Crowd Investing: Wefunder

by ysilver • 14 years ago

174 58 14 years ago

dclaysmith2• 14 years ago

I think the need to stop SOPA and the need to legalize this funding model are apples and oranges. I would love to see some changes to funding laws but many of these laws exist to prevent the defrauding of smaller, less "sophisticated" investors. Simply making the investment legal wouldn't do much without modifying the disclosure requirements the start-up faces. These disclosures will remain very important to prevent scams.

So, great idea but not simple. And not a "cause" like fighting SOPA was...

ysilver• 14 years ago

To me it's about getting congress to legislate in favor of startups and young tech companies rather than big business interests. With the SOPA protests, we showed what is possible with a grassroots effort. I think a similar effort could work with startup funding.

zapnap2• 14 years ago

Agree that it's largely apples and oranges. I think the poster was more calling attention to the fact that SOPA showed a lot of people that their voices do matter, and can affect change in government. So in that way, at least, they're related.

Fraud is certainly a concern, and the reason that the laws were introduced in the 1930s in the first place. But the S.1791 bill has provisions for dealing with this through (relatively) strict individual investing limits and reputation via crowdfunding intermediaries. A balance needs to be struck between protecting "less sophisticated" investors and giving those of us who want the opportunity the chance to get involved, help support entrepreneurs, and create jobs (on main street and in silicon valley). There's still a lot to be hashed out of course, but this would be a step in the right direction.

Disclaimer: I'm one of the people who worked to put the petition together.

B0Z• 14 years ago

One of the things The Securities Act of '33 was established to do was to protect the general public from themselves and from predatory brokers who were loaning a generally ignorant public caught up in speculative bubbles. Brokers were lending people up to 2/3rds of the face value of stock they were purchasing. When the market started to get cold feet and rumors ran rampant, people were selling every stock they owned just to cover the amount they were leveraged.

I haven't read the bill before Congress, but I would think if there are provisions that prohibit borrowing as a mechanism for financing stock purchases, this would benefit the start up ecosystem. The system in it's current state only benefits the very, very wealthy, and forces young start ups into term negotiations with people who do it for a living.

Methinks there is / will be heavy lobbying on behalf of the major investment banks who would naturally oppose any new members in their club.

http://en.wikipedia.org/wiki/Wall_Street_Crash_1929

chernevik5• 14 years ago

Fraud is _the_ concern. It isn't hard to imagine a crowdfunding bucket shop flacking shell companies to clueless investors who think they're buying a piece of the future. You can't fit much due diligence expense into a $2mm funding round.

I'd also worry about crappy documentation / followthrough. What's to stop management teams from using such ventures to roadtest ideas and architecture and fit, "fail", then launch for real without the crowdfunders?

Nor need we go even that far. What about cronyisms in investment recommendation, management hiring, consultant hiring?

You or I might be able to assess the network reputation of various players and intermediaries. But there are a ton of investors who can't spell 'DNS' and lack the self-knowledge to know they can't.

I'm as anti-regulatory as anyone I've seen on this forum, but this to me looks like trouble. I'm sure you mean well, it _sounds_ like a good idea. But if you imagine the broader universe of potential funders and funded, you may begin to see the problems.

JumpCrisscross• 14 years ago

There used to be a time when anyone could sell shares in any company. That didn't work out and so we got the Securities and Exchange Act of 1933. Crowd-funding isn't fatally flawed, but it needs a lot more time to integrate the last 400 years of capital market development history.

npt42792• 14 years ago

Limiting an individual's investment to a maximum of $1000 goes a long way to making sure Grandma doesn't lose her life's savings. As does the requirement for companies to use an Internet intermediary that performs background checks, verifies identity, holds funds in escrow, etc. The world is different from the 1930's.

jerf• 14 years ago

What's the difference between being able to invest $1000 and $0? That's not helpful to anybody. If I want to invest $30,000, I have to go find 30 startups? That doesn't make any sense.

drhowarddrfine• 14 years ago

You still can. My company, for instance, has but two investors holding all company stock. My wife and me. If we wished, we could sell a portion of our company to others even though it is not publicly traded. Privately held companies like ours can still sell portions of their company to other investors, or even take investment capital without selling private stock.

_delirium• 14 years ago

You can even sell to (up to 35) non-accredited investors, as long as you in good faith believe that they are "sophisticated" and understand the investment, and you provide them with some additional required financial disclosures. Afaict, most startups avoid that though, mostly because of worries that having non-accredited investors might complicate future financing rounds.

mapleoin• 14 years ago

All Americans—not just the wealthy and well-connected ...

How about we turn that into:

All people—not just the wealthy and well-connected Americans ...

