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

#41

Post by tptacek » Tue, Dec 08, 2015, 5:54 PM UTC

jt2190 wrote: post #30

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 m…

It's a real problem that startup investment potentially further levers capital for rich people, but direct equity crowdfunding is not the right solution. As a way of improving financial outcomes for regular investors, equity crowdfunding is a radium tonic.

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

#42

Post by ceejayoz » Tue, Dec 08, 2015, 5:55 PM UTC

dandelany wrote: post #32

tptacek wrote: post #12

Earlier quoted context omitted.

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

No, but plenty of people (stupidly) gamble at a casino and hope for returns to fund their retirement, and no one is clamoring to outlaw gambling. To expand on this analogy - gambling is legal because, as a society, we've decided that the upside of "entertainment value" outweighs the downside of "unsophisticated 'investors' (gamblers) may lose more money than they can afford to." If this is the case, it seems obvious…

> No, but plenty of people (stupidly) gamble at a casino and hope for returns to fund their retirement, and no one is clamoring to outlaw gambling.

Many of the games at a casino are required by law to payout at a certain rate, though.

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

#43

Post by zxcvvcxz » Tue, Dec 08, 2015, 5:55 PM UTC

Traditional product crowdfunding, a la Kickstarter, is meant to act as product pre-sales (debt financing). I think we're starting to move further away from flashy CGI promising us a concept (and subsequently squandering investment money) towards more mature companies able to actually deliver. Though this is taking the magic out for those makers with fewer resources, it's certainly better for the backers.

Equity crowdfunding is... very risky business. This is where mom and pop can get involved. If professional investors routinely lose out of the majority of their investments, Joe Everyman is in for a ride. But should he be protected? The first line of investment are usually the 3 F's -- family, friends, and fools. By making these type of investments more networked and liquid (particularly the fools part), more startups could raise capital at the expense of fools. I guess we saw that didn't work out too well about a decade-and-a-half ago, because there will always be more swindlers than legitimate entrepreneurs.

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

#44

Post by tptacek » Tue, Dec 08, 2015, 5:56 PM UTC

khaolak wrote: post #28

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.

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 conservati…

I understand the utility of that middle ground but not how equity crowdfunding provides it. The issue here is the failure rate for companies. Good companies fail routinely, and that includes companies that aren't on 100x trajectories. The high rate of failure requires higher returns from the winners. Accounting for realistic failure rates, I simply don't see how you can build a model that makes 2x returns from winners workable for outside investors.

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

#45

Post by swamp40 » Tue, Dec 08, 2015, 5:59 PM UTC

mgav wrote: post #2

Excerpt: The SEC, responsible for creating the rules designed to fulfill Congress’s mandate in Title III of the JOBS Act, included rules—known collectively as the 12g rule—that are a powerful disincentive for high-growth startups to use what the SEC calls “regulated crowdfunding.” These rules stipulate that any company that takes on more than 500 individual investors or grows to a size greater than $25 million in ass…

A comment below the WSJ article by a crowdfunding lawyer says that "or" should be an "and", and that makes a huge difference, since a startup doesn't have to worry about the disclosures until they hit $25M.

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

#46

Post by dandelany » Tue, Dec 08, 2015, 6:03 PM UTC

tptacek wrote: post #38

lawstudent2 wrote: post #35

Earlier quoted context omitted.

Many, many, many people are clamoring to outlaw gambling in the very, very few places it is currently legal, myself included. Right now Draftkings and whatever that other one is are in the process of getting worked over by multiple state AGs for violating anti-gambling prohibitions. Gambling is legal in only a tiny handful of places and in the few places where more casinos have recently been authorized, NY state (my…

I really don't think we need to concede the equivalence between restricting equity crowdfunding and outlawing gambling. Gambling is legal because, as marketed, it's an entertainment product. Equity crowdfunding is restricted because it's an investment product. Similarly, GNC can sell all sorts of useless nutritional supplements, but the FDA is all up in the business of anyone trying to sell a new medication. Reminder…

> Reminder: you can take money from non-accredited investors

My understanding is that it's only legal if investors approach you, or if you solicit individual investors on a one-by-one basis. It's illegal to simply announce that you're publicly accepting investment. I wholeheartedly agree that the marketing of these types of offerings need to be tightly regulated, but as it stands today, it's effectively impossible to participate (as an investor) without having a personal connection to the business.

