, and a free rift!
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.