How The JOBS Act will hurt the startup industry
thenextweb.com
thenextweb.com
"As demand for developers increases, developer salaries will shoot through the roof. Remember, it will be easier than ever for startups to raise money, so they’ll spend a lot more of it on tech talent. I can see salaries for lead developers climbing upwards of $300k a year (in many cases they’re already getting $150k-$200k)."
Hey, why is that a bad thing???
Which is it: do you want the true scoop before investing in an IPO or do you not? You can't have it both ways.
The JOBS Act is going to be awesome for startups and entrepreneurs. Any company that has even an infinitesimal chance of becoming a publicly traded company will be able to attract investors (few or many) to raise money and grow. And as that company raises money and becomes more prominent on the radar, those who got in early will realize a greater return.
It's going to create an incentive for investors to seek out and invest in the obscure. Not to mention, it'll likely create an ancillary benefit: reducing the cost of IPO-ing.
The potential benefits you mention will probably materialize. But seeing as this is an economic issue, we have to look for what the tradeoff is.
I don't know... "average" people could buy houses. I think it's when you push it out to the edge so everyone gets involved, then you have problems.
Currently, "average" people can't even do these investments. Probably, won't be so bad, unless it becomes a bubble.
I know that angel funding can bridge some of that, but doesn't JOBS create an opportunity to raise smaller amounts of money on better terms so you can build a more sustainable company and still retain a lot of ownership?
This seems like Kickstarter on a grander scale, and Kickstarter has made a lot of interesting business ideas newly viable.
And as for salaries, that is a total red herring argument. As more startups are created and salaries rise, more people will choose programming as a career and balance out the wage inflation. But hey, so what if programmers are making as much or more than bankers and lawyers...
I beg to differ. Have you met a high school student or college student recently? ;)
Are there really that many people who wanted to invest pre-JOBS and couldn't? It seems I've heard dozens of stories about how some suburban family invested in their neighbor or brother-in-law or drinking buddy. I don't think I've ever heard or read someone complaining that they wanted to give money to an entrepreneur and just weren't allowed to. What am I missing?
What are the options?
http://www.sec.gov/info/smallbus/qasbsec.htm#eod6
Reg D, Rule 504: "Rule 504 provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period."
So your colleague's business can likely sell you shares now. However, unless they register, they can't market the shares for sale.
Crowdfunding will expand this and allow you to market your securities for sale.
On top of that, if you get so many non-accredited investors, you have to go public. A very, very expensive process so most entrepreneurs avoid small investors like the plague.
You don't hear about people wanting to invest in an entrepreneur and not being able to because of the vacuum of information created by these two factors.
No, you have to release financial information like publicly-traded firms. You can keep the shares from trading publicly, you just have to share data on your financials. SAS analytics and UPS are examples of large firms that were private with lots of shareholders (UPS has since gone public). This rule isn't just to be restrictive, it's to ensure that a company with more shareholders than can sit down at a dinner table informs all of them about the company's financials. I'd guess it was designed because prior to its existence, managements could mislead investors in private firms to help raise money, to liquidate their own shares, etc. If it's not illegal to not disclose material information to retail shareholders, you can be sure that managements will use that loophole to screw their retail investors.
"But the market will route around shady firms." Yes, the global financial crash was how the market routed around shady behavior in some markets. Suboptimal.
>> A very, very expensive process so most entrepreneurs avoid small investors like the plague.
Citation needed. Since we're talking about companies bumping against the 500 shareholder limit, let's say they've received $1m in capital and are about to get one more investor. NASDAQ listing fees (https://listingcenter.nasdaqomx.com/assets/nasdaq_listing_re...) start at $35k. Other exchanges are cheaper: https://en.wikipedia.org/wiki/List_of_stock_exchanges#United...
Going public on one of the two flagship US exchanges, with a top-tier investment bank leading, is expensive. But if you're raising money in $1k blocks, you probably aren't on that path anyway and so an appropriate public listing would cost a fraction of what Facebook will pay.
Human nature is what it is. People will lose money. People will get ripped off. People will blame each other and sue. All of that is bad. The question is will the good outweigh the bad, and will anyone notice?
Three opportunities that matter:
1. Due diligence (verifying the existence of the team, and the software; fact checking the prospectus, filtering out the outright scams)
2. Team and talent aggregation, think of the old hollywood studio guys who could pick up the phone and pull together the right team for the project in ten minutes; automate that process and scale it up.
3. Startups wanted (hat tip to pg) find out what this large new pool of investors wants to put their money on. Form new companies designed to appeal to these investors. Since that will be changing rapidly the skill of quickly putting together an offering that has high potential to return investors money will be a valuable one.
There is a lot of detail in those three opportunities, and each one will probably be served by multiple organizations.
I'm interested in talking to people about these new opportunities; if you're interested in building the new new economy and don't want it to flame out in a bunch of scams that give startups in general a bad name; and you're interested in releasing the latent talent and ingenuity that's been sidelined by the economic crisis. Drop me a line.
Let me put it this way: if your startup is able to attract a large number of people willing to give you small(ish) amounts of money so you can create your product, they are essentially your customers. And customers are not interested in any equity in your company, which may or may not bring them any profit several years down the road -- they are interested IN YOUR PRODUCT, and as soon as possible so they can use it to solve their problems and keep on living.
This is why I don't expect crowdfunding to have any significant impact on startup funding. It's great for indie arts and movies, and perfect for funding open-source development, but it's just not suited to startups.
How is this necessarily bad? I've read many a story on HN where a developer was placed in an adverse situation and excelled. I know I've stumbled my way to success on more than one occasion. Then from n=1 on, isn't being thrown into the fire an efficient path to growth (and necessary in a startup)?
Just wondering what the general consensus is. I assumed that it was fine to "fake it 'till you make it" in startup-land.