MikeNorman• 14 years ago

This is super important. Everyday Americans should have the right to invest in businesses. Think of the jobs we could create? Government shouldn't be telling me I dont know what Im doing if I want to help a friend start a company that I think can succeed. I get that unsophisticated investors need some protection, but $1000 seems like a reasonable risk to allow folks to take on something they believe in.

appswell• 14 years ago

I fully support this! To someone's point, we have an outdated system of balances that are based on 400 year old common law, and put in place as a consequence of the great depressions. S.1791 is a good bill, that puts the proper protections, capping investments at $1k. Not riskless, but appropriate amount of risk for investing. A fairer shake than the individual investor gets in the days of algorithmic, fraud ridden Wall street, or for that matter, the keno tickets the govt is happy to let them purchase.

lukeschlather• 14 years ago

It should be stated as a percentage of gross income. Magic numbers are bad, in software and law.

zeratul• 14 years ago

We are getting the news too late. Did you know that there are 7 bills that might change how startups operate?

    H.R.3427 - Startup Technical Assistance for Reemployment 
              Training and Unemployment Prevention Act
    H.R.3571 - Entrepreneur Startup Growth Act of 2011
    S.1965 - Startup Act of 2011
    S.1826 - Startup Technical Assistance for Reemployment 
             Training and Unemployment Prevention Act
    H.R.2941 - Startup Expansion and Investment Act
    H.R.1114 - StartUp Visa Act of 2011
    S.565 - StartUp Visa Act of 2011

We need a web service that is more robust than http://www.opencongress.org/ . We need a web service that has proper data mining, visualization, and notification system. The big guys have their lawyers - we need a proper web service. Who can help to build that?

vyrotek• 14 years ago

Plenty of people would like to. But, more importantly... who will help pay for that?

marcidale3• 14 years ago

At POPVOX, our first investor was Tim O'Reilly. Legislative advocacy is a huge market -- and one in great need of disruption.

untog• 14 years ago

> Who can help to build that?

I would love to. But it's difficult to justify when there is no payoff for it.

thinkcomp• 14 years ago

That's what we're working on with http://www.plainsite.org.

davidcuddeback• 14 years ago

Well, there's already https://www.popvox.com/. They show bills currently in Congress, organized by category or what's most popular on the site. They also send alerts that recommend bills based on your interests, although it seems to be in the alpha stage right now.

I'm not sure if Popvox has all the features you have in mind. Rather than starting a new web service from scratch, you might find it easier to request certain features from an existing one.

marcidale3• 14 years ago

Thanks, David - yes, we would love the input at POPVOX (info@popvox.com)

New alerts system is imminent, so please check it out.

BTW - we had our own go at crowdfunding for POPVOX. I explained on Quora how we had to turn down non-qualified investors: http://b.qr.ae/nXFsiM

We ended up with a crowdfunding variation to raise the money for our iPad app for Congress through Appbackr (MarkUp - the first app designed for Congress http://bit.ly/uLSrOT). See article in Entrepreneur magazine on the fundraising: http://bit.ly/rKQSzS

marcidale3• 14 years ago

Here are links to take action on the bills you list. Your message will be sent to the appropriate legislators and aggregated on the public bill report so that you can see how sentiment is shaping up across the country. (The "sentiment across the country" part is important. Even if everyone in Silicon Valley thinks this something is great, the case has to be made to legislators who represent very different districts.)

https://www.popvox.com/bills/us/112/hr3427

https://www.popvox.com/bills/us/112/hr3571

https://www.popvox.com/bills/us/112/s1965

https://www.popvox.com/bills/us/112/s1826

https://www.popvox.com/bills/us/112/hr2941

https://www.popvox.com/bills/us/112/hr1114

https://www.popvox.com/bills/us/112/s565

robmay4• 14 years ago

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.

dclaysmith2• 14 years ago

> 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• 14 years ago

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.

chernevik5• 14 years ago

+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?

robmay4• 14 years ago

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

gojomo3• 14 years ago

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.

tptacek3• 14 years ago

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".

te_platt• 14 years ago

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.

robmay4• 14 years ago

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.

rmc• 14 years ago

protecting people from themselves

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

chernevik5• 14 years ago

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.

webwright• 14 years ago

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.

robmay4• 14 years ago

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.

drumdance• 14 years ago

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.

tptacek3• 14 years ago

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

ssharp• 14 years ago

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?

SaidiSmenk• 14 years ago

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?

ck2• 14 years ago

You really want this current congress to set it's eyes on something?

You honestly believe that will make something BETTER?

They blocked something as basic as consumer protection for over a year and would have kept doing it for years more if they could have.

It's an election year, forget it. Try again in 2013 maybe.

lcusack• 14 years ago

This should go without saying - but please don't use the petition to populate Wefunder's mailing list.

jchung• 14 years ago

We should all support this. We could unlock millions of dollars of crowd-sourced funding for startups, supporting more innovation, creating more jobs, and driving a healthy democratization of the spirit of investment.

