Just thinking how much fun it would be to have a Kickstarter-like fund but with real equity. Maybe the HN community could pick its own YC applicant each season that gets into YC if the HN community funds it. We could see how valuable the wisdom of the crowd is when it comes to real investing. :)
I don't think crowdfunding is good for startups. For startups, having large numbers of investors is bad, and having inexperienced investors is bad. So having a very large number of inexperienced investors is the worst scenario possible.
The right way to get money from large numbers of people is to sell them your product, like Inpulse did, not to sell them your stock.
"For startups, having large numbers of investors is bad"
But isn't investment about spreading risk? The more risk you spread, the less founders would have to a) give up in ownership and b) answer to anyone but their own vision.
I think the reason why kiva (and even prosper) works is that risk is spread widely to individuals with common vested interest and enough skin in the game to make it sting but not be completely in-shambles devastating; as opposed to rich people trusting a richer VC to make them foo% return and putting it all in Color.
"The right way to get money from large numbers of people is to sell them your product, like Inpulse did, not to sell them your stock."
What if the product isn't one? What if it's a service like Facebook or (gasp!) Instagram? If you believe in a vision, and you want to contribute to it monetarily -- perhaps even see a return on that money -- why is that bad?
It seems to me that giving up less ownership and having more freedom to answer to their own vision and no one else is not some automagical formula for success.
I have had the freedom to do that with my own websites. In spite of audience interest which led to their creation, they have dismal traffic, are not profitable, and have helped only a paltry few people. Having that kind of "fuck you" decision making autonomy was critical to my ability to get well when doctors claim it cannot be done but it has not been a good basis for a business model. I am currently working on getting feedback to change that. It is clear to me I need more connection, not less, to make a viable business model. Yes, I am leery of the type of connection which can be strangulating but I am also leery of being so autonomous as to be isolated.
I remember someone posting here with an anonymous account who expressed similar concerns because he had $400,000 in savings and was thus free to pursue his vision to his heart's content. He worried he would go broke before he got his act together and created a solid business model simply because he didn't have to before that. "Duke Nukem Forever" comes to mind as well.
Funding a startup is very different than something like Kiva. Startups are new untested theories put into practice. To succeed, you need not just money but quality advice. My parents might be able to provide money to a startup, but they could never provide critical advice around an inflection point and guide me in what to do.
The idea of crowdfunding a startup to "spread risk" focuses on the wrong reason for raising money. You also do not give up less ownership just because you spread the risk farther. You would give us less ownership for equal funding if your backers are more naive, maybe (this assumes that we are not talking about experienced investors calculating the right price for a round and valuing it based on competing internal theories - reasonable considering the average knowledge level of the likely crowdfunders), but that would not serve your company in the best way.
Spreading risk is only one factor. It's like selling a car and only factoring in fuel efficiency and ignoring safety. Having a larger number of people, and this is important, with a megaphone that are like minded that can cause you trouble would be hard to control. While you could say that companies now have a large number of investors (stock owners) and they have little control, they also aren't the age group using the megaphone of the internet to amplify their voice.
Yes, but including a lot of unexperienced investors actually increases the risk of failure. The distraction alone (in time spent managing these investors) might be the death of any startup. Imagine trying to deal with hundreds of mini-vc's all day. Pg's right in the sense that a startup needs just a few focused, knowledgable investors early on.
Something like Kiva might work for a startup, but perhaps more in a donation bootstrap sense. Not as a serious investment.
In this context, crowdfunding is a large group of people pooling small amounts of money for an equity stake. This is relatively new and it hasn't been done yet. The OP was basically asking if there would be a new YC fund that would be open for the masses to 'micro invest' in.
This is in contrast to Kickstarter is crowdfunding where you pre-order the product.
Instead of investors, could there be a place where customers can sign up to be early access paying customers, instead of shareholders?
My first impression of Kickstarter was "Cool, I get to buy this and support the first batch being built and get a product", not "I am a shareholder and get a product".
The fact that I was some kind of shareholder came as a total surprise to me, and didn't seem to make sense. I was helping kickstart a project by buying one of the first batch, like a group buy, instead of getting the company off the ground.
