8 ms·

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

• ph0rque 14y ago
  I'm hoping that with the passage of the crowdfunding act that will take effect in early 2013, we can all do what Yuri Milner and SV Angel are doing, and invest in all of the YC startups (or selectively invest in particular ones).
  • nbashaw 14y ago
    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.
    • rbn 14y ago
      This is sentence alone means that there is going to be another full blown tech bubble. Lower bar for entry to invests in startups. just like lower bar to get a home loan.
• adyus 14y ago
  The law that allows this to actually happen has been signed last week I believe. The barriers to investment have been greatly reduced, and with HN's collective wisdom, a PG-backed crowd-investing venture would steer clear of scammers and actually thrive. Voted up.
  • Alex3917 14y ago
    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.
  • wtvanhest 14y ago
    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?
    • adyus 14y ago
      And the SEC is right to do so. One of the provisions of this new law is that companies seeking unqualified investor funding (i.e. crowdfunding) are not required to disclose their finances for up to five years after going public. As to simply buying stocks, IANAFinance Guy, but I believe there is an upper limit on the amount you can invest before having to be certified as an investor. Could anyone contribute a proper explanation of that?
      • wtvanhest 14y ago
        As a non-accredited investor you can invest as much cash as you want in public companies. The crowd funding portion of the bill restricts non accredited investors to (I believe) 10% of income or 10,000 per year for risky start up investing. Further it requires investments are made through a platform. Personally I am worried that 10000 is way too much for an asset class this risky.
• eggbrain 14y ago
  Crowdfunding a startup feels really "gimmicky" for YC -- just because someone raises a lot of money doesn't mean the product is great -- I believe there was a very bad RPGMaker game recently that received $20k worth of funding with barely anything done and stolen assets. I'd like to think that VC's and the judges at YC have quite a lot of experience knowing who to pick, what characteristics to focus on, among other things. I also think money is one of the least important factors into joining YC, as what's more important is the mentoring, along with the network you become a part of. Finally, PG and the other mentors have put their name behind YC, but when you start to allow in companies that win popularity contests, you diminish the brand. I do like the idea, and it's why I've helped people build websites that can do this (although I need to wait for the JOBS act to finish its evaluation by the SEC), and I've also signed up for Wefunder, a site dedicated for stuff like this. I just don't think this is a good fit for an incubator with the prestige of YCombinator.
  • tstegart 14y ago
    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.
    • ssharp 14y ago
      I would assume that YC's resources are more limited at the energy level than the money level.
  • kenrikm 14y ago
    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.
• chrisaycock 14y ago
  > We could see how valuable the wisdom of the crowd is when it comes to real investing. Dot-com bubble, real-estate flipping, tulip mania...
  • pgroves 14y ago
    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?
    • noahc 14y ago
      Many bubbles are caused by a change in legislation that either incentivizes bubble participation or removes barriers to bubble participation. We saw this with the policies the Bush Administration adopted to further encourage an ownership society via home ownership as well as ongoing incentives to own a house. We also saw that the changes to Glass–Steagall contributed to the economic meltdown. I'm not arguing that we are or aren't in a bubble, but instead the legislative changes are common leading up to a bubble. Some would argue that the house bubble has been building via legislative change since the 1950s.
      • pdx 14y ago
        When you say Bush Administration, I think you mean Clinton's 1995 and 1999 modifications to the Community Reinvestment Act. http://en.wikipedia.org/wiki/Community_Reinvestment_Act http://en.wikipedia.org/wiki/Community_Reinvestment_Act
        • noahc 14y ago
          You are correct. Thanks.
        • deleted 14y ago
          [deleted]
        • 14y ago
• ssharp 14y ago
  I'm not sure what benefit this would have to the YC partners, unless they have an unwanted barrier to funding more applicants because of lack of money, which I doubt. While it may be fun (and profitable) to crowdsource-fund at the seed level, why would YC give its services to a company they have no stake in for the sake of making the HN community money? I'd see more value if the HN community itself were to pool together money and invest in the various classes, though this benefit may be completely negated by what the Start Fund does.
