7Figures2Commas

> Have you looked into Lending Club and Prosper Marketplace peer to peer lending platforms?

1. Lending Club and Prosper Marketplace have grown up in a period of historically low defaults. We will see how successful investors, retail and institutional, really are at assessing and managing risk when the current cycle ends and defaults rise. As Warren Buffett said, "Only when the tide goes out do you discover who's been swimming naked."

2. Marketplace lending activity is increasingly institutional[1]. Without institutional money seeking yield, you would not see nearly as much dollar volume in this market.

3. While I would not be surprised to find that some institutional investors aren't very diligent, you should also recognize that the notes they are purchasing typically make up just a portion of their investments. Unless you have a 360-view of a fund, it's not entirely fair to pass judgment on how well the fund manager is managing risk.

4. Assessing the risk of Lending Club and Prosper notes, which are debt obligations associated with consumer loans, is a very different exercise than assessing the risk of an equity investment in a company, especially when that company has little or no operating history.

5. The last time I checked, the notes on Lending Club and Prosper were actually obligations of Lending Club and Prosper and are not secured by the actual loans. In other words, if Lending Club or Prosper run into financial difficulty and can't meet their obligations, investors can lose even if a borrower is still making payments on his or her loan. I would venture a guess that many of the supposedly diligent retail investors you refer to don't actually know this.

[1] http://qz.com/536573/one-thing-putin-and-kim-jong-un-both-ge...

> The main problem I have with the "old rules" of investing is that wealth is used as a proxy for sophistication.

I think there are strong arguments for revisiting the accredited investor criteria, but you're missing an important fact: wealthy individuals have access to resources, like attorneys, accountants and financial advisers, that the less well-heeled frequently don't have access to. So even if accredited investors themselves aren't sophisticated, they usually aren't without the ability to protect themselves.

> With companies staying private longer, most of the growth in high growth startups is only available to the wealthy.

A lot of proponents of Title III offerings use the "average Americans are being denied access to the opportunities the wealthy have" argument but it's not as convincing as it might seem.

First, most Americans are currently not investing in the public markets[1], many because they don't have the money to. They have therefore missed out on one of the greatest bull markets in history, central bank-inflated or not. Providing greater access to private markets doesn't do anything for those who can't even afford to participate in the public markets.

Second, there are plenty of publicly-traded vehicles that provide access to private market investments. For example, for those interested in tech, GSV Capital (ticker: GSVC) owns stakes in pre-IPO darlings like Dropbox and Palantir[2].

> A similar thing happened three years ago with "rich person" crowdfunding – many critics speculated only bad companies would use it, not-bad companies started using it, and now it's generally accepted.

Are you referring to 506(c)? Adoption of this has been tepid at best.

[1] http://www.cnbc.com/2015/04/09/half-of-americans-avoid-the-s...

[2] http://gsvcap.com/investment-portfolio/

No, with equity crowdfunding, muppets get the down rounds, not the up rounds.

> “I think it’s going to really make a difference for businesses that are not especially fashionable for professional investors,” said James Dowd, the chief executive of North Capital Private Securities, a broker-dealer that focuses on private fund-raising. “They want to invest in companies that have the potential to be disruptive to an entire industry. You don’t see a lot of capital flow into ordinary consumer and retail businesses.”

The statement about professional investors "want[ing] to invest in companies that have the potential to be disruptive to an entire industry" is really not accurate. The vast majority of dollars raised through Regulation D offerings go to financial issuers (investment funds), not "disruptive" startups. Reg D is also commonly used to raise capital for real estate ventures and funds.

Although they certainly don't constitute the majority of Regulation D offerings, "ordinary consumer and retail businesses" do use private placements to raise capital, but the real reason it's more challenging for these businesses to raise capital is not that all professional investors are looking for hundred-baggers. It's that they know there's a strong likelihood they'll never see their capital again at all.

