Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

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

bloomberg.com

Post reply on HN
Print view View original

111–120 of 168 posts

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

#111

Post by xiaoma »

hkmurakami wrote: post #98
ericb wrote: post #45

Earlier quoted context omitted.

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…

>"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"

This is backwards. Funding a company that goes nowhere is far smaller an error than turning down the next SpaceX.

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

#112

Post by ericb »

hkmurakami wrote: post #98
ericb wrote: post #45

Earlier quoted context omitted.

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…

I totally agree. One could argue that one way to view the value proposition of YC from a VC perspective is that they apply a smarter filter than "the buddy system."

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

#113

Post by crispytx »

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.

Investment companies usually have a different legal structure than a typical startup and are subject to different regulations. You could however start a conglomerate, like Berkshire Hathaway, that invests in startups like VCs do.

So a "fund" wouldn't legally be allowed to raise money using equity crowdfunding. But a "conglomerate" that invests in startups structured as a C-Corporation could raise money through equity crowdfunding. Hope my reply helps!

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

#114

Post by SomeStupidPoint »

scott00 wrote: post #101
SomeStupidPoint wrote: post #87

Earlier quoted context omitted.

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/

I would prefer a for-profit one, but due to many of the concerns you point out about compliance (and that you can no longer get donated labor), I don't think you can make it work (you end up spending too much on compliance and management relative to the size of the fund). Amortizing the costs across a national fund substantially changes the incentives and control structure -- which replicates many of the problems I have with current investment mechanisms. (And you'd still run in to issues where every state has special snowflake rules about certain things.)

The reason is I think you really need to focus on localization of such funds to make them effective -- metro scale ones. You can probably make the financials work by simply eating the overhead on that scale, but not on one trying to turn a profit, but paying for labor. Losing 17% of your investment every year to overhead is simply too rough, because you'd need to generate 20% returns.

You could do it, but it would substantially change the nature of the investments you could make and the size the fund would have to be to operate. There's a certain charm to funds in the 1-10 million dollar range making small investments in 10-100 businesses. (And I believe helps combat some of the problems involved with corporations, by intentionally distorting the market by "losing" money purposefully and recouping the value from the social change.)

I was (obviously) unaware of CDVCA, but even there, it seems like they're mostly a broader investment scale and set up as a traditional venture fund (ie, looking to connect traditional investors with high growth potential ventures) as opposed to operating a continual flux of small, local businesses at (likely) negative returns funded by the local populace at large. (I poked around the NYC one, for instance.)

That said, they likely have worked out some of the legal hurdles involved.

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

#115

Post by hkmurakami »

xiaoma wrote: post #111
hkmurakami wrote: post #98

Earlier quoted context omitted.

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…

> "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" This is backwards. Funding a company that goes nowhere is far smaller an error than turning down the next SpaceX.

A fund only has 10~20 bets it can make though. That likely influences the human decision making (could still be suboptimal).

Afterall didn't A16Z catch some criticism for not investing a large enough sum into Instagram (which iirc had 500x returns or something) to make a large enough difference to the fund?

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

#116

Post by anigbrowl »

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…

Well until now retail investors were shut out of opportunities reserved for VCs even if they only wanted to risk small sums they could afford to lose. Crowdfunding seems like a godsend for the small indie film industry where it's hard to get attention from major investors but donations from friends and family may be insufficient to raise a budget.

I realize the prior rules were there to protect investors from losing their shirts, but simply excluding people without changing the problematic behaviors in the marketplace means that it's harder than ever for small investors to accumulate any kind of meaningful investment capital.

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

#117

Post by dragonwriter »

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.

> Why not to create a massive crowd-funded or publicly traded VC fund?

Because then you need to find someone with the skill to be a VC fund principal who is satisfied to work as an employee magnifying other people's capital rather than magnifying his own.

Or, have a fund run by someone without the requisite skill.

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

#118

Post by dragonwriter »

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.

> The investors are then partners in an LLC

Pedantically, "members" not "partners"; an LLC is not a partnership.

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

#119

Post by lenzm »

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…

You aren't describing venture capital. By definition, venture capital is high risk and therefore must potentially have crazy big returns.
Post reply on HN