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Will VCs make better investments, on average, than retail crowdfunders? Probably. That's their job after all.

Does that mean the law should protect crowdfunders from themselves? That I'm not so sure about.

I can think of no more "Rich Get Richer" law than the accredited investor law [1]. It literally says: if you aren't already rich, you don't have access to this entire set of opportunities that could make you rich.

This was less of an issue when we had a healthier IPO market. With more companies staying private now, and more of the actual IPOs coming later when there's less growth left, how can we continue to deny retail investors (read: the not-rich) access to the best opportunities?

Many of us on HN can start tech companies to gain access. Maybe the person down the street can't do that, but once in a while they might have valuable insights into an industry or the people in it, insights that others (yes even VCs perhaps) lack. Saying "sorry, you can't play this game" seems immoral to me. How can we give regular folks -- non-rich, non-tech people -- access to the same opportunities? If not the current crowdfunding laws, then what?

[1] https://en.wikipedia.org/wiki/Accredited_investor#United_Sta...

> I can think of no more "Rich Get Richer" law than the accredited investor law [1]. It literally says: if you aren't already rich, you don't have access to this entire set of opportunities that could make you rich.

Or alternatively "If you aren't already rich, you don't get marketed at by people offering opportunities so bad they've been passed on by high-risk investors who underperform the returns the non-rich get on less risky asset classes despite working full time on managing their investments whilst having significant power to induce exits in their favour." Or rather, the general public actually does have the opportunity to invest in startups if introduced by genuine friends and family but random mountebanks don't have the right to run slick campaigns to dupe non-rich people into believing that Startup X is a good place to put life savings despite offering lower expected returns than a roulette wheel and zero liquidity. I mean, it'd be nice if the law was as restrictive on more blatant attempts to scam like penny stock pump and dumps and MLM, but it's difficult to argue the general public would be better off for having comparatively sincere people beguile them with Powerpoints involving hockey stick curves.

It's not a "Rich Get Richer" provision when it's obvious that on average the poor will get poorer from random startups being able to present themselves as investment opportunities to them.

That makes sense and all, but the definition of accredited investor is tied to net worth and not knowledge. Which means that maybe you can't scam poor people, but there are plenty of gullible rich people with net worth over the $2 million in liquid assets or whatever it is these days.

Maybe treat being an accredited investor like a driver license and not tie it to your net worth?

Much easier to develop a roughly accurate heuristic for assessing people's ability to afford to misjudge risk or liquidity than to develop a roughly accurate heuristic for assessing their ability not to make such misjudgements.

How about a terms-based knowledge test, like getting a driver's license? The US loves standardized testing!

Driver testing is run at the state level. The US hates federal organization.

The difference is that when a millionaire loses $100k, they're not going to feel it the way someone who's taken out a second mortgage would.

I don't know what other financial services the Accredited Investor Rule deprives ordinary consumers of, but to the extent that it deprives them of access to VC investments: it's increasing their wealth. Most VC firms fail. A significant chunk of assets under VC management are there as part of a hedging strategy for a much larger portfolio; it's not parked there with the expectation that any one person's retirement can depend on it.

> I don't know what other financial services the Accredited Investor Rule deprives ordinary consumers of, but to the extent that it deprives them of access to VC investments: it's increasing their wealth.

By that same logic, we should deprive engineers of the ability to start companies, and push them instead towards AmaGooBookSoft. We would undoubtedly be increasing their wealth.

>By the same logic...

It's a very fair point.

I just wanted to note something about this that is part of a broader pattern of something I notice about HN posters. They will generally argue in favour of personal liberties, and even go so far to do it based on principle, but only when it comes to a case where liberties they personally care about are taken away. There is a contrast between this argument for liberty based on principle--which is by definition libertarian ideology (but note: not necessarily US Libertarian Party followers)--and the pattern of anti-libertarian rhetoric seen around here sometimes in threads where it comes up.

It seems perhaps there is a disconnect: people appear to generally care a lot about their liberties when suddenly it comes the ones they care about being taken away, and they will be argued for them based on principle. However When others generally want liberties they care about, then, that's apparently a different story.

Sometimes it is different person being attracted to different topic. E.g. libertarians like to argue when it is easy for them to defend their opinions and are silent when it is harder.

Moreover, most people opinions are not systematically based on ideology - they are based on their own observations about what worked well in their opinion.

