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Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be

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Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be

#11

Post by URSpider94 »

utnick wrote: post #7
tptacek wrote: post #6

I haven't heard a rationale for equity crowdfunding that makes sense to me. It sounds straightforwardly dangerous. The whole thesis for startup investing is that investors build large portfolios where the winners pay for the losers. A 2x return is a out-of-the-park home run for a retail investment in a public company, but is, mathematically, a failure for a startup investor, because only 1-2 companies in a portfolio…

Couldn't an equity crowdfunding investor spread their money around hundreds of companies as well, making smaller sub 1000 dollar bets. Or is there a minimum investment amount for this? The main reason I'm skeptical of this approach is that I think the most promising companies won't do it, so the pool of companies doing equity crowdfunding will be low quality

It's not clear whether companies will be willing to take hundreds or thousands of small investments. Each one adds a non-negligible amount of overhead in investor communications, and at a certain threshold of investors, you trigger the same regulatory requirements as if you were actually a public company (issuing quarterly and annual financials).

Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be

#12

Post by tptacek »

patio11 wrote: post #10
tptacek wrote: post #6

I haven't heard a rationale for equity crowdfunding that makes sense to me. It sounds straightforwardly dangerous. The whole thesis for startup investing is that investors build large portfolios where the winners pay for the losers. A 2x return is a out-of-the-park home run for a retail investment in a public company, but is, mathematically, a failure for a startup investor, because only 1-2 companies in a portfolio…

It's certainly more dangerous than investing in IBM or Chipotle, but not obviously more dangerous than a number of things which we let adults purchase, including casino chips, time share properties, houses in California (which we'll subsidize your 5X leverage on), art history degrees (where capping it at 5X leverage would be refreshingly conservative), etc etc. A $3,000 computer purchased today will depreciate to zer…

Normal people don't buy computers because they anticipate the returns will help fund their retirements.

Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be

#13

Post by tptacek »

didgeoridoo wrote: post #9
tptacek wrote: post #6

I haven't heard a rationale for equity crowdfunding that makes sense to me. It sounds straightforwardly dangerous. The whole thesis for startup investing is that investors build large portfolios where the winners pay for the losers. A 2x return is a out-of-the-park home run for a retail investment in a public company, but is, mathematically, a failure for a startup investor, because only 1-2 companies in a portfolio…

I haven't looked too much into this space, but what about this rationale: the existing model pushes startups into 1000x-or-bust behavior, which contributes to the low success rate, which reinforces the need for high-risk growth followed by a spectacular cash-out. This could be driven by many factors, not least of which is the "brand name VC" model in which venture funds need a couple household name home runs to attra…

I don't understand. The "model" isn't the creation of venture capitalists; it's just mathematical reality. Whether you're shooting for 2x or 10x returns, the odds-on bet is that your company will fail. That's what new companies do. It's true of tech companies, barber shops, and restaurants. In a cohort of failing companies, the returns from successes must be higher to subsidize the losers.

Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be

#14

Post by waylandsmithers »

> The worry, voiced by many, is that the pool of startups using equity crowdfunding will consist mostly of lower-quality companies that couldn’t get funding by other means.

Yes, of course. When you can't get the "smart" money, you try to go public or raise money from someone who won't or can't be involved with the actual business, right? The highest quality funding comes with expertise and guidance and is more than just a check.

Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be

#15

Post by HiLo »

utnick wrote: post #7
tptacek wrote: post #6

I haven't heard a rationale for equity crowdfunding that makes sense to me. It sounds straightforwardly dangerous. The whole thesis for startup investing is that investors build large portfolios where the winners pay for the losers. A 2x return is a out-of-the-park home run for a retail investment in a public company, but is, mathematically, a failure for a startup investor, because only 1-2 companies in a portfolio…

Couldn't an equity crowdfunding investor spread their money around hundreds of companies as well, making smaller sub 1000 dollar bets. Or is there a minimum investment amount for this? The main reason I'm skeptical of this approach is that I think the most promising companies won't do it, so the pool of companies doing equity crowdfunding will be low quality

Are you just assuming an equity crowdfunding investor (retail investor) has the resources or sophistication to do proper due diligence on hundreds of investments?

Maybe the interest rates are lower on these for borrowers because the cost of due diligence isn't included. Not maybe, actually.

Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be

#17

Post by ChuckMcM »

tptacek wrote: post #12
patio11 wrote: post #10

Earlier quoted context omitted.

It's certainly more dangerous than investing in IBM or Chipotle, but not obviously more dangerous than a number of things which we let adults purchase, including casino chips, time share properties, houses in California (which we'll subsidize your 5X leverage on), art history degrees (where capping it at 5X leverage would be refreshingly conservative), etc etc. A $3,000 computer purchased today will depreciate to zer…

Normal people don't buy computers because they anticipate the returns will help fund their retirements.

Exactly this. This was what was sad about the dot com bust. People would not listen when I tried to explain that most of the companies they were putting their retirement funds into would die, and take their funds with it.

Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be

#18

Post by tuddman »

tptacek wrote: post #12
patio11 wrote: post #10

Earlier quoted context omitted.

It's certainly more dangerous than investing in IBM or Chipotle, but not obviously more dangerous than a number of things which we let adults purchase, including casino chips, time share properties, houses in California (which we'll subsidize your 5X leverage on), art history degrees (where capping it at 5X leverage would be refreshingly conservative), etc etc. A $3,000 computer purchased today will depreciate to zer…

Normal people don't buy computers because they anticipate the returns will help fund their retirements.

I did, for exactly that reason. And I'm guessing just about everyone else on HN did, too :)

It's a good point, though. "Normal" people should be protected against themselves in their financial decisions.

Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be

#20

Post by landonshoop »

tptacek wrote: post #12
patio11 wrote: post #10

Earlier quoted context omitted.

It's certainly more dangerous than investing in IBM or Chipotle, but not obviously more dangerous than a number of things which we let adults purchase, including casino chips, time share properties, houses in California (which we'll subsidize your 5X leverage on), art history degrees (where capping it at 5X leverage would be refreshingly conservative), etc etc. A $3,000 computer purchased today will depreciate to zer…

Normal people don't buy computers because they anticipate the returns will help fund their retirements.

But I can't crowdfund if I don't buy a computer...
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