My bad, totally missed it. A better clarification on my part would have been "sell early access to a mailing list via monthly subscription which becomes a monthly subscription product".
If there was a beta available, all the better.
Either way, the customer knows exactly what they're getting into.
Is it the same though? If your start-up gets money from Kleiner Perkins, do you really pay attention to everyone who gave money to Kleiner Perkins to start the original fund? I had in mind that HN would be more of being a provider of capital than an active investor. YC would be "investor."
Harvard University invests quite a bit of money in equity vehicles so for illustrative purposes I'm going to pretend they are a LP in KP.
Here's a conversation which will never happen:
"Hey, YC company! This is Bob at Endowment Management at Harvard. I've decided to forget my 20 year career in finance while simultaneously hopping straight over our trusted partners at KP and ask you directly about our investment. As you'll recall, we dropped a whole Benjamin on that software whatsamahoozit of yours, and we want to know you're working hard on protecting our investment. It shouldn't have cookies, or crackers, or whatever the trace your Facebooks on the Googles thing the WSJ was talking about this morning. You should probably give me your cell phone number so I can call at odd hours with spurious requests. By the way I hear Steve at Stanford says you're a dick for not answering your phone -- not cool! Steve paid 20 perfectly good dollars for your stock, you OWE it to him to take his questions."
Which means that the investment professionals aren't loose canons and they've been around the block and understand what their role is. Publicly at least they don't operate like that.
"For startups, having large numbers of investors is bad,"
Who says that it has to be large numbers. In kickstarter they are $1 pledges and $1000, $5000 pledges.
You could have thousands of people around the world hear your pitch and decide investing on you.
"and having inexperienced investors is bad"
Who says that they have to be inexperienced. Do you really believe that the people in Bay Area is the smartest and only experienced people in the world?. Maybe they are the smartest and more experienced in USA, but the world is bigger than USA.
Who says that startups could not decide who they let invest on them?. (investors also pitching their selves). And pick experienced ones?.
Crowfunding is not only about large numbers of people, but also about removing frontiers.
Even if they are inexperienced, Paul, Did you were born knowing it all? People could learn like you did.
"Experienced Investor" often has quite specific meanings - namely that the investor fully understands all the risks involved in an investment.
This generally goes beyond just knowing that there's a risk involved but also understanding the risk profile and where the risk comes from and any liabilities and responsibilities that might come with the investment and being able to afford the downside risk involved as well (for example, if you buy a cross currency interest rate swap you might find that extreme FX moves blow the position out of the water and leave you on the hook for far larger payments than anticipated).
Experienced in this sense doesn't really mean that you've done it before, it means something far closer to "can read and understand the whole prospectus and afford to lose the money".
I think capital structure is an important consideration in the determination of whether or not a large number of investors is "good" or "bad".
Under traditional methods of capitalization you don't want a large number of investors because each investor is another person that you need to clear important business decisions with (for example if you wanted to raise another round of funding). In this system you can almost view an investor as a partner in your venture.
However there is no need to carry this over to the crowdfunding domain. It can be quite easy to reserve a class of shares with the typical rights that traditional investors would require while creating a new class of shares (with much more limited shareholders' rights) to be distributed to crowdfunding investors.
For some startups, this leaves a chicken and egg problem. I've certainly been there with BidNear.Us. You can't afford to self-fund everything, you've got a mortgage to pay, and your product requires a critical mass, not just early adopters, to finish the sale.
I think if the product requires a crowd to complete a sale, it might make sense to crowdfund. What if those game developers on Kickstarter had tried to directly sell their games for $50 today with no working product for two years later without any proof that the game was funded and could exist. People would rightly call it a scam.
PG, would you still feel the same if there were limited disclosure/access requirements to crowd investors, so that the disclosure/reporting obligations were no different than if you were dealing with a limited number of accredited and/or sophisticated investors?
I'm curious as to how people think Ycombinator would benefit from such a move. To me, it looks like a distraction at best and has a huge potential for the appearance of conflicts of interest.
