Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be • Hacker News Board

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

#21

Post by vonmoltke » Tue, Dec 08, 2015, 3:14 PM UTC

tptacek wrote: post #13

didgeoridoo wrote: post #9

Earlier quoted context omitted.

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.

> The "model" isn't the creation of venture capitalists; it's just mathematical reality.

Only if you invest in startups they way you play craps. The statistical distribution of outcomes is not predictive of the chances of a particular startup succeeding or failing. Some founding teams are virtually guaranteed to fail; some have a better than even chance to succeed. If you are willing to give up on the unicorns you can also eliminate most of the duds. Valley VCs are not willing to do that.

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

#22

Post by roymurdock » Tue, Dec 08, 2015, 3:15 PM UTC

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.

Nor should any normal retail investor purchase crowd-funded equity for retirement purposes. These are risky bets on immature companies with unproven products & business models and unvetted financials. I'm fairly certain that the majority of retail investors who are looking to put their money into crowd-funded equity will understand the higher risk associated with this new asset class.

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

#23

Post by jb613 » Tue, Dec 08, 2015, 3:21 PM UTC

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…

"startup investing" depends on your definition of startup.

For example, a person that has applied for a patent - no VC would call that a startup, but perhaps those with intimate knowledge of what the patent will lead to may indeed call that a startup.

Another example are "stealth startups" - we explicitly refer to them as startups yet many are merely patents with maybe a partially working prototype but no product yet.

There are instances where both of those examples are combined (sole inventor + operating in stealth). Just because the entity doesn't fit the profile of "startup" for VC's doesn't mean there isn't room for that type of "startup investing".

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

#24

Post by jb613 » Tue, Dec 08, 2015, 3:33 PM UTC

rdlecler1 wrote: post #8

Pension funds and mutual funds are some of the largest crowd funded entities on the planet. The former lacks transparency and has too many middlemen, and the later is far more limited in it mandate and typically is restricted to public markets. If congress wants to bring small non-accredited investors into the private markets and increase access to capital for small companies, there needs to be mechanisms in place to…

who are these "companies don't want to disclose IP"?

Software startups disclose their IP whether through traditional IP protection (copyrights, trademarks, patents) - or open source. Those relying on trade secrets do not disclose their IP to investors.

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

#25

Post by [deleted] » Tue, Dec 08, 2015, 4:06 PM UTC

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…

[deleted]

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

#26

Post by tptacek » Tue, Dec 08, 2015, 4:15 PM UTC

vonmoltke wrote: post #21

tptacek wrote: post #13

Earlier quoted context omitted.

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.

> The "model" isn't the creation of venture capitalists; it's just mathematical reality. Only if you invest in startups they way you play craps. The statistical distribution of outcomes is not predictive of the chances of a particular startup succeeding or failing. Some founding teams are virtually guaranteed to fail; some have a better than even chance to succeed. If you are willing to give up on the unicorns you ca…

No, that's the model for firms with expertise in valuing companies. It's very trendy to suggest that big venture capital firms are throwing darts, but in fact they are competing for the best deals (which is another reason crowdfunding investors are at a disadvantage) and for the most part they are not spectacularly successful.

Venture capital firms aren't competing for "unicorns" simply out of vanity. They need to bet on firms with outsized returns because even in a cohort of pedigreed startups with plausible business plans and some degree of traction, most are going to fail.

Many of those failures are capable of generating reasonable incomes for employees and founders for years, but those incomes are not proxies for investment returns. That's another reason crowdfunding is dangerous: we have a skewed idea of "success", because to us, starting a company that lets us control our own destiny, build our resume, and earn a competitive salary for 10 years is a huge success. To a crowdfunding investor, the returns to investors are the only thing that matters.

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

#27

Post by ensignavenger » Tue, Dec 08, 2015, 4:25 PM UTC

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.

Yeah, the computer one was maybe not the best example... but there were plenty of other examples to illustrate the point.

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

#28

Post by khaolak » Tue, Dec 08, 2015, 4:37 PM UTC

tptacek wrote: post #13

didgeoridoo wrote: post #9

Earlier quoted context omitted.

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.

I'll try to help you understand the parent's point. The current environment of VC-backed companies is such that almost all companies in the tech startup ecosystem are following high-risk, high-reward paths.

Barber shops and restaurants tend not to do this - they follow low-risk, low-reward paths. One reason for this is how they are funded - a bank giving a business loan for a restaurant might want to see a conservative plan to make one restaurant profitable within a few months of opening, to maximize the likelihood that their loan is repaid.

If there was a VC backed restaurant with equity financing, they might instead try to grow rapidly to a thousand locations to try to displace/disrupt McDonalds, all while losing money for several years, in the hope that they end up a multi-billion dollar chain. Obviously this is much more likely to fail and be worth nothing.

By adding a new form of funding that sits between a business loan and a VC equity deal, the hope is that you also create a new space of business plans that are more aggressive than the single-restaurant with debt plan but less aggressive than the "try to take on McDonalds" plan.

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

#29

Post by jsprogrammer » Tue, Dec 08, 2015, 4:44 PM UTC

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…

>A $3,000 computer purchased today will depreciate to zero in 3~4 years, leaving you with hopefully some happy memories and a paperweight.

My desktop contains many parts manufactured more than four years ago and it is still useful. In fact, it no longer matters how many dollars of value you think it is worth, it is still effective, consuming only electricity and my time.

Your thesis is incorrect.

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

#30

Post by jt2190 » Tue, Dec 08, 2015, 4:56 PM UTC

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 heard a rationale for equity crowdfunding 
    > that makes sense to me.

My take is that it's political, meaning that we're trying to avoid the perception that only industry insiders can participate in and benefit from these types of investments. I've read some press about how companies are taking longer to go public, and that by the time they do, there's very little growth left.

(edit: Crowdfunding seems to me like an attempt to allow "retail" investors to participate in pre-IPO investments.)