Crowdfunding and the ninety nine percent

I have been following the idea of “crowd-funding” for several years and am a great fan. A couple of weeks ago I was having lunch with a colleague who is starting a new crowd-funding site. As we discussed it, I realized that crowd-funding represents an antidote to one of the many ways in which today the “ninety nine percent” are disadvantaged compared to the “one percent”. I have not seen this particular line of thought articulated before, so here it is.

In case that introduction sounds too rabid, let me qualify this post by saying I am not really a fan of Occupy Wall St (OWS), I have no problem with the 1% earning lots of money (so long as the taxpayer is not acting as bailer-out of last resort), and I am myself an accredited investor, long-time startup entrepreneur, and occasional angel investor. I dont believe in equality of outcomes, but I believe very strongly in equality of opportunity. And that is where I see an intersection of crowd-funding, and the concerns of movements like OWS.

Opportunities for the small investor back in the eighties.

The first startup in which I was involved, back in the second half of the 1980’s, pioneered a medical procedure called laser vision correction. Back then, small companies could relatively easily go public (no Sarbanes Oxley) and we did. Even before our product was ready. And the company went on to be a big success, and all the early investors were very happy.

As I learned more about the world of small public companies, I discovered that there were all sorts of early-stage, small public companies that were listed on NASDAQ. They might only have market cap’s of $5-10M. And anyone could invest in them, including me, as a young and very inexperienced investor. Of course they were risky. But I (and many others like me) could decide for ourselves whether we thought they had potential and invest our own hard-won dollars in them if we wished. The amounts we invested could be very small. We might lose all our money. Or we might make a lot. It was up to us. And very exciting.

Back then, the 99% had many of the same investment opportunities in early startups as did the 1%, because companies could go public on blue chip exchanges like NASDAQ relatively early in their life cycle.

Opportunities for the small investor today.

Today, things are very different. Going public on NASDAQ is now not possible except for fairly substantial companies, and the days of early IPOs (in the US) are largely gone. This is in part as a result of regulation, but there are many other factors as well. Just think of recent successes like Facebook or LinkedIn or Zynga. By the time they go/went public they have huge valuations. And the opportunity to get in early is not possible for a small, public market investor.

Instead, there are more and more special “secondary market” opportunities to invest in these companies before they go public. If you are an accredited investor you can participate in some of these if you know the right people. But increasingly, it is about who you know. And often these investment opportunities require sizable minimum investment amounts. If you are on the list of “friends of Goldman Sachs”, lots of opportunities emerge. If you are part of the in-crowd in Silicon Valley, you can often find a way to get in early on some hot private company. But if you are in “the 99%” and have no special connections, or influence, you are out of luck. By the time you can invest, these are $multi-billion companies often, and the chance to pick early winners is unavailable to you.

I see this as a clear example of a reduction in “equality of opportunity”. And I think it is a shame.

Crowdfunding

Crowd funding is the idea that large numbers of small individual investors can invest in early stage, private companies. This is not at present possible in the USA in its purest form (because of securities laws). Nonetheless, a horde of emerging startups are developing financing platforms that incorporate certain aspects of crowd funding. To pick just a few examples to explore (Kickstarter, ProFounder, List of crowdfunding sites). And I have to mention Kiva, one of my personal favorites, although it is really crowd philanthropy rather than crowd investing. Read The Crowdfunding revolution by Lawton & Marom if you want an excellent overview of the landscape.

Outside the USA the laws differ from country to country, and experimentation is happening. One of the early entrants to the space (GrowVC) is based in HongKong.

There are exciting initiatives underway to change legislation in the USA to remove the legal obstacles to crowd funding in its pure form. (See here and here for background and status). Basically, this would open up a whole new way to connect small early stage companies and the average-joe investor.

It seems to me this would be an important step toward greater equality of opportunity. What’s not to like?

I have heard the arguments about needing to protect Mom and Pop investors from unscrupulous sharks. But the 99% are routinely encouraged to spend money they can’t afford to lose on government-run lotteries, and anyone is free to go to Las Vegas and gamble away his/her last penny. Would it not be better to take that money and invest it in some small startup with the potential to change the world?