I think you've confused positive with normative arguments: you're rebutting a normative argument I did not make. I'm simply describing a fact: the Accredited Investor Rule is not excluding average people from processes that, like the rich, would make them richer.

Why not to create a massive crowd-funded or publicly traded VC fund? (as opposed to crowd-funding for a single startup)

Thus more people could expose themselves to VC but in a diversified manner. Also, more capital would be available for startups.

Again, selection problem. Most VCs can do a raise on their reputation and not have to deal with quarterly reports; most funds are 5-10 year closed. Great VCs wouldnt want to deal with the hassle of going public and reporting losses every year for five years straight. Also, startup valuations can be....creative.

Someone has to get paid to do that, so now the premise of equity crowdfunding has been reduced to: in the best case, you can crowdfund another venture capital firm, and pay a tax out of your returns that wealthy investors don't have to pay.

And, again: most VCs fail! A lot of money is invested in VCs not in the expectation of those investments being lucrative, but instead in the hopes that VC returns are uncorrelated with the public markets. But no retail investor does that.

> And, again: most VCs fail! A lot of money is invested in VCs not in the expectation of those investments being lucrative, but instead in the hopes that VC returns are uncorrelated with the public markets.

Are there meta-VC's that treat VC funds like startups and invest in multiple VC funds with the understanding that most will fail? That is, can you confirm my suspicion that it really is turtles all the way down (or up)?

Most VCs raise money from things like pension funds, which manage a lot of money, and I believe invest in multiple vcs.

They Usually invest a very small amount of their money in this sector, usually a fee percent at most.

Fund of funds exist. They typically become LPs in PE funds and Hedge funds. Their value add is that they provide fund selection for sovereign funds / pensions / endowments that feel that they do not have the expertise to become LPs directly in the right funds (I find this value add to be bs, but I guess I'm unfamiliar with how clueless someone directing a random sovereign fund could be).

Larger VCs will become LP in smaller upstart ones to have better visibility into earlier stage companies [1].

[1] Bessemer, Emergence, Social, and Sapphire are LPs in Saastr Fund http://www.saastrfund.com/strategic-partners-1/

> pay a tax out of your returns that wealthy investors don't have to pay

Can you expand on this?

This is specifically not allowed under the JOBS ACT. I wish it were. I'd dedicate my life to it.

Trust. A crowd-VC-fund would have two options: either delegate decisions to a few powerful administrators or put everything up for direct voting.

Administrators would be terribly prone to be influenced by more or less open kickbacks, because what they could potentially skim would far outweigh their personal investment or any piece tag you could put on whatever little reputation they might have. A conventional big name VC won't ever be impressed be the CEO of the startup he funded meeting him at a fancy restaurant, not so sure about the representative of some hypothetical crowd-VC subreddit. And keep in mind that most methods used to keep regular investment funds accountable cannot be applied to VC investments.

The "everything up for a vote" path has a trust problem as well because that kind of popularity contest is totally unpredictable. A perfectly rational crowd today could tomorrow decide to go all in on a fake startup promising the energy revolution based karmavoltaic modules. All it would take is some vocal minority that is good at agitating everybody else into submission through the online arsenal of strawman tricks, shaming, tactical trolling and the like.

Allied Minds [1] is a publicly traded VC fund (LON:ALM). It is a bit unique in the sense that, in addition to doing traditional VC equity investments, they fund technologies at very early stages and build companies aroud them.

[1] http://www.alliedminds.com/

Investment companies usually have a different legal structure than a typical startup and are subject to different regulations. You could however start a conglomerate, like Berkshire Hathaway, that invests in startups like VCs do.

So a "fund" wouldn't legally be allowed to raise money using equity crowdfunding. But a "conglomerate" that invests in startups structured as a C-Corporation could raise money through equity crowdfunding. Hope my reply helps!

> Why not to create a massive crowd-funded or publicly traded VC fund?

Because then you need to find someone with the skill to be a VC fund principal who is satisfied to work as an employee magnifying other people's capital rather than magnifying his own.

Or, have a fund run by someone without the requisite skill.

It's illegal, at least in the United States. Why? Because venture capital is considered too risky to be marketed as a public security. There are VC ETFs sold on the Hong Kong market.

