31–40 of 53 posts
There's not the same amount of visibility and accountability in startups as with companies on a publicly traded exchange.
Someone will lose their shirt, sue, and set precendent for how startups should now behave with unsophisticated investors.
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It's certainly more dangerous than investing in IBM or Chipotle, but not obviously more dangerous than a number of things which we let adults purchase, including casino chips, time share properties, houses in California (which we'll subsidize your 5X leverage on), art history degrees (where capping it at 5X leverage would be refreshingly conservative), etc etc. A $3,000 computer purchased today will depreciate to zer…
Normal people don't buy computers because they anticipate the returns will help fund their retirements.
To expand on this analogy - gambling is legal because, as a society, we've decided that the upside of "entertainment value" outweighs the downside of "unsophisticated 'investors' (gamblers) may lose more money than they can afford to." If this is the case, it seems obvious to me that we should also accept crowdfunding, which has exactly the same downside, but infinitely more valuable upsides: normal investors get more opportunities for investment and businesses get access to more capital.
Securities regulations should protect investors from shady businesses doing illegal things, not from themselves.
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> The "model" isn't the creation of venture capitalists; it's just mathematical reality. Only if you invest in startups they way you play craps. The statistical distribution of outcomes is not predictive of the chances of a particular startup succeeding or failing. Some founding teams are virtually guaranteed to fail; some have a better than even chance to succeed. If you are willing to give up on the unicorns you ca…
No, that's the model for firms with expertise in valuing companies. It's very trendy to suggest that big venture capital firms are throwing darts, but in fact they are competing for the best deals (which is another reason crowdfunding investors are at a disadvantage) and for the most part they are not spectacularly successful. Venture capital firms aren't competing for "unicorns" simply out of vanity. They need to be…
That's part of my point. The current VC model causes failures of businesses that are viable going concerns, but not growing fast enough. They know they can make more overall by pushing a subset of those business to explode at the cost of killing most of the others. This also allows them to increase the velocity of their investments, further pressuring their startups to grow or fail fast. Their "cohort of pedigreed startups with plausible business plans and some degree of traction" should yield enough moderate successes to make investment profitable, as long as they are willing to play the long game.
Also, those incomes become proxies for investment returns once the company is stable enough to start paying distributions to its owners. Again, though, that ties up capital for the long term, which is anathema to the current VC crowd.
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Normal people don't buy computers because they anticipate the returns will help fund their retirements.
No, but plenty of people (stupidly) gamble at a casino and hope for returns to fund their retirement, and no one is clamoring to outlaw gambling. To expand on this analogy - gambling is legal because, as a society, we've decided that the upside of "entertainment value" outweighs the downside of "unsophisticated 'investors' (gamblers) may lose more money than they can afford to." If this is the case, it seems obvious…
Earlier quoted context omitted.
Normal people don't buy computers because they anticipate the returns will help fund their retirements.
No, but plenty of people (stupidly) gamble at a casino and hope for returns to fund their retirement, and no one is clamoring to outlaw gambling. To expand on this analogy - gambling is legal because, as a society, we've decided that the upside of "entertainment value" outweighs the downside of "unsophisticated 'investors' (gamblers) may lose more money than they can afford to." If this is the case, it seems obvious…
Gambling is legal in only a tiny handful of places and in the few places where more casinos have recently been authorized, NY state (my state) included, it has been a hugely controversial decision. In NY State, the rationale was certainly not that gamblers benefitted, but that the added tourist attraction of creating casinos in depressed communities will boost the local economy. I think this was a patently bad decision and I'm certain that history will bear me out, that the local economies will not suddenly prosperous and quite to the contrary, all of the low grade crime associated with risk seekers, substance abusers and the profligate will now infect these communities as well.
The whole reason we have the SEC in the first place is to protect the credulous from the sharks.
I don't anticipate this type of crowdfunding taking off, quite honestly, and I don't know that this is a problem. We want the middle classes putting their assets in places safer than just betting them on papa's mustache in the third - which is what unsophisticated startup investing basically is. Except there is a much greater chance that a random horse picked with a dartboard is going to have a return than a random startup will.
Earlier quoted context omitted.
It's certainly more dangerous than investing in IBM or Chipotle, but not obviously more dangerous than a number of things which we let adults purchase, including casino chips, time share properties, houses in California (which we'll subsidize your 5X leverage on), art history degrees (where capping it at 5X leverage would be refreshingly conservative), etc etc. A $3,000 computer purchased today will depreciate to zer…
>A $3,000 computer purchased today will depreciate to zero in 3~4 years, leaving you with hopefully some happy memories and a paperweight. My desktop contains many parts manufactured more than four years ago and it is still useful. In fact, it no longer matters how many dollars of value you think it is worth, it is still effective, consuming only electricity and my time. Your thesis is incorrect.
Earlier quoted context omitted.
No, but plenty of people (stupidly) gamble at a casino and hope for returns to fund their retirement, and no one is clamoring to outlaw gambling. To expand on this analogy - gambling is legal because, as a society, we've decided that the upside of "entertainment value" outweighs the downside of "unsophisticated 'investors' (gamblers) may lose more money than they can afford to." If this is the case, it seems obvious…
Many, many, many people are clamoring to outlaw gambling in the very, very few places it is currently legal, myself included. Right now Draftkings and whatever that other one is are in the process of getting worked over by multiple state AGs for violating anti-gambling prohibitions. Gambling is legal in only a tiny handful of places and in the few places where more casinos have recently been authorized, NY state (my…
Similarly, GNC can sell all sorts of useless nutritional supplements, but the FDA is all up in the business of anyone trying to sell a new medication.
Reminder: you can take money from non-accredited investors; it's just so complicated that it's not practical to do so at scale and with strangers.
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Normal people don't buy computers because they anticipate the returns will help fund their retirements.
Nor should any normal retail investor purchase crowd-funded equity for retirement purposes. These are risky bets on immature companies with unproven products & business models and unvetted financials. I'm fairly certain that the majority of retail investors who are looking to put their money into crowd-funded equity will understand the higher risk associated with this new asset class.
Earlier quoted context omitted.
No, that's the model for firms with expertise in valuing companies. It's very trendy to suggest that big venture capital firms are throwing darts, but in fact they are competing for the best deals (which is another reason crowdfunding investors are at a disadvantage) and for the most part they are not spectacularly successful. Venture capital firms aren't competing for "unicorns" simply out of vanity. They need to be…
> Many of those failures are capable of generating reasonable incomes for employees and founders for years, but those incomes are not proxies for investment returns. That's part of my point. The current VC model causes failures of businesses that are viable going concerns, but not growing fast enough. They know they can make more overall by pushing a subset of those business to explode at the cost of killing most of…
There is in fact very little value of a "going concern" to outside investors. These "going concerns" are successes for people directly involved, but are not successes for investors. Consider that distributions are the normal way partners and LLC members get paid, and also a huge source of lawsuits, because when management is just a small fraction of ownership, their incentives are to minimize distributions.
You will find few people on HN more pro-boostrap and anti-VC than me. My last company bootstrapped and ran 10+ years. We're bootstrapping this one. I agree with everything Pinboard says about investment versus funding from customer revenue.
But those arguments only have merit as long as you aren't taking outside money to build the business. As soon as you take outside money, your business plan must make sense to the investors.