When I read this comment I thought, this is exactly the kind of comment that people will link to in 2021, as a "can you believe this guy" comment, just as crowdfunding (and what it evolves into) begins to replace all other forms of investing.
Everything seems like a bad idea when you first start. That's the very nature of the new idea; it's something nobody else ever thought was a good idea... or else it wouldn't be a new idea. But this doesn't matter. We, almost all of us, simply cannot break outside of a paradigm. It has to be broken for us. The few that can break their paradigm are the same folks we read about on Forbes and Fast Company.
When I read this comment I thought, how does this guy not realize that crowdfunding whole companies from unsophisticated investors isn't new, it's very old.
And in fact, the regulation we have around it is because the problems didn't disappear after starting, they grew, as fraud in such a market is incredibly easy to commit, incredibly hard to improve, and extraordinarily lucrative.
Perhaps enough has changed with improved distribution of reputation to make it work this time, but... it's not new. It's old. It's widespread. And it's a common vehicle for fraud in every time and every place that it's existed.
Thus, I find myself thinking that yours is the kind of comment that people will link to in 2021 as a "can you believe this guy" comment, about how naive it was for you to believe that this time was different.
What is so new and special about crowdfunding? This is basically the stock market (which already gets its share of ruining amateur players who don't know enough) but taking away all the rules required to participate.
There's no oversight, no required disclosures, no stock/ownership, no liquidity, no insurance, no fallback protection, no guarantee of product, etc.
And this is supposed to replace all other forms of investing? I'm sorry but that just seems very naive.
You answered your own question so eloquently that I'm affraid I cannot offer too much more.
Airbnb removed all the expensive rules and oversight intrinsic of the hospitality industry and opened the market, leading to new gains in market efficiency that are tough to compete with.
Uber did the same for personal transportation.
Crowd funding does this for investing. The real gains will be seen when the intelligence and agility of emergent, fast-moving fund pools are able to out-pace and out-perform traditional funds, indexes, and VC. That will change a lot of things.
FTR, I am talking about investing, not just preorders, but this may not mean that you get stock certificates in all cases.
It's not just about the lack of oversight. If that's all it was, I wouldn't bring the concern up; it'd be banal.
The problem is that startup investing is nothing at all like investing in public company stocks.
Venture capitalists don't back a single company. The majority of startups fail. Pushing all your chips in on a single startup is like going all in on a queen high hand. Instead, VCs invest in whole portfolios of companies.
But that's not the only difference. Because most companies fail, there's a theme to VC investment theses. And it's not obvious, because it drives founders (who are atypically savvy about startups) batshit. It's this: the winners have to pay for the losers. A decent shot at a 2x return sounds like a no-brainer, but it isn't. The returns on the wins have to be so good that they make up for all the failures.
Then there's dealflow. Good VCs get preferred access to the good startups. Most startups that raise money --- and all the startups that fit the "win will pay for other losers" mold --- plan on taking more money. If your first round is low 7 figures, your second round is going to be 8 figures, and probably not crowd-based! If you know you're going back to PE/VC for money, you care about who take money from this time. So if you can take money from Sequoia, you do. Sequoia gets the best deals, and crowd-funders get adversely selected into crappier deals.
Most VC funds lose money. Those are funds whose investments come with control --- something no crowdfunding investor gets. They can fire the CEO. They get bespoke due diligence, not to mention the VC's network of other firms to syndicate with on future investments. And when they close a deal, they tend to get preferences built in. Despite all those advantages, they still lose money. Crowd-investors get none of those things. Why would they do better?
This is before we get into how comically subordinate common shareholders of private companies are. Startups routinely do things that would generate shareholder lawsuits in public companies. They get to do those things because they are taking money from people who know the game. Consenting adults. The crowdfunding public can't do that.
And finally, why do we grant the premise that normal people are capable of selecting startups to invest in? They're not even able to do that with public companies. In 2015, companies listed on the major stock markets have proven an ability to drive revenue. We know where their money comes from. Venture capitalists have to prognosticate about that. How are normal people supposed to compete with them?
1) Removing rules in any industry will almost always lead to increased "efficiency" in some manner. That's just a mathematical function of less layers in the way.
2) Airbnb, Uber and others did not "remove" the rules and oversight. They're just skirting the law and are not completely legal nor right in every market. We haven't seen anything final on how these companies will be regulated in the future nor what happens due to the various loopholes they create in consumer protection.
3) Airbnb, Uber and others deliver something in exchange for your purchase and fall under the basic commitment of all companies who provide products/service to not just take the money and run. They're also relatively small purchases with no lasting damages.
4) Finance is much more complicated and regulations are necessary for consumer protection, especially when dealing with something like cash that can have direct and lasting impact on people's lives with the amount invested and the reliance on future stability and returns. Like the other comments have said, it's been proven over and over again that deregulating actions can cause massive fraud and losses.
This is the same reason we have regulations for medical practice and law and banking and countless other situations where safety is paramount, even at the cost of some inefficiency.
I dunno, crowdfunding a company's investment rounds sounds a lot like an IPO to me. But with less oversight. I can't really see how this is a good thing.
Exactly. There's nothing especially novel about the concept of raising funds as widely as possible, and the reason that regulators have historically made it as difficult as possible to solicit funding for immature ventures through slick [recorded] pitches to as many retail investors as possible has nothing to do with the absence of the internet as a delivery mechanism until recently, and everything to do with people losing their shirts.
A few ideas that seem bad turn out to be good. Most turn out to be terrible, especially when the paradigm they're breaking was established precisely because most of the aspects of the idea have been tried, tested, and proven to be terrible.
Everything seems like a bad idea when you first start. That's the very nature of the new idea; it's something nobody else ever thought was a good idea... or else it wouldn't be a new idea. But this doesn't matter. We, almost all of us, simply cannot break outside of a paradigm. It has to be broken for us. The few that can break their paradigm are the same folks we read about on Forbes and Fast Company.