Equity crowdfunding is doomed as an asset class
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Equity crowdfunding is doomed as an asset class
1–10 of 28 posts
Re: Equity crowdfunding is doomed as an asset class
#2tl;dr A VC thinks VC works better than equity crowdfunding ever will. As if VC is the answer to all problems.
Re: Equity crowdfunding is doomed as an asset class
#3VC denying reality, hoping it'll go away.
Re: Equity crowdfunding is doomed as an asset class
#4First, I think it deserves mentioning that this post is not about things like Kickstarter, as far as I can tell, but about equity crowdfunding like AngelList. Kickstarter backers do not get equity in the company.
I don't really think the "good startups will opt for VCs, ergo only bad startups will go for crowdfunding" line of argument is really convincing. The reason being that how good or bad a startup is isn't really a knowable quantity both because it's an incredibly vague, meaningless concept and because at the funding stage not much about the future of the company is pre-determined.
That said, I do think the crowdfunding movement (equity and otherwise) has a major, often overlooked, negative. It's much better to have to deal with one or two VCs than be beholden to a dozen, or in the case of Kickstarter, tens of thousands of stakeholders. A good VC will let you drive the company and only provide high-level guidance and a rolodex, but an active community of a few thousand backers who don't want to lose their money will put your head on a pike if you don't deliver exactly what they were promised. (And odds are many of them have a completely different idea of what they are paying for than you do.) Good luck to you if you want to pivot once you have 10,000 backers on Kickstarter, for example.
However, if you have a very straightforward project that is well specified and has a concrete way to measure when it is completed or failed, like shipping a piece of hardware that is completely designed, if lack of capital is a blocker, crowdfunding seems to make sense. For more open ended projects like games or software applications I see Kickstarter has a horrible idea unless there are literally no other options. And even then, it might be worth it to just die instead of having to become beholden to thousands of people on a project you may lose interest in or won't be able to kill even when the writing is on the wall since it will destroy your reputation.
Re: Equity crowdfunding is doomed as an asset class
#5A lot of folks are making ad hominem arguments that because it is a VC arguing against crowd funding, he must be wrong because of who he is.
Let's see if we can focus on the reasons why his arguments are wrong, not just that he is a VC.
Valid reasons why he may be wrong:
- He argues that good startups have no trouble raising VC. On the contrary, many VCs have poor ability to determine what is a good investment, and many good startups have war stories to tell of how difficult their first financing round was. Therefore, crowdfunding could benefit good startups because raising money from VCs is not easy even for quality startups, because VCs are (as a class) not particularly good at identifying quality.
- Investor selection: sure, getting top-tier VC has soft benefits. But there are costs as well: VCs have more board power, can often force a founder to step aside, or will force a sale to liquidate equity to distribute returns to LPs. Yes, individual investors may not add as much "soft value". But the power dynamics are different and in some ways there may be lower risk to the founder.
- Later stages: so what if crowdfunded companies don't turn to crowdfunding for second rounds? Crowdfunding will work best for early stage. If the business turns out great, and the company needs large amounts of follow-on funding, then getting $20mm from institutions will be more feasible. But it is difficult to understand why that's a serious problem for earlier stage crowdfunding.
- Marketplace for lemons: information asymmetry also exists for VCs with startups, so the lemon argument against crowdfunding is not unique versus VC.
In short, these are interesting ideas against crowdfunding, but none stand out as particularly compelling, or they can at best make a claim against crowdfunding for certain types of deals, rather than against crowdfunding as an asset class.
Re: Equity crowdfunding is doomed as an asset class
#6tl;dr A VC thinks VC works better than equity crowdfunding ever will. As if VC is the answer to all problems.
yep.
It's also worth making one of the key assumptions of the post explicit.
the author says
If the funding platforms cannot attract the best deals, then investors will not make any money.
the key assumption that's baked into that statement is that everyone universally recognizes the 'best deals'. Of course that's not certain. The wisdom of the crowd may be better than VCs at recognizing the 'best deals'. I can easily imagine 'best deals' that the crowd identifies that VCs wouldn't fund.
Re: Equity crowdfunding is doomed as an asset class
#7First, I think it deserves mentioning that this post is not about things like Kickstarter, as far as I can tell, but about equity crowdfunding like AngelList. Kickstarter backers do not get equity in the company. I don't really think the "good startups will opt for VCs, ergo only bad startups will go for crowdfunding" line of argument is really convincing. The reason being that how good or bad a startup is isn't real…
AngelList has an invest online feature which groups smaller investors into a single LLC. Those investors also get fewer information rights than regular direct investors, IIRC. Not many startups there seem to be using this feature yet but it seems to me it could be an effective way to deal with the issue of many small backers if that changes.
And at the end of the day it's equity. Your clout is generally proportional to the number of shares you hold, share classes aside.
Re: Equity crowdfunding is doomed as an asset class
#8First, I think it deserves mentioning that this post is not about things like Kickstarter, as far as I can tell, but about equity crowdfunding like AngelList. Kickstarter backers do not get equity in the company. I don't really think the "good startups will opt for VCs, ergo only bad startups will go for crowdfunding" line of argument is really convincing. The reason being that how good or bad a startup is isn't real…
AngelList has an invest online feature which groups smaller investors into a single LLC. Those investors also get fewer information rights than regular direct investors, IIRC. Not many startups there seem to be using this feature yet but it seems to me it could be an effective way to deal with the issue of many small backers if that changes. And at the end of the day it's equity. Your clout is generally proportional…
Wefunder has the same feature. We've found that using a single-purposes LLC to aggregate smaller investors mitigates all the concerns that top-quality startups have. That, and a high bar for curation.
Disclosure: I'm a founder of Wefunder.
Re: Equity crowdfunding is doomed as an asset class
#9First, I think it deserves mentioning that this post is not about things like Kickstarter, as far as I can tell, but about equity crowdfunding like AngelList. Kickstarter backers do not get equity in the company. I don't really think the "good startups will opt for VCs, ergo only bad startups will go for crowdfunding" line of argument is really convincing. The reason being that how good or bad a startup is isn't real…
AngelList has an invest online feature which groups smaller investors into a single LLC. Those investors also get fewer information rights than regular direct investors, IIRC. Not many startups there seem to be using this feature yet but it seems to me it could be an effective way to deal with the issue of many small backers if that changes. And at the end of the day it's equity. Your clout is generally proportional…
Yeah I guess I wasn't thinking about this clearly enough. Equity crowdfunding doesn't really seem to have much of an issue since investors aren't really promised anything tangible other than some possible return. My general aversion to non-equity crowdfunding (is there a name for this) like Kickstarter is that sure, you get cash in the bank, but you now have a massive hidden liability on your balance sheet: an angry mob who will post horrible screeds on the Internet about you if you don't execute perfectly.
Re: Equity crowdfunding is doomed as an asset class
#10tl;dr A VC thinks VC works better than equity crowdfunding ever will. As if VC is the answer to all problems.
I met Josh once. He's a really sharp guy whose opinions are worth seriously considering. It will be interesting to see how this plays out. I personally am a believer in equity crowdfunding - I think it's a natural extension of the stock market to smaller scale. But he raises some good points.