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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

#91

Post by usrusr »

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.

Trust. A crowd-VC-fund would have two options: either delegate decisions to a few powerful administrators or put everything up for direct voting.

Administrators would be terribly prone to be influenced by more or less open kickbacks, because what they could potentially skim would far outweigh their personal investment or any piece tag you could put on whatever little reputation they might have. A conventional big name VC won't ever be impressed be the CEO of the startup he funded meeting him at a fancy restaurant, not so sure about the representative of some hypothetical crowd-VC subreddit. And keep in mind that most methods used to keep regular investment funds accountable cannot be applied to VC investments.

The "everything up for a vote" path has a trust problem as well because that kind of popularity contest is totally unpredictable. A perfectly rational crowd today could tomorrow decide to go all in on a fake startup promising the energy revolution based karmavoltaic modules. All it would take is some vocal minority that is good at agitating everybody else into submission through the online arsenal of strawman tricks, shaming, tactical trolling and the like.

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

#92

Post by edanm »

kbenson wrote: post #89
tptacek wrote: post #67

Earlier quoted context omitted.

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 (o…

Most VCs raise money from things like pension funds, which manage a lot of money, and I believe invest in multiple vcs.

They Usually invest a very small amount of their money in this sector, usually a fee percent at most.

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

#93

Post by sharemywin »

onion2k wrote: post #44
nathan_f77 wrote: post #34

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…

That just means you should be looking for more equity when you invest in a smaller business. If you get 10* the equity you can achieve the same investment outcome with 1/10th the exit value, and a $100m exit is a lot more likely than a $1bn exit.

I imagine a 5M company is even more likely to succeed which is on lower end of selling to private equity.

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

#94

Post by sharemywin »

SomeStupidPoint wrote: post #48
nathan_f77 wrote: post #34

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…

not sure if this helps but I think if you "work more than 500 hours a year" at the business your considered an active investor. Kind like a partner at a law firm.

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

#95

Post by hkmurakami »

kbenson wrote: post #89
tptacek wrote: post #67

Earlier quoted context omitted.

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 (o…

Fund of funds exist. They typically become LPs in PE funds and Hedge funds. Their value add is that they provide fund selection for sovereign funds / pensions / endowments that feel that they do not have the expertise to become LPs directly in the right funds (I find this value add to be bs, but I guess I'm unfamiliar with how clueless someone directing a random sovereign fund could be).

Larger VCs will become LP in smaller upstart ones to have better visibility into earlier stage companies [1].

[1] Bessemer, Emergence, Social, and Sapphire are LPs in Saastr Fund http://www.saastrfund.com/strategic-partners-1/

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

#96

Post by hkmurakami »

lettergram wrote: post #53
zebrafish wrote: post #43

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…

> * Crowdfunding invests in a product/idea

I would expand this to state that crowdfunding would fund product/idea but not product/idea fit with market.

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

#97

Post by sharemywin »

lumost wrote: post #42
seibelj wrote: post #33

Earlier quoted context omitted.

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.

That assumes that the company proceeds through successive rounds with an upwards trajectory. If the company falters and takes a down round the initial investors may disagree with the direction or even sue. If the company needs to be recapitalized or restructured under a time crunch, tracking down 100 loosely involved investors and getting them to sign the deal may not be feasible.

Probably would have been better to have arbitration instead of lawsuits written into the law. (to make it work not for investors)

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

#98

Post by hkmurakami »

ericb wrote: post #45
FailMore wrote: post #37

Earlier quoted context omitted.

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…

I think this bias is mistaken--because VC's use their network as a filter, it falsely equivocates strong business/strong founder with individuals who landed on a social graph that happened to have VC connections. Biases like this are market inefficiencies that can provide outsize returns for those who learn to look past it.

It's basically a filter that tolerates false negatives.

Figuring out a way to create that VC/Angel connection implies abilities and characteristics that they pattern match to past success. There may be high potential teams that cannot pass this filter but will still succeed, but the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more, especially when you consider VC math needing 100x-1000x return potential from each of their companies.

It's just like the FaceGooAmaSoft hiring filter we're familiar with that is designed to prioritize low false positives at the cost of having a higher false negative. (skilled programmers who aren't interested in the contrived coding quizzes or can't do them well will be a false negative in the hiring process)

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

#99

Post by javiramos »

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.

Allied Minds [1] is a publicly traded VC fund (LON:ALM). It is a bit unique in the sense that, in addition to doing traditional VC equity investments, they fund technologies at very early stages and build companies aroud them.

[1] http://www.alliedminds.com/

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

#100

Post by caoxuwen »

grellas wrote: post #72

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…

Genuinely curious, been looking into it recently - what're the problem with unregulated public offering? Things i can think of are insider trading, misleading information, ponzi scheme, etc.
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