As an added benefit, I think it is worth considering that allowing small-scale investments will help to educate a large number of Americans on the basics of investing and financial management. I think we'll all agree that we wouldn't want folks investing their life savings, but $1,000 isn't going to break the bank.

vaksel• 14 years ago

I think something like what Goldman Sachs did with Facebook would work.

You create a Startup Mutual Fund...where regular folks can sign up and deposit money into.

The fund then uses that money to invest into companies. i.e. they'd issue a notice that a week from now they'll be investing into Startup Z and each share would cost $X(actual cost per share + 10% fund operating premium)

If the round is limited, the shares would be assigned on first come first serve basis.

Essentially a venture capital company but without requiring huge investments to participate.

Then also create a marketplace where shares can be sold on the secondary market.

Fund's revenue would come from a) fund's fee when purchasing b) fund's fee for secondary sales c) yearly membership fee.

And this way you essentially just have the one investor and those who want to invest small investments won't need to get accredited to get into the game.

dxbydt• 14 years ago

Democratizing startup investing is a much bigger problem than democratizing very simple speculation, so simple & straightforward a child can figure it out. Look at google. Its trading around $580. Just 2 weeks back it was well over $610. So you say, okay in a month it'll be back above $610. The 1 month otm call on goog is $10 for a 600 strike. You check your pockets. You have $10. You figure, you plonk down $10. Then check back on March 17th. If goog crosses $610 you make the difference. Here I'll even do the math for you: (580,-10),(590,-10)...(599,-10),(600,0),(601,-9),(602,-8),...(610,0),(611,1),(612,2)....(650,40) etc. so that's the list of tuples, one has the google stock price & the other the money you make. So you break even at 610 & after that the sky's the limit. So can you bet $10 ? No. Why not ? Beats me. You can put down $1000 for a 100 bets. But you say, I don't want 100 bets. I just want 1 bet. 1 bet is $10. I have $10. Let me bet. Nope. Sorry. You think this will change anytime soon ? If you can legalize single option trading, you can structure any startup investing on top of that. Many people will lose many $10, but some people will make $10 too, and life will go on.

frobbin• 14 years ago

What if you got a 'startup investor license' with the same effort and cost as getting a real estate license? That way only the motivated who prove some basic knowledge can participate. A side industry of investor courses and test study materials would spring up. Even as someone trying to raise funding I would like to educate myself with such a course.

padobson• 14 years ago

I love this because it is effectively disrupting wall street from a legal perspective. You don't need giant public markets anymore when you have the internet, and entrepreneurs that know how to build applications that generate money from lots of people should also be able to raise money from similar people.

Although, if we as a an industry are going to focus on something legislatively, I think we should start thinking about going on the offensive in the copyright war. The MPAA and the RIAA are going to regroup and then try to push a similar piece of legislation through. If we go on the offensive now and attempt to pass legislation that will protect user-uploaded content sites and apps like MegaUpload, Dropbox, Box.net, and others, then the web will be a much better place for eveyone building apps like these in the future.

vsl2• 14 years ago

The key here is the "accredited" investor restriction for funds that invest in anything other than the most vanilla of securities (i.e. stocks and bonds). This is also why most of us cannot invest in hedge funds or private equity funds.

In protecting people from themselves, the government is limiting participation in a potentially very lucrative area of investment to only those with money (the rich get richer). I don't believe that everyone is equipped with the financial knowledge to deal with the risk associated with participating in alternative investment funds, but I'd much rather that everyone have the opportunities to take the risks that they choose. Casinos are legal in many areas, strip clubs are legal in even more areas, and shopping malls are everywhere - all of these cause people to take arguably unnecessary risks with their financial health (and some would say even greater than investing). Particularly with the plethora of financial information available on the Internet, the everyday Joe has more resources than ever.

I'd love to see Congress eliminate the "accredited investor" requirement for investing in alternative funds so that everyone can have the same access to investing in startups, private companies, etc. I'm sure more than enough funds will spring up to meet investor demand, this being a capitalistic sociey and all.

Finally, startups can choose to avoid the problem of many small direct investments by ordinary investors (i.e. too many people to report to). by accepting money only from the investment funds or from few large investors, if such sources are available and willing. If such sources are not available to a startup, then you have to go with the options you have, (e.g. many small direct investors, self-funding, fail), as has always been the case.

dancole• 14 years ago

This is a great way for Wefunder to attract future funders to their site. Besides the traditional name and email address for a signup list, they're also finding out how much people are willing to fund each year. To add to that, it's also an open list where you can see who and how many people are going in on it. One way to solve the chiken-and-egg problem.

billshander• 14 years ago

Definitely - kickstarter and peer-to-peer lending have proven the greater public can make decisions like this - especially if there are some protections and risk-abatement tactics such as background checks for founders and maximum investment amounts per company.

Crowd Investing: Wefunder

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