71–80 of 168 posts
Why not to create a massive crowd-funded or publicly traded VC fund? (as opposed to crowd-funding for a single startup)
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.
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.
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.
I wish the crowdfunding platforms well but, in the end, there is an inherent tension between the core idea of crowdfunding and the idea of investor protections under the securities laws. 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 backgr…
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.
Crowdfunding appears to be a terrible deal for retail investors: * 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 relative…
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…
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.
Earlier quoted context omitted.
> 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…
> I expect 9 out of 10 of my investments to fail 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.
Earlier quoted context omitted.
as they should have tried to raise from high quality individuals first.....got a check from Andreessen Horowitz and the CTO of LinkedIn 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…
I actually am torn on the subject. I'm not a VC, but I do invest heavily and regularly track various companies. That being said, I recognize my opinion might mean little, but... 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[1] or it c…
Well, VC's think so anyway. Given the success rate of VC funds, I'm not sure that's actually true at all.
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.
Earlier quoted context omitted.
> 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…
Let's say you invest $500/yr at $50 a pop in local businesses, as part of a club. This seems like an amount of money you might be okay essentially gambling with. 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 businesse…
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.