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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

#101

Post by scott00 »

SomeStupidPoint wrote: post #87
scott00 wrote: post #80

Earlier quoted context omitted.

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…

Ah, I didn't realize you were talking non-profit. That's actually a relatively established model: http://cdvca.org/

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

#102

Post by [deleted] »

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…

[deleted]

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

#103

Post by jonwachob91 »

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…

>> 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 relatively specialized people here understand why VCs don't back quietly, steadily profitable companies.

You're assuming all VC funds are like SV/NYC type funds. Most VC funds in FL (and I'm assuming most of the US), are small funds that invest fewer than 10 times a year, and take large equity positions in companies that are steadily profitable (but will NEVER be crazy big). They prefer companies that are making profits over companies that have growth potential, low risk low reward funds.

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

#104

Post by erikpukinskis »

Lagged2Death wrote: post #3

I thought the whole deal with startup investing was: Invest in a few dozen companies and hope you get one hit so big it makes up for all the others, which you expect to all go down in flames. That can work if you have millions to spend and the time, connections, and access to pal around with dozens of founders, looking for the good eggs. For a "small investor" who has a small fraction of a middle-class paycheck to sp…

My hope for crowdfunding would be that it would be exactly like you describe: spend the time, connections, and pal around with people doing projects, but the only difference would be the dollar amounts. $1,000 here, $10,000 there, on things like performances, food carts, etc. Stuff a VC would never touch because the max payout is like $50k.

But for a small investor to make 10 ~$5k investments, and get back principal plus $50k over the course of a few years that's pretty good. And they can do it in their own community on projects that don't make sense for someone in New York or SV to even know about.

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

#105

Post by Taek »

FailMore wrote: post #37
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…

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 can talk as a startup who took institutional capital. Our investors have been super hands on, board meetings every month, and if I need to talk to them about something or get help with a company problem they are never more than a day or two from being able to give me a few hours.

It's helped a lot. In my mind we are much, much better off for having their guidance and assistance.

If you crowdfund, you aren't getting that. You are weaker relative to the companies that did. Doesn't matter if you were stronger initially, the company that got institutional capital (especially first time founders) is going to have training that gives them a huge edge.

Having been on both sides of the fence, there is no question to me that good institutional capital will make a better team. Smart money goes a long way.

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

#106

Post by ilugaslifk »

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…

> pay a tax out of your returns that wealthy investors don't have to pay

Can you expand on this?

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

#107

Post by Applejinx »

jethro_tell wrote: post #86
seibelj wrote: post #66

Earlier quoted context omitted.

> 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'

Yeah, it's kind of 'meta'.

Though the interesting thing is, Y Combinator is interested in basic income. That's effectively like crowd-seeding, which makes all the 'cut out the middleman' stuff more practical.

If you're expecting 'disruption' and embracing it, and you see disruption coming for your own livelihood, the sophisticated response is to try and find a place for yourself in the new situation, rather than stop things from changing at all. In that light, Y Combinator looking at ways to cut out SV incubators could be prescient.

It's like with me: I run a very functional small recording studio as part of my business, and it's well on the way to handling the live recording of traditional bands and their instrumentation. Yet I'm a lot more interested in finding unusual ways to support electronic genres (a strikingly different skillset).

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

#108

Post by vkou »

caoxuwen wrote: post #100
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.

Add "Our business model consists of paying salaries to ourselves, using investor funds."

The regulations that public firms are burdened with are intended to make it possible for investors to figure out if these kinds of shenanigans are happening at your company. Private firms are exempt, because only sophisticated investors can invest in them, and they can do their own due dilligence/can afford to lose their investment.

If your crowdfunded startup is willing to provide enough information for your investors to be able to figure this out, you may as well take it public.

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

#109

Post by sigil »

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…

Will VCs make better investments, on average, than retail crowdfunders? Probably. That's their job after all.

Does that mean the law should protect crowdfunders from themselves? That I'm not so sure about.

I can think of no more "Rich Get Richer" law than the accredited investor law [1]. It literally says: if you aren't already rich, you don't have access to this entire set of opportunities that could make you rich.

This was less of an issue when we had a healthier IPO market. With more companies staying private now, and more of the actual IPOs coming later when there's less growth left, how can we continue to deny retail investors (read: the not-rich) access to the best opportunities?

Many of us on HN can start tech companies to gain access. Maybe the person down the street can't do that, but once in a while they might have valuable insights into an industry or the people in it, insights that others (yes even VCs perhaps) lack. Saying "sorry, you can't play this game" seems immoral to me. How can we give regular folks -- non-rich, non-tech people -- access to the same opportunities? If not the current crowdfunding laws, then what?

[1] https://en.wikipedia.org/wiki/Accredited_investor#United_Sta...

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

#110

Post by crispytx »

The problem with equity crowdfunding right now is that most of the tech startups aren't raising money through the portals. What percentage of the YC Summer 2017 batch do you think will go on to raise money through the equity crowdfunding portals? My guess is that few, if any, of the YC Summer 2017 companies will raise money through equity crowdfunding. And this is a huge problem for potential equity crowdfunding investors. Equity crowdfunding investors simply do not have the opportunity to invest in large number of the best startups. Go check out the types of companies raising money on the funding portals, most aren't tech startups. You'll find all sorts of bullshit companies, everything from board games to restaurants!
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