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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

#81

Post by corford »

prostoalex wrote: post #58
cstavish wrote: post #28

Earlier quoted context omitted.

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.

The way AngelList (and I think FundersClub, too) handle it is to set up an LLC. The investors are then partners in an LLC, not direct shareholders.

Seedrs also does it like this.

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

#82

Post by omarchowdhury »

skdotdan wrote: post #60
tptacek wrote: post #55

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…

Why not to create a massive crowd-funded or publicly traded VC fund? (as opposed to crowd-funding for a single startup) Thus more people could expose themselves to VC but in a diversified manner. Also, more capital would be available for startups.

This is specifically not allowed under the JOBS ACT. I wish it were. I'd dedicate my life to it.

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

#83

Post by guntars »

mhluongo wrote: post #77
criddell wrote: post #56

Earlier quoted context omitted.

> 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.

Clearly the expected value should be higher investing. You don't win blackjack by playing more games, but you can improve returns by spreading out your investments.

Spreading out investments does not improve expected return which is just a ratio to the invested amount.

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

#84

Post by nowarninglabel »

Small dollar amounts, but not necessarily "few" in numbers of people. Granted, I'm not particularly interested in crowd-funded equity, but crowd-funded interest-free charitable loans that Kiva has been doing in the U.S. have been steadily growing. https://www.kiva.org/lend/kiva-u-s

Growing at the bottom may not produce eye-popping changes right now, but could have some great long-term effects for re-invigorating small business growth (which has been on the decline in the U.S. as I've posted elsewhere).

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

#86

Post by jethro_tell »

seibelj wrote: post #66
ericb wrote: post #47

Earlier quoted context omitted.

I believe it. I also know that Realtors aren't too fond of For Sale By Owner houses. I suspect this comes down to a similar effect.

> I also know that Realtors aren't too fond of For Sale By Owner houses This scares agents because a wide-spread DIY real estate industry kills all of the middlemen (themselves)

This is an interesting conversation to have here really.

'Never ask a barber if he thinks you need a haircut'

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

#87

Post by SomeStupidPoint »

scott00 wrote: post #80
SomeStupidPoint wrote: post #48

Earlier quoted context omitted.

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…

This is an interesting concept. I think the implementation would be very tricky though. The most important implementation detail is whether the investments are chosen by the investors, or by a manager or management committee of some kind. 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 in…

If you look closely, my numbers don't quite add up -- $50/mo is $600/yr not $500/yr.

I was guesstimating about $200k/yr in operating expenses (and that's with a lot of volunteered expertise, as you note).

But structured as a social-purpose non-profit, with everyone paying in being a member who elects a management board, who allocates the money as they see fit (perhaps with some constraints chosen by members), I think this actually bypasses a large amount of compliance work -- if you never return the money, and are strictly a non-profit investing in local businesses which rolls returns in to future investments -- because the members aren't actually making investments: they're paying for a non-profit's operational funds to support local business ventures. Structuring this way also makes for a better case to get donated expertise, eg from local lawyers and investors, and probably makes your tax situation a lot better.

You probably need some rules about earning lifetime membership after a certain pay-in, and definitely some about conflicts of interest (eg, funding member's ventures) but those are more technical details.

It's not a good financial investment vehicle, in that even in the best case you'd almost certainly have negative returns and in the worst, you'd have no returns at all -- but if your goal is changing the function of the market to support local enterprises and you're willing to pay in to make that happen, I think it'd function excellently. (Of course, you only really need to seed one or two Starbucks to have the whole portfolio right-side up again, even after decades of total losses. So at a generational level, it might work as a financial instrument as well.)

Worth noting, even as a non-profit, there are ways to "return" the money besides the value of the businesses started if you do find yourself with extra funds -- investments in local parks, schools, art programs, etc. It'd never come back in currency returns, but I expect "investors" would see tangible value in their lives, quite possibly exceeding the monetary value they put in.

tl;dr: It's easier if you structure as a one-way investment in your community, and collect dividends from the output of a vibrant community.

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

#88

Post by dharma1 »

I was chatting with a startup that recently raised £1m crowdfunding as their second round. They were really happy with their choice and not having VC strings attached. I think an undervalued aspect of this is how powerful crowdfunding can be in creating a few thousand early product evangelists (who have vested interest in the company).

And I think TheDAO - though it was too early /fragile, had a half-baked voting model and got too big too fast - was onto something. I think cryptocurrency based equity/ dividends and decentralised, crowdfunded companies will definitely happen at some point in the future.

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

#89

Post by kbenson »

tptacek wrote: post #67
skdotdan wrote: post #60

Earlier quoted context omitted.

Why not to create a massive crowd-funded or publicly traded VC fund? (as opposed to crowd-funding for a single startup) Thus more people could expose themselves to VC but in a diversified manner. Also, more capital would be available for startups.

Someone has to get paid to do that, so now the premise of equity crowdfunding has been reduced to: in the best case, you can crowdfund another venture capital firm, and pay a tax out of your returns that wealthy investors don't have to pay. And, again: most VCs fail! A lot of money is invested in VCs not in the expectation of those investments being lucrative, but instead in the hopes that VC returns are uncorrelated…

> And, again: most VCs fail! A lot of money is invested in VCs not in the expectation of those investments being lucrative, but instead in the hopes that VC returns are uncorrelated with the public markets.

Are there meta-VC's that treat VC funds like startups and invest in multiple VC funds with the understanding that most will fail? That is, can you confirm my suspicion that it really is turtles all the way down (or up)?

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

#90

Post by brentm »

seibelj wrote: 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…

> If they were stronger, they would have raised proper VC.

I think that is really the most important part. A lot of people sophisticated enough to have their interest peaked by the opportunity probably figure the deals being offered are (more or less) the deals already rejected by traditional and more sophisticated channels. If established but private companies (e.g. Lyft) were doing late stage rounds through this type of a marketplace I think demand would be much greater. The problem is those companies probably don't have a lot to gain by doing it that way.

Now my assumption on quality may be wrong but that sentiment seems like an important hump for these marketplaces to get over.

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