[robmay]

I have a lot of experience here because a) in 2005 I started something called "The Business Experiment" which was an attempt to have a purely crowd sourced business. (http://www.fastcompany.com/magazine/101/next-essay.html) At the time, I spent a lot of my own money on lawyers trying to figure out how to give equity to people who aren't accredited investors.

b)I have since raised $10.5M in venture capital for Backupify.com, so I have also learned that side of the world.

From my view, allowing anybody to invest a few hundred or a few thousand dollars in a startup is a bad idea for a few reasons. First of all, the startup world is glamorized by the media. Most startups fail. Most capital is erased. No one writes about those companies, unless the failure is spectacular. Studies have shown that on average, entrepreneurs will do better financially in the "real world" of work than in startups. But the media doesn't play this up, and as a result, society has a bias that is a combination of the survivorship bias and recency bias that makes them think startups are a good investment. Many wealthy people that I have dealt with don't really understand the odds and risks of startups, so all the less likely that your average Joe can do it.

Secondly, capital structure matters a lot as your company grows. If you are successful, a bad capital structure can really fuck you over down the road when you need bigger rounds. And some issues require a shareholder vote. Average Joe doesn't know how to deal with these issues, and that scares professional investors. An idea like this will get a lot of companies seed capital, and they won't be able to raise later stage.

Third point - startups are really fucking hard, and will strain all of your relationships in your life, including those with your investors. Hell, Backupify is doing pretty well and it's still hard. Having to manage a bunch of small investors can be a nightmare, and going through difficult times with people you barely know, who don't do this professionally, will just make it worse.

Here is my prediction about how this legislation plays out. 1. It will eventually pass, because it is sexy and cool and part of the American dream.

2. Media will point to examples of companies getting funded that wouldn't normally get VC/Angel funding, to show how great it is. These examples will be thinks like companies outside of major startup hubs, companies that don't put profit/shareholder value / growth first, companies that are highly unusual, weird, or even too risky for VC, and companies that have non-sexy ideas that can't get VC because they aren't mobile/social/sharing/whatever.

3. Many will fail, but there will be at least one massive success, and that success will become the poster child for why this works.

4. But really, it won't work. People will lose money. There will be lawsuits and complaints. There will be a bubble after point #3 happens, and some 60ish dude will invest too much of his retirement in a dozen startups only to see every one of them fail and his whole net worth wiped out.

5. There will be outcry against this, and we will pass laws to regulate it, taking us back to where we began, only in a much worse situation.

Now, all that said, I will say there is probably room for a new investment scenario under two conditions.

1. The amount is so low it doesn't matter. For example, the bar is $100 and you can't invest in more than 5 at any one time. This makes your returns so small, even with homeruns, to be almost irrelevant, but maybe it's fun and cool and people will like it.

2. There is probably room for an "almost accredited investor" clause. I'm a perfect example for this. I'm not quite accredited, but probably will be by this time next year. I understand startups quite well. So maybe a clause saying that if you have worked 2 years in a venture backed startup, you can invest up to $10K, that might be ok.

Anyway, those are my thoughts. It will be interesting to see how this will play out.

[webwright]

Respectfully disagree.

Penny stocks? Real estate? Gambling? Entrepreneurship? Credit cards? No one is stopping people from "investing" their life savings in any of these areas, and people are losing everything in these areas every day.

We don't need to protect people from making bad decisions with their own money.

Your arguments about the capital structure and lawsuits are pretty spot on, though... under the current system. It doesn't seem too hard to bake some protections into the reform. You don't see people suing casinos when they lose their life savings there.

[robmay]

Well, but here's the problem... Backupify was my third attempt at raising VC. Before I did it, I would have jumped at the chance to raise money from anybody, even average Joes. But now that I know the difficulty in managing investors and their expectations, I would never consider it. So this idea will develop a lemons problem (similar to what you see in penny stocks) which is that any entrepreneur who understands the game well won't participate and won't raise this kind of funding, so you end up with the bad ones, and the uneducated/inexperienced ones. Some of the latter will ultimately be successful, but not enough.

[tptacek]

Casinos are intensely regulated. That's something you want for startups?

[drumdance]

Yeah, but penny stocks and gambling have unsavory reputations. At a minimum, someone researching them will be met with a blizzard of warnings about how the odds are stacked against you. I'm not sure that's true of entrepreneurship.

[SaidiSmenk]

I agree with you with all the pionts you made with the information you have.

Listen up, the world is changing. Startup is changing big time. Movements like "Lean(eric reis)","cloud (marc bernoiff)""richdad(robert kiyosaki)","kickstarter", "500 startups" (paul graham)" and "business mastery" (anthony robbins) show big potential of the new way to do startups and investing. Thanks to the mobile phone, we have access to all the data of the world what kings or leaders have never have. The time is changing big time!!!!!

