- Posted by Jeff Carter
- on October 8th, 2012
This morning, I am going to be on a panel for a crowdfunding discussion. It’s obviously a hot new topic. There have been some great successes with crowdfunding and some spectacular failures. I don’t care about them. Here is what we are talking about:
Crowd funding is a newer and growing funding outlet for startups and the creative entrepreneurs that typically requires businesses to quickly articulate their value proposition in words or youtube-style video. As a virtual interaction from potential funder to recipient, the information must
grab the attention of viewers/readers, resonate, and ideally have an end result in the form of
action/funding. benefits to the business owner include taking the pressure off of the “friendsand-family route,” which may mean the business can run “emotionally-neutral.” benefits also
include opening up the door for smaller amounts of investments from more investors. Challenges
range from managing multiple “investors” at varying levels in a consistent manner while
uniformly responding to their interest inquiries while also being concerned with the potential
theft of the start-up idea.
• identify ideal users of crowd funding
• understand crowd funding as a new source of
raising capital for small businesses
• identify the most common benefits and
challenges to protect both the entrepreneur
and the investor; gain insight into future rules/
regulations revolving around crowd funding.
If you are coming to the conference, I hope to see you there. I attended a community college and I have a soft spot for them. Unlike a lot of people, I don’t turn my nose up and make suppositions as to why someone attended a certain school. My style at these panel things is to interact and engage the audience as much as possible to get to the crux of what’s important to you. I can talk all day, but it would bore you.
The JOBS Act has been signed and details are still being sorted out. William Carleton is an attorney I follow and he has some great thoughts about crowdfunding. Leaders in the entrepreneurial community are generally in favor of crowdfunding. If you follow them on Twitter it almost seems like they see zero downsides.
I see some downsides to crowdfunding, the least of them being that people will lose money. There are a lot of issues for entrepreneurs in managing a group of investors that were crowdfunded. Instead of delving into minutae, I’d rather go broader in scope and distill the concept back.
Crowdfunding can be looked at through the lens of Ronald Coase. Coase Theorem is so elegant, yet very controversial. Typical examples examine things like, “If fisherman fish in a river and a plant produces in the same river, who should pay for the pollution devices on the plant?” All of a sudden, normative emotional economic theories develop and Coase gets misallocated to situations. The answer is with property rights clearly defined, and economics outcomes clearly defined, whatever solution the two independent private parties come to agreement on is the best for society.
Let’s extrapolate that to crowdfunding. What does it mean? How does it work?
Mr.Entrepreneur wants to fund a business. They put their business on a crowdfunding platform. Mr. Investor sees the business and decides to invest. Should the government be involved in that decision? Or should we rely on the three independent parties (Entrepreneur, Crowdfunding platform, Investor) to be the only parties involved?
I understand the government interest in trying to protect investors from fraud. Fraud and deception suck and there is plenty of people in the entrepreneurial world that are really just hucksters acting like they are innovators. Conversely, fraud happens today even with the heavy handed regulation we have. Ask account holders at MF Global how well the SEC rules protected them.
At this point, If I were the government, I might provide very broad rules to crowdfunding-and then let the market innovate around them. I wouldn’t limit crowdfunding to accredited investors. Maybe someone would innovate a way to make investing in startups efficient for non-accredited investors?
Besides, I believe in the power of individuals to make the best decisions for themselves. The nature of crowdfunding done correctly is that it creates a market of information. The crowd should be able to allocate capital and make decisions better than any single person. My reading of America’s founding documents say that everyone ought to be included. No one should be excluded from taking risk and trying to build wealth by investing in start ups.
The biggest fear I have at this time is when government begins to fill in the blanks of the JOBS Act, it delineates lines that artificially pick winners and losers. No one has the market cornered on good ideas. Everyone ought to be able to participate in funding those ideas. Most of those ideas are going to fail. People will lose money. As long as that information is transparent, the entrepreneurs are transparent, and the platforms set up to bring those two parties together are transparent, we should have a more robust entrepreneurial ecosystem than we did before.
The robustness of the entrepreneurial ecosystem in America will determine our future. We need to design rules and regulations tailored to making it as productive as possible. With that, the risk of failure is very high. Acceptance of that risk will be better for all of us as society. “A rising tide lifts all boats”. We need to make sure that tide rises.
When I speak at things, I hate to use Powerpoint. Everyone follows the powerpoint, I talk to the screen and it’s sleepy. I’d much rather write down some notes and become engaged with the room. That’s what we did today at the NACCE. It was a fruitful discussion with lots of questions, and hopefully some answers. Crowdfunding is so new, it’s impossible to be an expert. It’s impossible to know all the answers. The market will tell us those answers and we have to listen to the market. Post talking, I said I would create some slides so people could have access to them. I uploaded them to Slideshare, and you can go to get them.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)