I will speculate that crowd source funding is more likely to generate headlines for dissatisfied investors from the middle class than for successful ones. The economics of startup investing require a sufficient pool of capital to:
1. Have access to quality opportunities.
2. Sufficiently capitalize each opportunity.
3. Invest in a large number of opportunities so as to increase the odds of hitting a homerun.
Few people have that much money. And crowdsourcing will attract both people with little inhibition toward spending other people's money and investors without the knowledge or resources or inclination to conduct due diligence.
To put it another way, real investors have a track record already. They don't need crowdsourcing.
But real investors also need capital, or it helps to have more capital. Crowd funding is a way to lower your risk. The big investor organizes the venture and finds opportunities. They put less money in but still get the same payout. The tiny investor gets less of a return on their money, but gets an opportunity to invest at a stage they are normally shut out of. They're paying for the opportunity essentially.
A large number of naive investors as partners increases the risk of an investment.
It's the reason that professional investors tend to put together deals with other investors they have previously worked with. It's the reason they form groups.
As I've said, crowdsourcing will attract dumb money. Smart money will tend to prefer not to become legally entangled with it. People with lower inhibitions will enjoy a feeding frenzy.
Don't misunderstand me. There will be widely trumpeted crowd source success stories.
It just won't change the fact that most people will lose their investments - heck that's even the rule for smart money investing in startups.
The only potential reason I can see is that crowdfunding also builds an audience with a stake in seeing your company turn out successfully, but it's hard to imagine how that would be useful in the case of a YC backed company.
For background, the JOBS Act that was recently signed removes a ton of regulation from the funding of small companies and specifically allows the creation of "funding portals" that allow non-accredited investors (ie. regular people) to invest up to $10k/year in startups.
Seems like a "curated fund" where organizations like YC pick the companies and crowdsource funds would be one of the better applications of the new legal permissions (the potential "worse applications" being boiler rooms pushing hot new photo sharing startups to midwestern pensioners).
However, it's not like YC and other funds are hurting for cash so what's the incentive for PG to need to crowdsource funds in tiny amounts like this when they have plenty of institutional funding? The limits are 2,000 investors and $10k/investor for a max of $20m of crowdsourced funding per company (assuming every investor makes $100k+ and maxes out on one company which would be stupid).
It'd be like Scrooge McDuck stepping outside his money bin to pick up pennies off the street.
I'm very interested to see how established VC firms react to JOBS Act. It's not like startups are finding it difficult to get funding right now, so doesn't this just create a subprime market for companies that the big players have no interest in? Coupled with the lifting of advertising restrictions and the appeal to amateur investors, this seems like the potential makings of the next big bubble...
The real potential for this is funding for non-tech startups. Tech can get funded (right now) but trying to get funding for a corner deli is next-to-impossible.
>Seems like a "curated fund" where organizations like YC pick the companies and crowdsource funds would be one of the better applications of the new legal permissions (the potential "worse applications" being boiler rooms pushing hot new photo sharing startups to midwestern pensioners).
The JOBS Act prohibits intermediaries from offering investment advice or recommendations on investments.
We've built a robust platform that will allow the HN community (and others) to make investments together exactly as you're desribing. I spoke to Sam Altman about this a few weeks ago at lunch. We're less than a month from launching so if you'd like to talk to me directly about this please feel free to email me with my username <at> gmail and we can talk further.
I don't think it can be a bubble when up until very recently it was illegal for 'crowds' to invest in private equity deals at all. How can there be over investment from small investors when there is currently zero investment from small investors?
The act removes restrictions on advertising of securities. It's specifically designed to get amateur investors to put money into small startup companies.
Hence, there will be large amounts of advertising aimed at encouraging the mass population to put money into risky investments that the mass population (seeing Instagram/Facebook/etc) think will make them rich beyond their wildest dreams.
Many bubbles are caused by a change in legislation that either incentivizes bubble participation or removes barriers to bubble participation.
We saw this with the policies the Bush Administration adopted to further encourage an ownership society via home ownership as well as ongoing incentives to own a house. We also saw that the changes to Glass–Steagall contributed to the economic meltdown.