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

#47

Post by roymurdock » Tue, Dec 08, 2015, 6:14 PM UTC

tptacek wrote: post #39

roymurdock wrote: post #22

Earlier quoted context omitted.

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.

I can't see any reason to accept the premise that equity crowdfunding investors are sophisticated. The entire point of deregulating equity --- which is what equity crowdfunding is --- is to allow unsophisticated investors to invest.

An unsophisticated investor can deduce that the risk profile of Coke is much different than that of a company with a penny stock trading at $0.05. Likewise, the majority of "unsophisticated" investors can probably deduce the difference in risk between investing in and . But we can't know for certain without conducting some kind of survey of the demographics and level of sophistication of the retail investor population.

As someone else pointed out - the SEC should be protecting investors/general public from unethical and illegal acts by the businesses, not from themselves and their own lack of knowledge. If you don't know what you're doing, you probably shouldn't be investing in the first place. Put your money in an ETF/savings account and only gamble what you're willing to lose in the equity crowdfunding market.

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

#48

Post by tptacek » Tue, Dec 08, 2015, 6:26 PM UTC

dandelany wrote: post #46

tptacek wrote: post #38

Earlier quoted context omitted.

I really don't think we need to concede the equivalence between restricting equity crowdfunding and outlawing gambling. Gambling is legal because, as marketed, it's an entertainment product. Equity crowdfunding is restricted because it's an investment product. Similarly, GNC can sell all sorts of useless nutritional supplements, but the FDA is all up in the business of anyone trying to sell a new medication. Reminder…

> Reminder: you can take money from non-accredited investors My understanding is that it's only legal if investors approach you, or if you solicit individual investors on a one-by-one basis. It's illegal to simply announce that you're publicly accepting investment. I wholeheartedly agree that the marketing of these types of offerings need to be tightly regulated, but as it stands today, it's effectively impossible to…

That's correct, and what I mean about it being difficult to accept non-accredited money at scale. Which is the difference between being able to invest, and being able to market an investment.

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

#49

Post by tptacek » Tue, Dec 08, 2015, 6:27 PM UTC

roymurdock wrote: post #47

tptacek wrote: post #39

Earlier quoted context omitted.

I can't see any reason to accept the premise that equity crowdfunding investors are sophisticated. The entire point of deregulating equity --- which is what equity crowdfunding is --- is to allow unsophisticated investors to invest.

An unsophisticated investor can deduce that the risk profile of Coke is much different than that of a company with a penny stock trading at $0.05. Likewise, the majority of "unsophisticated" investors can probably deduce the difference in risk between investing in and . But we can't know for certain without conducting some kind of survey of the demographics and level of sophistication of the retail investor populatio…

You can already do this. What startups want to do is market investments without dealing with public company disclosures, or the stigma of being an OTC public company.

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

#50

Post by SilasX » Tue, Dec 08, 2015, 6:37 PM UTC

tptacek wrote: post #38

lawstudent2 wrote: post #35

Earlier quoted context omitted.

Many, many, many people are clamoring to outlaw gambling in the very, very few places it is currently legal, myself included. Right now Draftkings and whatever that other one is are in the process of getting worked over by multiple state AGs for violating anti-gambling prohibitions. Gambling is legal in only a tiny handful of places and in the few places where more casinos have recently been authorized, NY state (my…

I really don't think we need to concede the equivalence between restricting equity crowdfunding and outlawing gambling. Gambling is legal because, as marketed, it's an entertainment product. Equity crowdfunding is restricted because it's an investment product. Similarly, GNC can sell all sorts of useless nutritional supplements, but the FDA is all up in the business of anyone trying to sell a new medication. Reminder…

So, let's say I market the crowdfunding shares as an entertainment product. Then it could become a legal model?

Relatedly, I had the idea to sell small shares of (legit, regulated) far-out-of-the-money options as lottery tickets. As investment products, they're legal, but work like lottery tickets in that you have a tiny chance of winning big (e.g. if the underlying security has a sudden, sharp shift in price).