I can see this working for a few niche markets that fall in between the gaps of kickstarter and VC. One market that immediately comes to mind is microbreweries. Small to midsize microbreweries have pretty good margins because they are usually selling their beer directly out of their taproom (as opposed to distributing their product, which results in a few other people taking a cut of your sales). But expanding to the next size up can be fairly capital intensive (relative to the size of the business) and there are not a lot of ways to finance that. My guess is it's a lot of friends and family money, or 'scraping the barrels' for cash in the company. Some breweries have managed it through kickstarter. But kickstarter seems to work better for product focused companies with a pre-order dynamic.

The advantage of crowdfunding would be that you can offer some upside to your supporters (M&A[1] or maybe dividends?). Assuming you are already established and are trying to take it to the next level, you can generate support for your crowdfunding campaign by advertising to your existing clientele. They already have a connection to the business and that can also result in creating a small army of brand ambassadors.

There are probably a few other niche businesses out there that could follow this playbook. Use existing local support/community to help fund expansion. One possible hang up is that there would need to be a path to an exit or some type of return. With the microbrewery market, as mentioned below, M&A is happening, but for other markets that don't have that, I would be interested to know if dividends are a possibility.

[1] There is a decent amount of M&A activity going on as the major beer companies try to maintain market share as the micros take over.

There's embedded survivorship bias here that is distorting your analysis. The median successful microbrewery does a fine, if quiet, business. But most new business starts, especially in the food and hospitality sectors, fail. Lots of attempts at microbreweries never find a market fit, or are unable to execute with sufficient margins to stay afloat.

Kickstarter works because nobody funds a Kickstarter with the expectation that they'll be able to return to those funds later to fund college, a house purchase, or a retirement. That's not the case with equity crowdfunding.

Oh, I am in no way claiming this isn't a risky investment. But I have seen a trend in the microbrew market where a lot of these failures[1] tend to occur as they try to expand. The general pattern is they load up on debt to fund expansion, but hitting even a few bumps during that time (slump in sales, construction delays) can send things into a tailspin. As mentioned in the previous post, the economics of these taprooms are really good (500-600% markup, costs about $1 to make a pint, which they then sell for $5-$7), so microbreweries don't quite face the same pain points that restaurants do (super thin margins). But expanding operations tends to be a huge pain point, because unlike a restaurant, you need to build out the new brewhouse, and then there is a lead time before your brewhouse is pumping out beers (the more sought after beers these days require a decent amount of fermentation/aging). So if you took out a risky loan to finance the expansion, as you can imagine, it only takes a few small things to go south before the whole operation tanks. But if you finance the expansion using equity, you would probably have a lot more flexibility as you don't have to worry about default.

My thought is that crowdfunding could be a good financing option for someone like this[2]. They have already established themselves, but are trying to get to the next stage. If I was local beer fan, I might support them on kickstarter, but if they offered a crowdfunding option, perhaps with some perks like an annual tasting, than I would probably be a lot more enthused. Also keep in mind, that a lot of specialty microbreweries already have 'fan clubs' that cost a few hundred dollars a year. In return, you get access to limited releases. It seems like a creating a 'lifetime fan club' for a few thousand dollars would be doable, with the added bonus that the supporter gets some equity.

[1]http://www.sfgate.com/food/article/San-Francisco-s-popular-M... [2]https://www.kickstarter.com/projects/findlaybrewing/findlay-...

BrewDog is an increasingly bizarre case study in the microbrewery/crowdfunding space. Their 'Equity For Punks' money- raising efforts received a wide range of legal opinions in different jurisdictions.

Pretty sure no one expected -- given their very loud anti-'sell-out' rhetoric -- that they would sell a 22% stake for £100M to a private equity firm (TSG Consumer Partners) and actually deliver a serious return to said 'punks.'

Edit - 'Serious Return' per BrewDog's own reporting at anywhere between 2,765% and 177% depending on the 'fund' you invested in (https://www.brewdog.com/lowdown/press-hub/tsg-deal)

Oh wow! I am only mildly familiar with them (mostly been hearing about how they have been trying to enter the US market). I didn't realize they crowdfunded. But yeah, this is a really good example of why microbreweries could be a good niche for crowdfunding. Operating your own brewpubs is a really good business because of the markup, but the challenge is in the expansion phase.

Also, looks like they are offering another round of equity in the US[1]. I was under the impression that crowdfunding was limited to $1M, but looks like they are raising $50M under 'Regulation A+'. Not sure what that is.

