Ask PG: Can you start a HN crowd-funding venture?

That law doesn't mean you can invest in any privately held company. True, there is a lower bar to entry, but the startups need a reason to want you to invest in them.

I would expect we won't see many pre-series-A deals for at least a year, as the first few companies to do this are going to have to spend a lot of money on lawyers first since there aren't any precedents yet. Then once you have a couple dozen case studies the costs of replicating their success will hopefully come down enough to make this feasible for angel rounds.

The SEC is still reviewing the crowd funding portion before anyone can utilize it. Crowdfunding equity in startups has major governance problems that will be very difficult to solve.

I'm genuinely confused how people think it is a good idea to open up a class of investment with no controls. Why not just buy stocks where the companies have transparency and solid corporate governance?

The important part is not the money, its the opportunity for people like me to invest in growing companies. The money is just the way the risk is transferred.

Obviously, I would want the crowd sourced company to be a part of YC. The mentoring and the contacts are what make their companies successful.

But all that work takes energy and costs money, so we (the HN community) has to assume the risk. PG could structure it so that YC gets a stake in the company we fund. YC puts in the energy and the mentoring, and in exchange gets a stake. We put in the money and assume most of the risk.

Its a low-risk way to fund another applicant. I say low risk because there still are risks, namely that having more investors spells trouble and there are legal costs associated with us. But that's not a hurdle, merely part of the equation into how the profit would be distributed.

Yes however it could be for YC companies only, so you know you're less likely to get a dud. However I'm not sure how it would workout and it could get messy fast. I see a lot of potential pitfalls in crowd funding startups, there will be bugs at first.

I'd love the opportunity to invest pro rata with angel groups, TechStars, Y Combinator, and many VCs. The "gimmick" factor would depend largely on the structure and presentation of the opportunity.

As it stands, it's exceptionally hard to buy the startup market. The closest thing we have to an Index fund is Ron Conway, and he's not selling shares of himself. This is a huge missed opportunity.

HNWIs and institutions have varied and limited access to deals, and are constrained in the number of investments they can make. This exacerbates the problem that early-stage angel investing has sickening variance unless you're able to build a sizable portfolio.

The general public can't get in on these deals at all.

Because of this, I'd love to see top investors accept, as a limited partner, a crowd-sourced, retail-accessible "Fund of Funds" that operated on something akin to the Vanguard business model, charging a fairly minimal fee to buy the startup market. If that existed, I'd joyfully invest in it.

edit: this would also provide an interesting benefit the startups, particularly if they're consumer-facing, as it would dramatically increase the number of people who have a reason to care about them, their product and their continued success.

I don't think it can be a bubble when up until very recently it was illegal for 'crowds' to invest in private equity deals at all. How can there be over investment from small investors when there is currently zero investment from small investors?

We've built a robust platform that will allow the HN community (and others) to make investments together exactly as you're desribing. I spoke to Sam Altman about this a few weeks ago at lunch. We're less than a month from launching so if you'd like to talk to me directly about this please feel free to email me with my username <at> gmail and we can talk further.

I've mentioned it before, but there's a book called "Extraordinary Popular Delusions and the Madness of Crowds" that begs to differ on the point of "wisdom" being in the crowds. In fact, the title itself has the opposite opinion of crowds: Madness, not wisdom.

The benefit would be the return on investment, just like any other start-up they fund. In this case, their investment would be the time and effort they put into mentoring their companies and the legal fees they put into launching the crowd-funding. The return would be whatever they wanted it to be. The HN community would mostly have the capital at risk, not YC.

> It'd be like Scrooge McDuck stepping outside his money bin to pick up pennies off the street.

OT, but that's a pretty bad example, because he does do exactly that. A lot.

The real potential for this is funding for non-tech startups. Tech can get funded (right now) but trying to get funding for a corner deli is next-to-impossible.

>Seems like a "curated fund" where organizations like YC pick the companies and crowdsource funds would be one of the better applications of the new legal permissions (the potential "worse applications" being boiler rooms pushing hot new photo sharing startups to midwestern pensioners).

The JOBS Act prohibits intermediaries from offering investment advice or recommendations on investments.

See Section 304.b

But real investors also need capital, or it helps to have more capital. Crowd funding is a way to lower your risk. The big investor organizes the venture and finds opportunities. They put less money in but still get the same payout. The tiny investor gets less of a return on their money, but gets an opportunity to invest at a stage they are normally shut out of. They're paying for the opportunity essentially.

The only potential reason I can see is that crowdfunding also builds an audience with a stake in seeing your company turn out successfully, but it's hard to imagine how that would be useful in the case of a YC backed company.

Fact 1) If you are READY to sell a product, yes you do not need funding

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

Is it the same though? If your start-up gets money from Kleiner Perkins, do you really pay attention to everyone who gave money to Kleiner Perkins to start the original fund? I had in mind that HN would be more of being a provider of capital than an active investor. YC would be "investor."

"For startups, having large numbers of investors is bad"

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?

Instead of investors, could there be a place where customers can sign up to be early access paying customers, instead of shareholders?

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.

PG, would you still feel the same if there were limited disclosure/access requirements to crowd investors, so that the disclosure/reporting obligations were no different than if you were dealing with a limited number of accredited and/or sophisticated investors?

Kickstarter's aggregate-laissez-faire-angel model has some notable successes under its belt. I suppose the failures aren't as publicized.

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.

I am going to print the last sentence and hang it on the wall.

I would equate funding your startup via crowd funding to funding your public company via the pink sheets.

For some startups, this leaves a chicken and egg problem. I've certainly been there with BidNear.Us. You can't afford to self-fund everything, you've got a mortgage to pay, and your product requires a critical mass, not just early adopters, to finish the sale.

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.

"institutions will seek to preserve the problem for which they are the solution"

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?

On the other hand, pg is clearly "talking his book" with his response.

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).

Crowdfunding doesn't necessarily mean large numbers of investors.

"For startups, having large numbers of investors is bad,"

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.

I think capital structure is an important consideration in the determination of whether or not a large number of investors is "good" or "bad".

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.

We had a similar idea that we executed on during Mega Startup Weekend recently that was a lot of fun. It is similar to crowd screening in a sense, but really is more of a crowd sourced business idea validation engine. Imagine if there was a community / website where you could pitch your idea, have people vote on it and refine it. You could release your idea to as small or large a group or circle that you felt comfortable with. The goal would be to build a "tribe" around your idea that helps you refine it and validate it. We wanted to bake in the whole lean startup methodology into it. For example we had a step in the process called "assumption junction" where the tribe would list all the assumptions in the business idea and rank them by risk/importance. The community would then be tapped for building/refining surveys as well as for distributing the surveys or taking them themselves. Imagine if ideas where refined and validated by hundreds if not thousands of people before a single line of code was written. We called the idea "The Darwin Project", where only the strongest ideas survive.

This really jibed with coders we surveyed as they would love to be approached with ideas that are validated before they wrote any code. This could be a tool that finally empowers the non-technical business guys to vet their idea, get a critical mass behind it, and finally build enough value in the idea itself to build a team around. If anybody is interested in pursuing this I can put you in touch with the team that is running with this concept.

I wanted to point out that depending on how rulemaking goes in the SEC this is not necessarily true: the SEC is considering allowing all crowdfunding investors (people who have invested under the crowdfunding exemption in the JOBS act) to be bundled together into a single entity, thus easing the transition from crowdfunding to a Regulation D deal and possibly eliminating the need for a company to incorporate as a C corporation.

In addition full SEC filings are not required under the new crowdfunding exemption.