This said, I don't have a real problem with Title III. The SEC can't protect investors from themselves, as evidenced by the fact that investors are still defrauded to the tune of more than a billion dollars a year by penny stock schemes. But it's worth observing that the biggest proponents of equity crowdfunding are usually those who stand to profit from facilitating the sale of securities to investors. You'll notice that very few of them ever talk realistically about how those investors are going to get their capital back.

People are straight-up duped all the time. Just read the Vanity Fair link I posted. You can find countless other stories like this.

Again, investors in the U.S. are defrauded to the tune of tens of billions of dollars every year. Do you honestly believe that all the perps have stellar track records?

As it relates to Holmes and Theranos, it should first be noted that nobody really knows what's happening, so I don't think anybody can legitimately claim that Theranos is a scam at this point. But to say that Holmes has "no record" is silly. One might have good reason to question how meaningful her accomplishments are and her qualifications to run a business like Theranos, but she comes from a politically-connected family, attended an elite prep school and was a President's Scholar at Stanford. Before she ever reached the age of 20 she had access to, and could command the attention of, powerful and influential people most of us will realistically never be able to call on.

Thank you. You have refuted your own argument ("nobody could straight up dupe their way...").

Folks like Madoff are successful because they take advantage of fear and greed.

An "auditable track record" helps but is not required. See http://www.vanityfair.com/news/2008/10/follieri200810 for an example.

> Same with Clinkle, at first blush it seems like vaporware, but according to some of the insiders they had some hardcore tech that they could never get legally cleared to use.

I have a bridge I'd like to sell you.

> I don't care who you are, nobody could straight up dupe their way into $88M.

Bernie Madoff duped his way into tens of billions of dollars. His ponzi scheme worked pretty well at scale. Until it didn't.

Never underestimate what the two most powerful emotions, fear and greed, can lead even the most intelligent and sophisticated individuals to invest in.

At it relates to any specific company, assuming that there's no funny business solely on the basis that significant amounts have been invested is the product of flawed reasoning. Investors in the U.S. are defrauded to the tune of tens of dollars every year. Annual fraud related to penny stocks alone amounts to a billion-plus dollars[1].

[1] https://en.wikipedia.org/wiki/Securities_fraud#Pervasiveness...

> Seems like the right direction...

Huh? How in the world does Theranos shuffling its board(s) and issuing a statement supporting its "remarkable" founder represent anything meaningful?

> At this point, the company simply needs to hunker down and try to make its technology work. Demonstrating that it works will be comparatively trivial. Building a business if it works, relatively easy as well.

What in the world has Theranos been doing the past 12 years?

The founder says he acquired the data through an assignment for the benefit of creditors. I'm not an expert in ABCs, but my understanding is that the assignee in this process has a fiduciary duty to creditors and therefore must attempt to maximize the liquidation price of the company's assets. So I'm still curious as to how the twenty-something co-founder of the failed business acquired the data.

That aside, if we assume the data was acquired appropriately, it makes the questionable behavior[1] all the more baffling.

[1] https://news.ycombinator.com/item?id=10468700

> When you run a business into the ground, some decisions about what you sell get taken over by courts, at the direction of your creditors.

This is true, but a lot of this "story" still seems strange, especially in light of the fact that all of the sites that appear to be associated with Cheung's new venture have been taken offline.

There are a number of well-funded players in this space, some of which might have an interest in acquiring Homejoy's data. How did the twenty-something co-founder of the failed business come to acquire the data? Did outside investors provide funding for the new venture and its acquisition of the data? Were any of those investors also investors in Homejoy? Why weren't former Homejoy customers simply informed that another company had acquired their information in an honest, transparent fashion (the way most companies handle transactions of this nature)?

It's worth pointing out that the email Cheung sent to former Homejoy customers about FlyMaids stated that FlyMaids "work[s] with Homejoy's best cleaners."

If that is true, it would appear this new venture is essentially just Homejoy reincarnated, begging questions about Homejoy's liabilities. Assuming the lawsuits against Homejoy haven't settled, I'd imagine the attorneys behind those lawsuits might have an interest in what's going on.

