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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

#121

Post by jethro_tell »

Applejinx wrote: post #107
jethro_tell wrote: post #86

Earlier quoted context omitted.

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…

It's funny here too, because I would assume that crowd funding would put you on a more conservative path. I like the Idea of taking $100k seed money an building a company that turns a profit. Not one that IPO's and makes us fuck you money, just one that pays back my investors at better than market, and pays my employees.

But you're signing up for a lot of work, not a sprint, and that's kinda the antithesis to 'changing the world' without making a profit then going to IPO.

I don't want to gamble on something, I want to build something with a less sophisticated valuation model where the revenue plan is clear from the start.

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

#122

Post by api »

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…

> 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?

If it's a consumer product, probably the former. It means they can market and hustle. If it's an enterprise or B2B product, probably the latter.

Edit: with the caveat that I would only put my money in the former if they have shipped. There's a lot of vaporware in places like Kickstarter and crowdfunding markets. VCs and knowledgeable angels are more likely to be able to see through that (but as we've seen, they're not perfect either).

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

#123

Post by api »

JumpCrisscross wrote: post #76
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…

Crowdfunding nukes VC's downside protection. VC funds invest through preferred stock or convertible debt for its downside-protection features. If that downside protection comes at the expense of unaccredited investors, the risk that one of them sues or a regulator gets involved on their behalf goes up. That could easily neutralise or even outweigh the benefits of the protection. This isn't limited to crowdfunding, by…

> 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.

Hundreds?!?

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

#124

Post by walshemj »

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…

Arn't Investment Trusts a form of crowdsourced investing.

I have done quite well out of my PE trusts got a divi from Electra that is almost the same as my initial investment and have rolled that over into pershing square as an arbitrage play on the FSE 250.

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

#125

Post by Alex3917 »

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…

> There are logistical hassles with adding retail investors (in any form) to your cap table.

Sure, but do they outweigh the advantages?

Consider that Mormonism is the fastest-growing (by percentage) world religion. And that Bitcoin is the best-performing investment of the last decade. And that there are so many billion-dollar MLM companies.

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

#126

Post by morgante »

jonwachob91 wrote: post #103
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…

That sounds more like PE than VC.

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

#127

Post by notahacker »

sigil wrote: post #109
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.…

> 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.

Or alternatively "If you aren't already rich, you don't get marketed at by people offering opportunities so bad they've been passed on by high-risk investors who underperform the returns the non-rich get on less risky asset classes despite working full time on managing their investments whilst having significant power to induce exits in their favour." Or rather, the general public actually does have the opportunity to invest in startups if introduced by genuine friends and family but random mountebanks don't have the right to run slick campaigns to dupe non-rich people into believing that Startup X is a good place to put life savings despite offering lower expected returns than a roulette wheel and zero liquidity. I mean, it'd be nice if the law was as restrictive on more blatant attempts to scam like penny stock pump and dumps and MLM, but it's difficult to argue the general public would be better off for having comparatively sincere people beguile them with Powerpoints involving hockey stick curves.

It's not a "Rich Get Richer" provision when it's obvious that on average the poor will get poorer from random startups being able to present themselves as investment opportunities to them.

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

#128

Post by mljoe »

notahacker wrote: post #127
sigil wrote: post #109

Earlier quoted context omitted.

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.…

> 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. Or alternatively "If you aren't already rich, you don't get marketed at by people offering opportunities so bad they've been passed on by high-risk investors who underperform the returns the non-rich get…

That makes sense and all, but the definition of accredited investor is tied to net worth and not knowledge. Which means that maybe you can't scam poor people, but there are plenty of gullible rich people with net worth over the $2 million in liquid assets or whatever it is these days.

Maybe treat being an accredited investor like a driver license and not tie it to your net worth?

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

#129

Post by notahacker »

morgante wrote: post #126
jonwachob91 wrote: post #103

Earlier quoted context omitted.

>> 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…

That sounds more like PE than VC.

And whilst PE might be ostensibly lower risk than VC, PE firms' ability to not lose money depends entirely on their ability to actively restructure companies and find a buyer, two things retail investors have no chance whatsoever to do

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

#130

Post by zby »

The main problem for investors is the principal-agent problem - simply that the managers of the company will use the funds invested into it for their own advantage instead of advancing the company. There are degrees of this - from blatant fraud to slightly overpaying themselves or making deals with their friends instead of best offerers. It is impossible to entirely stop this - but there are ways to diminish the impact.

1. Become involved in the company - this can work only if you have a big stake in the company (with dispersed ownership you get collective action problems) and the company is a big stake of your activities (you cannot get involved much in many companies).

2. Lend not buy equity (and require collateral etc).

3. The laws for public offerings - with all that red tape involved: the strict accounting, governance rules, information disclosure rules, etc.

4. Investing in startups. This is a small special case where investing can be something between becoming fully involved in the company operations and being a small shareholder of a public company. This relies on the theory that startups goal is to grow a 100 times or die - so small continues extractions by the executives are ruled out.

The crowdfunding initiatives, try to reduce the red tape involved in a public offering of equity - but they don't even try to address the problem that the bureaucracy addresses in the first place.

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