I'm not arguing that we are or aren't in a bubble, but instead the legislative changes are common leading up to a bubble. Some would argue that the house bubble has been building via legislative change since the 1950s.
When he says "Bush Administration" and you say "Clinton's...Community Reinvestment Act" I think you mean to say legistlation like Roosevelt's New Deal http://en.wikipedia.org/wiki/New_Deal
I agree with your premise, and I'd add to it the governmental efforts that interfere with correcting the bubble, such as the Obama administration's work to prop up home prices.
However, it's not true that Glass-Steagall contributed to the economic crisis. If anything, it served to mitigate the problem. I think the argument here [1] is pretty slam-dunk:
<quote>
The 1933 Glass-Steagal Act [] prohibited commercial banks from owning investment banks ...
Just look at which organization’s have failed:
* Bear Stearns was an investment bank before it was sold to JP Morgan Chase (which includes a commercial bank).
* Fannie Mae were Freddie Mac were government sponsored entities before the government bought them.
* Lehman Brothers was an investment bank before it want bankrupt.
* Merrill Lynch was an investment bank befor it was sold to Bank of America (which is a commercial bank).
* AIG is an insurance company with no commercial banking division.
Remember, Glass-Steagal was passed to protect commercial banks from failure by forbidding them from investment bank practices like trading in securities and underwriting stocks and bonds. As you can see above non of the failed institutions are commercial banks that got in trouble through risky investment banking. Instead, it is the commercial banks that are providing some stability to the system by purchasing troubled investment banks.
I've mentioned it before, but there's a book called "Extraordinary Popular Delusions and the Madness of Crowds" that begs to differ on the point of "wisdom" being in the crowds. In fact, the title itself has the opposite opinion of crowds: Madness, not wisdom.
Crowdfunding a startup feels really "gimmicky" for YC -- just because someone raises a lot of money doesn't mean the product is great -- I believe there was a very bad RPGMaker game recently that received $20k worth of funding with barely anything done and stolen assets.
I'd like to think that VC's and the judges at YC have quite a lot of experience knowing who to pick, what characteristics to focus on, among other things. I also think money is one of the least important factors into joining YC, as what's more important is the mentoring, along with the network you become a part of. Finally, PG and the other mentors have put their name behind YC, but when you start to allow in companies that win popularity contests, you diminish the brand.
I do like the idea, and it's why I've helped people build websites that can do this (although I need to wait for the JOBS act to finish its evaluation by the SEC), and I've also signed up for Wefunder, a site dedicated for stuff like this. I just don't think this is a good fit for an incubator with the prestige of YCombinator.
The important part is not the money, its the opportunity for people like me to invest in growing companies. The money is just the way the risk is transferred.
Obviously, I would want the crowd sourced company to be a part of YC. The mentoring and the contacts are what make their companies successful.
But all that work takes energy and costs money, so we (the HN community) has to assume the risk. PG could structure it so that YC gets a stake in the company we fund. YC puts in the energy and the mentoring, and in exchange gets a stake. We put in the money and assume most of the risk.
Its a low-risk way to fund another applicant. I say low risk because there still are risks, namely that having more investors spells trouble and there are legal costs associated with us. But that's not a hurdle, merely part of the equation into how the profit would be distributed.
Yes however it could be for YC companies only, so you know you're less likely to get a dud. However I'm not sure how it would workout and it could get messy fast. I see a lot of potential pitfalls in crowd funding startups, there will be bugs at first.
I'd love the opportunity to invest pro rata with angel groups, TechStars, Y Combinator, and many VCs. The "gimmick" factor would depend largely on the structure and presentation of the opportunity.
As it stands, it's exceptionally hard to buy the startup market. The closest thing we have to an Index fund is Ron Conway, and he's not selling shares of himself. This is a huge missed opportunity.
HNWIs and institutions have varied and limited access to deals, and are constrained in the number of investments they can make. This exacerbates the problem that early-stage angel investing has sickening variance unless you're able to build a sizable portfolio.
The general public can't get in on these deals at all.