1. From http://cleanerconnect.com/, which appears to be connected to your new venture:

> Cleaner Connect is not an employer, but simply connects independent service professionals with customers

Your Homejoy co-founder stated lawsuits over worker misclassification were the "deciding factor" in the decision to wind Homejoy down[1]. Assuming cleanerconnect.com is indeed part of your new venture, the above suggests your "testing" involves the same flawed contracting strategy that contributed to Homejoy's demise.

2. Your email to former Homejoy customers encourages them to use a "partner" service. You fail, however, to disclose that you are actually a principal of the "partner" business. Additionally, your comment suggests that FlyMaids is not actually a partner of a company that is supposedly winding down but rather is the acquirer of certain Homejoy assets.

3. As far as I can tell, neither FlyMaids or Homeaglow were ever featured by Oprah, The New York Times, etc., yet this claim is/was being made on their sites.

4. There are multiple sites (http://www.dazzlingcleaning.com, http://www.homeaglow.com/ and http://www.flymaids.com/) that appear to be connected to your new venture. Each of their terms of service refers to Delaware corporations that don't seem to exist.

Humble advice: you might want to rethink your passion for the home service space. And make sure you have a good attorney on retainer.

[1] http://recode.net/2015/07/17/cleaning-services-startup-homej...

"If this company obtains 1% of a $500 billion market, things will be great!" is not due diligence. Here, everything realistically comes down to the technology because the company's ability to gain and sustain market share is almost wholly dependent on it having a superior technology.

> Theranos and Valeant seem like entirely different businesses.

I think you're missing the point I was making: Valeant is a timely and interesting example of what can happen to the valuation of a company under fire.

> I don't have much information, but I'm not all that convinced Valeant has real fraud issues.

If you don't have much information, how can you be convinced of anything one way or the other?

It doesn't look like there's a conflict of interest (Morin, as far as I can tell, is not a Theranos investor), but I think you're overlooking the fact that a lot of prominent tech investors are sitting on investments in companies that have been significantly overvalued, and the cracks in some of these companies are starting to become apparent.

There's a decent discussion on this here[1]. Red flags, like reports of late-stage investors marking down the value of some of their unicorn investments, are starting to mount and I think that has to be worrisome for investors who are sitting on large unrealized gains that could easily evaporate.

Expect to see a lot more hand-waving on the part of investors as prominent unicorns come apart at the seams.

Morin, according to his AngelList profile, is an investor in a number of unicorns, including AirBnB, Dropbox, Evernote and Slack. Two of the mutual funds that invested in Dropbox have reportedly marked down their investments[2] and some media reports suggest Evernote is in trouble[3].

[1] https://pando.com/2015/10/27/techpocalypse-coming/

[2] https://www.theinformation.com/mutual-funds-mark-down-dropbo...

[3] http://www.businessinsider.com/evernote-is-in-deep-trouble-2...

> I bet they pour over and nitpick lots of minor details on the financials

What financials? Lots of these companies have little to no revenue.

Since there's so much interest in unicorn valuations today, and Theranos is a prominent unicorn, anyone wondering about the potential implications of all this news on Theranos' valuation might find it useful to look at Valeant Pharmaceuticals, a publicly-traded company (ticker: VRX).

It is facing a number of issues, a few of which have led some to speculate that it could become pharma's version of Enron[1]. In July, VRX hit a high above $260. Today it's trading at less than $110.

[1] http://www.nytimes.com/2015/10/27/opinion/is-valeant-pharmac...

> Yeah, Homejoy's demise took everyone by surprise.

No, it didn't. Some of my previous comments:

https://news.ycombinator.com/item?id=8468863

https://news.ycombinator.com/item?id=6856221

https://news.ycombinator.com/item?id=8489834

https://news.ycombinator.com/item?id=8709632

Homejoy won't be the last company of this type to collapse.