The stats about 9/10 fail in the first year. And after that five years later 9/10 failed. Those are oldschool stats with all oldschool believes/behavoir. You have experiment with one startup and gave up. Instead of fighting for your vision and make it possible. (talking about your crowd idea, not backify)

Those threats what you describe are diamant for wefund. Wefund learn from it and give proper arguments/answer to that. But for now WeFund vision is possible! Let's experiment with it and see what kind of other businessmodels/investeringmodels will come out of it, after the government stop acting like parents!!!!

We can make mistake, that is how we learn. Stop trying to be my protector! I will learn from my own investing mistakes, why am i forbidden to make just a small investment into a smallcompany?

[dclaysmith]

> 4. But really, it won't work. People will lose money. There will be lawsuits and complaints.

I think this will be a common result. When these investments fail (as most of them will) the investors will cry "fraud" and "scam". The cost of defending against these lawsuits will end up overwhelming many of these fledgling start-ups. In the end, the "cost" of raising this money will be higher than it appears on the surface.

[prat]

And the investors will cry "fraud" and "scam" not for the wrong reasons alone. Fraud and scam artists will actually infiltrate the hacker community once they find out about the expansion (and dumbing down) of investor base.

[ssharp]

It seems entirely unreasonable to manage a bunch of "tiny" investments. It just sounds like a legal nightmare.

I think you'd have to pool all of the tiny investments into one large investment, and then that investment would have to have one person (or a small few) handle all interactions between the investment block and the startup. You'd essentially be creating a fund, in which investors of the fund would have a wall between their investment and the funds ultimate investment.

Even with all that, it seems like a very easy way for a person to lose their money. Startups are very risky investments and the people who succeed at investing are the ones who have developed a strategy for picking winners. Even if smart people decide that their strategy will be piggybacking off of more experienced investors' decisions, the market would still be ripe for drawing in lots of suckers to make really stupid investment decisions, though there are already lots of currently legal alternatives for that.

Financial literacy is already bad enough in this country, does it make sense to make learning it even harder?

[te_platt]

While valid, your points all seem directed to protecting people from themselves. Depending on the details it may be a very bad idea to invest or take investment at this level but who should be the one to make the decision? In this case I don't think the government should have a say.

[rmc]

protecting people from themselves

Which is not a bad thing in principle. We do it with lots of things.

[robmay]

And protecting startups. There are disclosure issues here that are much more risky for startups. For a publicly traded company to disclose a lot about its business is one thing... but such disclosures could kill a startup.

[chernevik]

Merits to one side, this sort of argument is going nowhere in the aftermath of the subprime loan mess.

Which people really should look at as a stress test on how something like this could be abused.

[chernevik]

+1.

From what you've seen, what are the prospects of aggregating mini-investment through a registered p.e. fund? Would the registration expenses be too high? If so, is it possible that this sort of thing might be enabled by right-sizing the current public securities regulatory apparatus?

[robmay]

That's probably a better overall idea. To let people by a mutual fund, in effect, that invests in a basket of startups.

[gojomo]

If the public and media have a glamorized, romantic view of the reality, what better way to train them than to let them get direct experience? That is, experience not mediated by the 'accredited investor' glass-barrier and carefully-calculated PR fluff pieces?

I think you overestimate the outcry/backlash during/after that necessary learning process. Trillions have been lost in homes the last decade, but very few of the government policies that goosed home prices and encouraged people of limited means to gamble their entire net worth on home ownership have been reversed. (People have learned to be wary, moreso than public policy has adjusted.) Billions have been gambled away as jurisdictions across the US have legalized gambling, and individuals have had to learn, but few if any places have undone gambling legalization, and more cities/states are discussing adding gambling. People with more hope than sense can lose all their money on eBay/Craigslist arbitrage, or margined public stock/option trading, or starting a restaurant/retail-store with friends. And there's no backlash demanding regulatory protection from these risky activities.

I think any backlash will be limited to actual scams, which is as it should be. The individual cases about fraud and malfeasance will be part of the public's learning process.

The "almost accredited investor" idea is a reasonable half-measure to begin the process of removing the discriminatory 'wealth test' from the process.

I would make it so any one of the following allow an individual to invest with the same freedom as someone who's inherited a million dollars or won a lottery:

• a college degree in economics, business, or law

• a related recognized accreditation (eg the 'Series 7' exams to work in certain financial-services roles)

• an amount equal to the desired private investment amount held in tax-advantaged investment accounts (IRA, Roth, etc) for at least 2 years. (For example, if you have $10K in such government-approved 'safe' accounts, you can also invest $10K in any private venture with the same assumption-of-competence that millionaires are granted.)