Because of this, I'd love to see top investors accept, as a limited partner, a crowd-sourced, retail-accessible "Fund of Funds" that operated on something akin to the Vanguard business model, charging a fairly minimal fee to buy the startup market. If that existed, I'd joyfully invest in it.
edit: this would also provide an interesting benefit the startups, particularly if they're consumer-facing, as it would dramatically increase the number of people who have a reason to care about them, their product and their continued success.
YC, good VCs, etc, aren't capital constrained, and do a ton of work to get their dealflow. So wishing that you could invest pro-rata alongside them with no fees is like wishing that ice cream were free :)
My apologies for being unclear. Pro-rata would apply primarily to angel groups that simply wanted to increase their attractiveness to entrepreneurs, by getting the ability to (very easily) multiply their financial firepower.
For VCs, I'm suggesting investing as an LP, and paying management and performance fees.
As it stands, the asset class is completely inaccessible to most retail investors. Even for HNWIs and institutions, it's difficult to build a reasonably diversified portfolio.
I feel as though with some work, the model could provide value to all participants.
- Startups get a broader range of individuals who care about their success
- Angel Groups effectively get more power.
- VCs get an LP whose whole business is structured around new venture investment, so sales and management would likely be simpler than with LPs that might be more fickle depending on who's running finance and treasury, and what else has happened to their endowment in the past twelve months.
- Retail investors and institutions get to buy a portion of the market that's currently inaccessible, which should provide a better overall allocation of funds.
The law that allows this to actually happen has been signed last week I believe. The barriers to investment have been greatly reduced, and with HN's collective wisdom, a PG-backed crowd-investing venture would steer clear of scammers and actually thrive.
The SEC is still reviewing the crowd funding portion before anyone can utilize it. Crowdfunding equity in startups has major governance problems that will be very difficult to solve.
I'm genuinely confused how people think it is a good idea to open up a class of investment with no controls. Why not just buy stocks where the companies have transparency and solid corporate governance?
And the SEC is right to do so. One of the provisions of this new law is that companies seeking unqualified investor funding (i.e. crowdfunding) are not required to disclose their finances for up to five years after going public.
As to simply buying stocks, IANAFinance Guy, but I believe there is an upper limit on the amount you can invest before having to be certified as an investor. Could anyone contribute a proper explanation of that?
As a non-accredited investor you can invest as much cash as you want in public companies. The crowd funding portion of the bill restricts non accredited investors to (I believe) 10% of income or 10,000 per year for risky start up investing. Further it requires investments are made through a platform.
Personally I am worried that 10000 is way too much for an asset class this risky.
I would expect we won't see many pre-series-A deals for at least a year, as the first few companies to do this are going to have to spend a lot of money on lawyers first since there aren't any precedents yet. Then once you have a couple dozen case studies the costs of replicating their success will hopefully come down enough to make this feasible for angel rounds.
The JOBS act makes this technically possible, but there are a number of roadblocks that would need to be surmounted before this could happen. First of all, any crowdfunding platform that plans to do this would need to register with the SEC. In addition, the crowdfunding site needs to do pretty thorough diligence on the companies listing equity and any major shareholders of those companies. Both of these provisions are mandated by the law.
Overall, it will happen, and there are people trying to make it so right now, but it's going to take a little while to sort everything out fully.
I think this would make HN a very boring place - if the community has a vested interest in whatever batch or whatever startups the bias is going to shift from mostly interesting content to mostly YC content.
Well, I don't know if this is the way to do it, but there have been times where my mind has been blown by projects submitted to HN where I wanted to communicate my utter amazement at what they had accomplished. I remember the time where a guy was offered a job by joshu in the comments for his submission.
Maybe we could start it out as a crowd-pledging venture where the community can pledge a commitment to contribute to the success of a product without the need for the creators' consent. If the creators accept the commitment, they can hash over the details with the committers subsequently.
One way to go about it would be to create a separate "pledge" economy from karma that still utilizes HN's default interface (for, say, karma>1000). Very flattr-like, I guess.
Problem: Crowdsourcing-for-equity quickly will result in >500 investors. This requires a C-corportation (not an S or an LLC), and requires full SEC filings and regulation. This means the company will be going public with no product, customers, or otherwise.
