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.
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?
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.
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.
Something like Kiva might work for a startup, but perhaps more in a donation bootstrap sense. Not as a serious investment.
That said, isn't "crowdfunding" your startup the same as charging $9/month for a service they need -- except in advance, before there is a service?
This is in contrast to Kickstarter is crowdfunding where you pre-order the product.
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.
That's the example pg gave about InPulse. And hell it worked great.
http://www.kickstarter.com/projects/597507018/pebble-e-paper...
If there was a beta available, all the better.
Either way, the customer knows exactly what they're getting into.
I'm not saying he's wrong, but as a matter of principle, people should take his position with at least a grain of salt.
Same with VCs who are opposed to incubators like YC (in favor of VCs).
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.
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.
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".
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.
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.
The legal mechanics of relating kickstarter-style funding to a share issue would add cost and complexity.
If a prospective company thinks it has a case for kickstarter-style crowd funding, it should probably make that case... on kickstarter.
Fact 2) If you need to sell Stock (crowdfunding or not) it is that you product needs a few month to deliver.
--> strategy 1(sell product) is not versus stategy 2 (sell equity). Not, those two strategies answer different needs.
Thierry