> And doesn't seem to be struggling from what I can tell.

http://www.yelp.com/biz/handy-san-francisco

http://www.yelp.com/biz/handy-los-angeles

http://www.yelp.com/biz/handy-chicago

Handy is also facing lawsuits:

http://gbdhlegal.com/wp-content/uploads/cases/Handybook-File...

http://arstechnica.com/tech-policy/2015/07/woman-sues-startu...

The investors dodged a bullet not because this founder lacked the mental fortitude to face challenges but because he did their due diligence for them and was honest enough to pull out of the financing once he discovered his concept was likely not viable.

The market for seed-stage investments is very frothy today. Lots of investors are spraying and praying, and as a result often lack domain expertise in the areas in which they're investing. Founder pedigree and social proof weigh heavily in what seed stage investors consider "due diligence."

Yeah, it's a shame the dolphins seem to be so attracted to them.

Kudos to the author for doing the right thing. But his post highlights just how frothy the market is and just how much weight founder resume and social proof are being given in seed rounds today.

> My friend has a rather large community house where he has offered me to stay for free for 2% equity (or something like that) per year...

Your "friend" isn't offering you anything "free."

In other news, Motif Investing today announced that it is rebranding as Muppet Investing.

It should be noted that many developers with CS degrees write spaghetti code and make poor architectural decisions.

Like it or not, this is part of the game that's played in Silicon Valley. It's a high-stakes game to be sure and a lot of companies (perhaps most) are not going to make it.

But I suspect many wouldn't have made it if they tried to build a profitable business anyway because they're operating services that probably can't be run profitably (or very profitably).

> Mr. Gurley said the root of many of Silicon Valley’s problems is a resistance to taking companies public. By staying private for longer periods, startups have eluded the scrutiny of public-market investors that is needed to help companies mature and become sustainable, he said.

A lot of Silicon Valley's high-flyers are not yet great IPO candidates. Of those that could be taken public, many would face much lower valuations in the public markets, forcing them to raise less capital or sell more of themselves to raise equivalent amounts of capital to what they're raising in the private market.

As such, one could argue that the startups have been acting completely rationally by taking advantage of the willingness in the private markets to invest at exorbitant valuations. Sure, the late stage valuations are all engineered and companies will pay a hefty price if they can't deliver the returns they're increasingly having to promise late-stage investors, but I think a lot of these startups have made a calculated decision to raise as much capital as they can selling the least amount of equity, and worry about the consequences later.

It's not surprising the traditional VCs aren't thrilled with this.

The even bigger question is what their margins will look like if they're forced to reclassify all or most of their contract workers as employees. Both DoorDash[1] and Instacart[2] are facing class action lawsuits over this.

[1] http://www.latimes.com/business/technology/la-fi-tn-grubhub-...

[2] http://www.xconomy.com/san-francisco/2015/08/06/instacart-ex...

Next big trend? This has been happening for years.

> In a sign of wariness among pre-IPO investors, an analysis of funding rounds by law firm Fenwick & West LLP in March found that 30% of private companies valued at $1 billion or more promised a specified IPO price. In some cases, the companies agreed to give additional equity to investors if the IPO price wasn’t met.

This is not necessarily a "sign of wariness." The investors are just doing what reasonably sophisticated investors do: protecting against downside risk. As long as the companies they've invested in can get out to market, the investors really can't lose. The companies themselves and other shareholders lose.

> Dropbox received the $10 billion-valuation offer from BlackRock after just two days of investor meetings, said a person familiar with the fundraising.

The company and its valuation don't matter. The terms of the deal do. You can make enormous profits investing in bad companies if you negotiate great terms.

If BlackRock structured its investment well, which it almost certainly did, Dropbox could go public with a $5 billion valuation and BlackRock would still achieve the desired return.

As I wrote in a previous comment, it's kind of amusing that so many in Silicon Valley rail against Wall Street and "financial engineering" when the biggest "winners" of this tech boom are products of Wall Street and "financial engineering."[1]

[1] https://news.ycombinator.com/item?id=10403067