Honestly, I think there's a role for a Kickstarter-like fund for startups (as opposed to Kickstarter's focus on creative projects). Still no equity--the "prizes" generally would be promises of receipt of future products. But without equity, there's none of the legal wrangling associated with going public.
For new companies, such an entity would give: 1) market validation based on the number of financial contributors, 2) market research based upon feedback of pre-sale customers, and 3) relatively strings-free funding. In fact, I thought heavily about announcing my current project on Kickstarter until I read their terms and conditions. I'd definitely be using it to fund a new company, and funding one that would be difficult to call "creative".
I wanted to point out that depending on how rulemaking goes in the SEC this is not necessarily true: the SEC is considering allowing all crowdfunding investors (people who have invested under the crowdfunding exemption in the JOBS act) to be bundled together into a single entity, thus easing the transition from crowdfunding to a Regulation D deal and possibly eliminating the need for a company to incorporate as a C corporation.
In addition full SEC filings are not required under the new crowdfunding exemption.
I doubt YC would be interested in this, and there's no reason to tie such a venture to one news site, like HN. However, the JOBS act will allow for many crowd-funding ventures to get started, and SecondMarket, WeFunder and maybe Kickstarter will join in.
Any company that does this will need to take various safeguards to prevent fraud or unqualified people from raising money. KickStarter and LendingClub seem to have been doing OK managing related issues, but it will be harder with actual investments.
It will also be interesting if crowd-funding expands to crowd-companies, so people also contribute to a startup like they contribute now to open-source software. You will probably still need a core team of people committed full-time to the venture.
I'm not sure what benefit this would have to the YC partners, unless they have an unwanted barrier to funding more applicants because of lack of money, which I doubt. While it may be fun (and profitable) to crowdsource-fund at the seed level, why would YC give its services to a company they have no stake in for the sake of making the HN community money?
I'd see more value if the HN community itself were to pool together money and invest in the various classes, though this benefit may be completely negated by what the Start Fund does.
The benefit would be the return on investment, just like any other start-up they fund. In this case, their investment would be the time and effort they put into mentoring their companies and the legal fees they put into launching the crowd-funding. The return would be whatever they wanted it to be. The HN community would mostly have the capital at risk, not YC.
I would rather see crowdscreening of YC applications. Letting people apply for HN screening about 2-4 weeks before YC deadline, discussing application's strong/weak points, etc here on HN. You can do it here adhoc, but more formal approach with voting, might help to narrow down 3000 applications to 1000 or so.
We had a similar idea that we executed on during Mega Startup Weekend recently that was a lot of fun. It is similar to crowd screening in a sense, but really is more of a crowd sourced business idea validation engine. Imagine if there was a community / website where you could pitch your idea, have people vote on it and refine it. You could release your idea to as small or large a group or circle that you felt comfortable with. The goal would be to build a "tribe" around your idea that helps you refine it and validate it. We wanted to bake in the whole lean startup methodology into it. For example we had a step in the process called "assumption junction" where the tribe would list all the assumptions in the business idea and rank them by risk/importance. The community would then be tapped for building/refining surveys as well as for distributing the surveys or taking them themselves. Imagine if ideas where refined and validated by hundreds if not thousands of people before a single line of code was written. We called the idea "The Darwin Project", where only the strongest ideas survive.
This really jibed with coders we surveyed as they would love to be approached with ideas that are validated before they wrote any code. This could be a tool that finally empowers the non-technical business guys to vet their idea, get a critical mass behind it, and finally build enough value in the idea itself to build a team around. If anybody is interested in pursuing this I can put you in touch with the team that is running with this concept.
I'm hoping that with the passage of the crowdfunding act that will take effect in early 2013, we can all do what Yuri Milner and SV Angel are doing, and invest in all of the YC startups (or selectively invest in particular ones).
That law doesn't mean you can invest in any privately held company. True, there is a lower bar to entry, but the startups need a reason to want you to invest in them.
This is sentence alone means that there is going to be another full blown tech bubble.
Lower bar for entry to invests in startups.
just like lower bar to get a home loan.
The right way to get money from large numbers of people is to sell them your product, like Inpulse did, not to sell them your stock.