7 ms·

> Not every idea has to have billion dollar potential If I'm going to seriously join a crowdfunding investment, I'm going to be thinking like a VC. I would hap

> Not every idea has to have billion dollar potential If I'm going to seriously join a crowdfunding investment, I'm going to be thinking like a VC. I would happily join a smaller "lifestyle" company as an employee or cofounder, but I probably wouldn't give them much money. I expect 9 out of 10 of my investments to fail, so I also need to look for those 10x opportunities. On the other hand, if it's just a token amount like a few hundred dollars, then I'll throw some cash at a Kickstarter or whatever. But then you can't say I really invested in anything.

onion2k 9y ago
That just means you should be looking for more equity when you invest in a smaller business. If you get 10* the equity you can achieve the same investment outcome with 1/10th the exit value, and a $100m exit is a lot more likely than a $1bn exit.
- sharemywin 9y ago
  I imagine a 5M company is even more likely to succeed which is on lower end of selling to private equity.
SomeStupidPoint 9y ago
Let's say you invest $500/yr at $50 a pop in local businesses, as part of a club. This seems like an amount of money you might be okay essentially gambling with. Let's imagine that fund spans a moderate size metro (2mil people) and 0.1% of people are willing to join once it gets "big". 2000 people by $500 is $1mil a year. If you figure seed money is $20-100k for a small business, you're creating 10-50 small businesses a year in your local area. (Possibly more once you're good at it and can leverage SBA and venture resources to help match your capital.) That's not a ton, and would definitely work better if you could nudge participation up to 1% or raise the average funding amount (or get another funding stream, or tax breaks, etc), but I think generating that local entrepreneurial churn can only be a good thing. I'd pay $50/mo to see several new businesses a year get started around town, just for the added cultural value small businesses bring.
- scott00 9y ago
  This is an interesting concept. I think the implementation would be very tricky though. The most important implementation detail is whether the investments are chosen by the investors, or by a manager or management committee of some kind. I think you would have problems doing this with investors doing the decision making; I would imagine you'd need to spend at least 10 hours per company invested to make a remotely informed decision; people aren't going to want to spend hours making a decision about a $50 investment. If you get the time commitment much lower, it will probably be a huge magnet for fraud. With a manager-based decision making process, I don't think the JOBS act affects the legality much. You'd probably need to house the decision-making in a registered investment company, which will probably cost you at least $50k/year in compliance costs. Getting even 1 remotely qualified manager would probably cost you $200k/year. I don't know that people are going to be as excited about the idea when they hear the expense ratio is 25%/year. To make it work, it seems to me you would need a national-level parent organization to amortize compliance and legal costs, and (qualified) volunteer decision makers.
  - SomeStupidPoint 9y ago
    If you look closely, my numbers don't quite add up -- $50/mo is $600/yr not $500/yr. I was guesstimating about $200k/yr in operating expenses (and that's with a lot of volunteered expertise, as you note). But structured as a social-purpose non-profit, with everyone paying in being a member who elects a management board, who allocates the money as they see fit (perhaps with some constraints chosen by members), I think this actually bypasses a large amount of compliance work -- if you never return the money, and are strictly a non-profit investing in local businesses which rolls returns in to future investments -- because the members aren't actually making investments: they're paying for a non-profit's operational funds to support local business ventures. Structuring this way also makes for a better case to get donated expertise, eg from local lawyers and investors, and probably makes your tax situation a lot better. You probably need some rules about earning lifetime membership after a certain pay-in, and definitely some about conflicts of interest (eg, funding member's ventures) but those are more technical details. It's not a good financial investment vehicle, in that even in the best case you'd almost certainly have negative returns and in the worst, you'd have no returns at all -- but if your goal is changing the function of the market to support local enterprises and you're willing to pay in to make that happen, I think it'd function excellently. (Of course, you only really need to seed one or two Starbucks to have the whole portfolio right-side up again, even after decades of total losses. So at a generational level, it might work as a financial instrument as well.) Worth noting, even as a non-profit, there are ways to "return" the money besides the value of the businesses started if you do find yourself with extra funds -- investments in local parks, schools, art programs, etc. It'd never come back in currency returns, but I expect "investors" would see tangible value in their lives, quite possibly exceeding the monetary value they put in. tl;dr: It's easier if you structure as a one-way investment in your community, and collect dividends from the output of a vibrant community.
criddell 9y ago
> I expect 9 out of 10 of my investments to fail You are probably better off taking your money to Las Vegas and playing blackjack. At least there you only lose 6 out of 10 investments.
- mhluongo 9y ago
  Clearly the expected value should be higher investing. You don't win blackjack by playing more games, but you can improve returns by spreading out your investments.
  - guntars 9y ago
    Spreading out investments does not improve expected return which is just a ratio to the invested amount.
    - mhluongo 9y ago
      Fair enough, maybe I should've said it reduced variance? Good for power-law investments, trending toward zero for house-edge blackjack.

onion2k 9y ago

That just means you should be looking for more equity when you invest in a smaller business. If you get 10* the equity you can achieve the same investment outcome with 1/10th the exit value, and a $100m exit is a lot more likely than a $1bn exit.

sharemywin 9y ago
I imagine a 5M company is even more likely to succeed which is on lower end of selling to private equity.