[1]https://www.bankroll.ventures/deal/brewdog/

>> VCs survive by maintaining portfolios of companies in which 1-2 in 10 survive (most VCs fail to generate returns that beat the public markets). This means more than that you need 10 companies --- it also governs the kinds of companies you can invest in. Despite being a message board in part dedicated to startups, it feels like very few of the relatively specialized people here understand why VCs don't back quietly, steadily profitable companies.

You're assuming all VC funds are like SV/NYC type funds. Most VC funds in FL (and I'm assuming most of the US), are small funds that invest fewer than 10 times a year, and take large equity positions in companies that are steadily profitable (but will NEVER be crazy big). They prefer companies that are making profits over companies that have growth potential, low risk low reward funds.

You aren't describing venture capital. By definition, venture capital is high risk and therefore must potentially have crazy big returns.

That sounds more like PE than VC.

And whilst PE might be ostensibly lower risk than VC, PE firms' ability to not lose money depends entirely on their ability to actively restructure companies and find a buyer, two things retail investors have no chance whatsoever to do

Oh I agree that equity crowdfunding is generally a bad idea for all involved.

> There are logistical hassles with adding retail investors (in any form) to your cap table.

Sure, but do they outweigh the advantages?

Consider that Mormonism is the fastest-growing (by percentage) world religion. And that Bitcoin is the best-performing investment of the last decade. And that there are so many billion-dollar MLM companies.

Don't forget fees. Intermediary fees and compliance costs (e.g. to draft a proper PPM and retail-ready subscription agreement) are--in my experience--2 or 3 times similar costs for a traditional VC round or venture bank loan.

Well until now retail investors were shut out of opportunities reserved for VCs even if they only wanted to risk small sums they could afford to lose. Crowdfunding seems like a godsend for the small indie film industry where it's hard to get attention from major investors but donations from friends and family may be insufficient to raise a budget.

I realize the prior rules were there to protect investors from losing their shirts, but simply excluding people without changing the problematic behaviors in the marketplace means that it's harder than ever for small investors to accumulate any kind of meaningful investment capital.

I think while most understand why VCs behave the way they do, there's a general understanding that a well run non-traditional fund where investments are made in well-run companies like Basecamp, for example, would over the long run beat the returns of the gambler style that's so prevalent right now. I don't know if that has ever been tried before, if not then we need to wait for the Warren Buffet of tech investing to prove us right or wrong.

There's no evidence that a portfolio of Basecamps would beat a portfolio of Twitter-hopefuls, and a lot of reasons to think it wouldn't. Most companies fail. They fail when they're carefully run companies on organic growth paths, and they fail when they're reckless moon-shots.

There's an important fact I think people here miss. We tend not to consider a quiet, well-run small organic tech company that generates great salaries for a team for 10-15 years a "failure". And, in the sense that it's lucrative and pleasant and enriching for everyone directly involved, it isn't. But if it doesn't ultimately generate liquidity for investors, it is, for those investors, a failure. Startup investing isn't a charity run by pension funds for the benefit of software developers and product managers, or even for the users who enjoy the products built by those teams. For investment to make sense, it has to generate returns --- not just steady ticking returns, but enough to offset all the other failures.

Companies like Basecamp are great. Incidentally: they're the only kind of company I ever think about starting! But we shouldn't kid ourselves that they should attract investment dollars. Reckless moon-shots are intrinsic to the model of investment-funded companies.

Crowdfunding appears to be a terrible deal for retail investors.

Probably. It's too soon to have hard numbers, but once we see 3-year returns on JOBS act IPOs, we'll have a sense of whether this is a good idea. Historically, it's not, which is why there are "blue sky" laws.

Arn't Investment Trusts a form of crowdsourced investing.

I have done quite well out of my PE trusts got a divi from Electra that is almost the same as my initial investment and have rolled that over into pershing square as an arbitrage play on the FSE 250.

Its almost like crowdfunding a record label (remember those?), with the investors thinking they're getting a piece of Madonna or Michael Jackson record sales. It's a hits driven business, the returns are extraordinarily long tail.

Disagree. I sure wish I could have got some equity (bundled via some proxy) along with my purchase of an oculus rift.

>"VCs compete for access to dealflow."

I am unfamiliar with this term, can you say what that is?

In this context, dealflow equates to opportunities to invest in startups. To have 'dealflow' means you've got access to a pipeline of promising, stage-appropriate startups looking for capital.

I believe in other contexts it simply refers to being in on deals; I think I've heard it elsewhere, too.

[Edited to add second paragraph, generalizing a little bit.]