• an amount double the desired private investment held in public securities for at least 2 years. (For example, if you have $20K in public stocks/mutual funds, then you can invest $10K in any private venture with the same assumption-of-confidence that millionaires are granted.)

I don't particularly like any of these restrictions. If you can legally take $10K off a credit card cash advance, and use it to buy state lottery tickets, you ought to be able to take a chance on a friend's startup stock. But these weaker rules could provide the small dash of paternalism, and speed-bump against totally reckless investing, that helps us phase out the wealth-based-discrimination that rules today.

[tptacek]

But lottery returns might be better than startup returns. In both cases, investor sentiment is hyper-focused on the very, very low probability event of a high return, but unlike startups, the lottery's returns are deliberately smoothed to keep people playing.

That doesn't make lotto better than startups; the lotto is obviously objectively much worse. But the financial outcome of an unsophisticated investment in startups is likely to be worse than a lottery ticket; if you buy a bunch of lottery tickets, you'll get something back. If you don't know the industry, investing in startups is like throwing your money away.

I think something people don't consider in these discussions is that the current startup ecosystem --- the one in which the majority of companies return zero to their investors! --- is the product of relatively sophisticated investment. It's not impossible for a huckster to get funded, but it's troublesome enough that truly fraudulent companies are the exception.

All that changes once you set up a structure that allows people to "fund" companies "retail".

[gojomo]

There are already plenty of legal ways for people to "throw away" 100% of their money, as quickly as they'd like. It is only their own judgement, perhaps after being burnt or perhaps after watching others get burnt, that keeps these processes in check.

You're overestimating the effective payback of lotteries, for example. If someone "invests" $1000 in government scratchers, perhaps they'll technically get around $300 back on an expected-return basis. But they were playing to win, so that $300 is used to buy more scratchers. Lather, rinse, repeat: they're at zero. Within a day. Legally.

The only lesson to be learned there is: the government shouldn't offer, and the public shouldn't buy, rigged games.

Even the worst hopelessly-naive startup dream or haphazardly-structured equity investment offers a greater benefit to the participants and society, even when there's a 100% loss.

Someone was being paid a salary and devoting effort to a purpose as they burnt through the money. They'll do better next time.

The investors, too, will either drop out or better evaluate/structure the risks (and their tolerance for risk) the next time. People of all means (not just SEC-accredited millionaires) know to get started at something slowly, in measured amounts. That means the learning losses are effectively capped, while the social benefits coming from those who do manage to learn could grow very large.

And if everyone with less than a million dollars is so clumsy with money they can't possibly learn, we shouldn't let them buy stock/options, leveraged real estate, or lottery tickets, either.

[tptacek]

I don't know how to respond to this.

First, I'm stating a simple fact: the payoff structure for Lotto is different from that of startup investing. It's different in a way that affects the outcome for normal people.

Second, loss aversion is loss aversion. It will cause people to double down on startup shares just the same as they do on lotto tickets.

Finally, I reject completely the idea that it's a win for society to encourage people to burn money because startups are somehow worthwhile even when they fail. That's not how the economy works, and it's not what the startup ecosystem needs.

Lottery tickets are evil. We would be better off without them. You picked an unfortunately useful example with which to throw crowdfunding into relief.

[gojomo]

Startups are worthwhile even when they fail. They are practice within an operating domain where learning over time happens, and positive-sum outcomes are possible, and individuals' incentives towards improvement create social benefits.

On the other hand, there is no chance that tomorrow, with more experience, someone will be a better lottery-ticket-buyer than today. The activity throws off no lessons for those involved or outside observers about what technologies or partnerships or businesses might work in the future. And yet that gambling is legal and easy for people of any net worth, while non-millionaires face legal deterrents for startup investing.

I didn't suggest 'encouraging people to burn money' on startups. There's no talk of creating subsidies or tax-advantages over other investments. Every check-writer needs to make their own calculation about the returns they expect, and the losses they can handle.

But it's their own damn money! How about we just remove the ancient, patronizing net-worth discrimination that makes it harder for non-millionaries to engage in private investing than other activities just as risky and more destructive?

It'd be a win for society to let 'normal people' of all wealth levels practice their competencies in a non-rigged, learnable, positive-sum business domain. When you say, "If you don't know the industry, investing in startups is like throwing your money away", that's not a bug, that's a feature. The losses would start the learning, and participants would improve or select-out very quickly. And the overall economy progresses in exactly that way: needing many small investigational failures to train the young, explore the possibility space, and lay the foundation for later big successes.