SomeStupidPoint 9y ago

Let's say you invest $500/yr at $50 a pop in local businesses, as part of a club. This seems like an amount of money you might be okay essentially gambling with. Let's imagine that fund spans a moderate size metro (2mil people) and 0.1% of people are willing to join once it gets "big". 2000 people by $500 is $1mil a year. If you figure seed money is $20-100k for a small business, you're creating 10-50 small businesses a year in your local area. (Possibly more once you're good at it and can leverage SBA and venture resources to help match your capital.) That's not a ton, and would definitely work better if you could nudge participation up to 1% or raise the average funding amount (or get another funding stream, or tax breaks, etc), but I think generating that local entrepreneurial churn can only be a good thing. I'd pay $50/mo to see several new businesses a year get started around town, just for the added cultural value small businesses bring.

scott00 9y ago
This is an interesting concept. I think the implementation would be very tricky though. The most important implementation detail is whether the investments are chosen by the investors, or by a manager or management committee of some kind. I think you would have problems doing this with investors doing the decision making; I would imagine you'd need to spend at least 10 hours per company invested to make a remotely informed decision; people aren't going to want to spend hours making a decision about a $50 investment. If you get the time commitment much lower, it will probably be a huge magnet for fraud. With a manager-based decision making process, I don't think the JOBS act affects the legality much. You'd probably need to house the decision-making in a registered investment company, which will probably cost you at least $50k/year in compliance costs. Getting even 1 remotely qualified manager would probably cost you $200k/year. I don't know that people are going to be as excited about the idea when they hear the expense ratio is 25%/year. To make it work, it seems to me you would need a national-level parent organization to amortize compliance and legal costs, and (qualified) volunteer decision makers.
- SomeStupidPoint 9y ago
  If you look closely, my numbers don't quite add up -- $50/mo is $600/yr not $500/yr. I was guesstimating about $200k/yr in operating expenses (and that's with a lot of volunteered expertise, as you note). But structured as a social-purpose non-profit, with everyone paying in being a member who elects a management board, who allocates the money as they see fit (perhaps with some constraints chosen by members), I think this actually bypasses a large amount of compliance work -- if you never return the money, and are strictly a non-profit investing in local businesses which rolls returns in to future investments -- because the members aren't actually making investments: they're paying for a non-profit's operational funds to support local business ventures. Structuring this way also makes for a better case to get donated expertise, eg from local lawyers and investors, and probably makes your tax situation a lot better. You probably need some rules about earning lifetime membership after a certain pay-in, and definitely some about conflicts of interest (eg, funding member's ventures) but those are more technical details. It's not a good financial investment vehicle, in that even in the best case you'd almost certainly have negative returns and in the worst, you'd have no returns at all -- but if your goal is changing the function of the market to support local enterprises and you're willing to pay in to make that happen, I think it'd function excellently. (Of course, you only really need to seed one or two Starbucks to have the whole portfolio right-side up again, even after decades of total losses. So at a generational level, it might work as a financial instrument as well.) Worth noting, even as a non-profit, there are ways to "return" the money besides the value of the businesses started if you do find yourself with extra funds -- investments in local parks, schools, art programs, etc. It'd never come back in currency returns, but I expect "investors" would see tangible value in their lives, quite possibly exceeding the monetary value they put in. tl;dr: It's easier if you structure as a one-way investment in your community, and collect dividends from the output of a vibrant community.

criddell 9y ago

> I expect 9 out of 10 of my investments to fail You are probably better off taking your money to Las Vegas and playing blackjack. At least there you only lose 6 out of 10 investments.

mhluongo 9y ago
Clearly the expected value should be higher investing. You don't win blackjack by playing more games, but you can improve returns by spreading out your investments.
- guntars 9y ago
  Spreading out investments does not improve expected return which is just a ratio to the invested amount.
  - mhluongo 9y ago
    Fair enough, maybe I should've said it reduced variance? Good for power-law investments, trending toward zero for house-edge blackjack.