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U.S. Startups Fail to Attract Expected Crowd of Small Investors

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Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#31
post #22

Earlier quoted context omitted.

> 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." Y…

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".

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#33
post #25

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) netw…

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 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.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#34
post #25

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) netw…

> 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.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#35

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.…

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-...

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#36

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.…

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.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#37
post #25

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) netw…

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.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#38
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.

Why?

* 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.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#39
post #25

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) netw…

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

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#40
post #25

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) netw…

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.
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