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Comment by zanny | Hacker News Reader

There will be tremendous recoil though when layman VC's realize their investments are so very risky. It won't be so much a bubble, because the real artificial force here is the monopoly marketplace of shares being on wallstreet. It is a positive move, but all economic shifts like this will produce excessive momentum with some recoil effects.

It is good in the long haul though. The easier it is for normal people to own stake in business the sooner we can close the tremendous gaps in socioeconomic status between the elites and common folk.

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> There will be tremendous recoil though when layman VC's realize their investments are so very risky.

Do you really think laymen understand risk, though? Casinos make billions of dollars each year off people who can't correctly model risk even after risking, and losing, large sums of money. Of course, VCs wouldn't put their money on black at the Roulette table--but VCs (and stock-brokers, and investment-bankers) model risk for a living, whereas the median layman micro-investor will have given their one or two investments maybe five cumulative minutes of thought in their lifetime.

To put it another way: there's a sucker born every minute--but no-one stays a sucker for very long, once they've been burned. This means that, when there is friction to investment, the suckers will slowly drain from the pool until only the sharks are left; whereas, when fiction is low, each sucker leaving the game will be replaced by a new sucker joining in, fresh and naive. When 90% of your revenue comes from people who have never invested in anything before, you can build your business model on the mob's irrational overconfidence in your ability to deliver.

So, the masses are stupid, VCs are smart. Stock brokers and investment bankers are the ones who truly caused every recession and the Great Depression. Oh, sure, poor and dumb people getting mortgages wasn't a very good idea, I totally agree. But it would've been a drop in the bucket compared to tarring and gzipping said mortgages into 30:1-leveraged bundles (laughably underwritten by AIG) created by Wall St. They knew they were unsustainable, but pressed on, some not even taking the "five cumulative minutes" of thought to what they were investing in or how much of not-their-own-money they were putting into it, until it burst.

So, you're saying we should still keep all the money in that silo? That we should keep letting "risk modelers" who have exacerbated every speculative bubble since the Great Depression keep investing in Color and Groupon and boo.com and flooz because the masses are too stupid to do it for themselves?

Well, okay. But, I disagree.

Er, no, no I'm not; you're reading moralizing from what was supposed to be a purely phenomenological description.

Personally, I think it's okay that regular people risk (extremely small, in relative terms) money and, more often than not (in the long term), lose it. It's okay to build businesses that only profit because of human irrationality. It's their money to spend (or lose) as they please--and, in aggregate, as businesses, it's our profit. Just so long as nothing's coercing anyone into doing this--like, say, a gambling addiction--we have no reason to feel bad for allowing people to bet on us and then, potentially, flopping.

I get the impression you turn everything into a political tirade.

There's a great alignment I think between having the consumers themselves invest the money. I read somewhere that VC's who invest in startup's actually lose money on average. The reason they're doing it in the first place is because they represent pension funds and similar who want a finger in 'that startup action' for diversity, with no one monitoring the eventual results closely enough (the consumers probably end up with +1-2% overall)

If point of capitalism is the efficient distribution of resources to the places they need to go then the VC's are actually doing a pretty bad job of it (on average)

At least with crowd sourcing it's a step in the right -direction- toward funding ideas that seem popular, that a bunch of consumers who invest would hopefully be doing so because they also want to use the product.

I'm sure there'll still be serial swindlers and greedy investors who get scammed, but in a utopian world it'd be great if it was sort of like Kickstarter, where you put in $50 with no guarantee of actually getting what you're funding, but now there's a chance you'll not only get that product, plus your money back, plus a nice little bonus sum if the company succeeds. I guess the key is managing the expectations of the investors

Yup, that's the one part I disagree with from this article: the ending where he says VC today is inbred.

First off, VC today is by no means doing poorly. IPO's, incubators/accelerators, and the spillover of excitement from SV to NYC/LA/Seattle/Boston is pretty evident that big money goes where it needs to go.

It's more so that there isn't -enough- VC out there today, in my opinion, that's really driving crowdfunding and crowdsourcing. Now that the barrier to entry has dipped so low (technical costs) and the need for innovation is so big, that there just is too much consumer demand to get involved with the game. Up until the JOBS Act, to play ball you had to enter the field as an entrepreneur. No one really takes money anymore from someone who hasn't had skin in the game (whether from a successful startup of failed investment).

I like to think of it as thirsty kids at a summer concert, where VC's were the big scary macho bouncers who threw out water bottles to a select few in the front. Only, now, there's more thirsty people than ever and the concert organizers just brought over a firetruck.

I agree about the long haul view. As I understood it, one of the previous purposes of the stock market was to allow companies to be able to raise revenue by having risk-takers fund them. If the companies win, the risk-takers win.

What with micro-trading practices looking for ups (and downs) in fractions of a second, market activity no longer seems to make sense, from the previous point of view.

Maybe with a fresh round of investment by "laymen" we can once again move back towards a model that is closer to that of patronage...

I think a lot of people don't understand risk, however.

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