  • tstegart 14y ago
    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.
• kmfrk 14y ago
  Well, I don't know if this is the way to do it, but there have been times where my mind has been blown by projects submitted to HN where I wanted to communicate my utter amazement at what they had accomplished. I remember the time where a guy was offered a job by joshu in the comments for his submission. Maybe we could start it out as a crowd-pledging venture where the community can pledge a commitment to contribute to the success of a product without the need for the creators' consent. If the creators accept the commitment, they can hash over the details with the committers subsequently. One way to go about it would be to create a separate "pledge" economy from karma that still utilizes HN's default interface (for, say, karma>1000). Very flattr-like, I guess.
• garethsprice 14y ago
  For background, the JOBS Act that was recently signed removes a ton of regulation from the funding of small companies and specifically allows the creation of "funding portals" that allow non-accredited investors (ie. regular people) to invest up to $10k/year in startups. 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). However, it's not like YC and other funds are hurting for cash so what's the incentive for PG to need to crowdsource funds in tiny amounts like this when they have plenty of institutional funding? The limits are 2,000 investors and $10k/investor for a max of $20m of crowdsourced funding per company (assuming every investor makes $100k+ and maxes out on one company which would be stupid). It'd be like Scrooge McDuck stepping outside his money bin to pick up pennies off the street. I'm very interested to see how established VC firms react to JOBS Act. It's not like startups are finding it difficult to get funding right now, so doesn't this just create a subprime market for companies that the big players have no interest in? Coupled with the lifting of advertising restrictions and the appeal to amateur investors, this seems like the potential makings of the next big bubble...
  • mseebach 14y ago
    > 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.
    • garethsprice 14y ago
      Hah, sorry, not watched Duck Tales for a while. It's still an irrational act ;)
      • Mz 14y ago
        My recollection: He will go so far as to put bubble gum on a stick to retrieve coins through a grate because it nets him $400/year tax free.
  • 14y ago
• dlevine 14y ago
  The JOBS act makes this technically possible, but there are a number of roadblocks that would need to be surmounted before this could happen. First of all, any crowdfunding platform that plans to do this would need to register with the SEC. In addition, the crowdfunding site needs to do pretty thorough diligence on the companies listing equity and any major shareholders of those companies. Both of these provisions are mandated by the law. Overall, it will happen, and there are people trying to make it so right now, but it's going to take a little while to sort everything out fully.
• benologist 14y ago
  I think this would make HN a very boring place - if the community has a vested interest in whatever batch or whatever startups the bias is going to shift from mostly interesting content to mostly YC content.
• PhilipDaineko 14y ago
  I have searched for a PG answer but haven't found it. So PG hasn't answered this question yet
• richerd 14y ago
  Today is a bad day to ask PG. YC interviews just started.
• brudgers 14y ago
  I'm curious as to how people think Ycombinator would benefit from such a move. To me, it looks like a distraction at best and has a huge potential for the appearance of conflicts of interest. I will speculate that crowd source funding is more likely to generate headlines for dissatisfied investors from the middle class than for successful ones. The economics of startup investing require a sufficient pool of capital to: 1. Have access to quality opportunities. 2. Sufficiently capitalize each opportunity. 3. Invest in a large number of opportunities so as to increase the odds of hitting a homerun. Few people have that much money. And crowdsourcing will attract both people with little inhibition toward spending other people's money and investors without the knowledge or resources or inclination to conduct due diligence. To put it another way, real investors have a track record already. They don't need crowdsourcing.
  • tstegart 14y ago
    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.
    • brudgers 14y ago
      >"Crowd funding is a way to lower your risk." A large number of naive investors as partners increases the risk of an investment. It's the reason that professional investors tend to put together deals with other investors they have previously worked with. It's the reason they form groups. As I've said, crowdsourcing will attract dumb money. Smart money will tend to prefer not to become legally entangled with it. People with lower inhibitions will enjoy a feeding frenzy. Don't misunderstand me. There will be widely trumpeted crowd source success stories. It just won't change the fact that most people will lose their investments - heck that's even the rule for smart money investing in startups.
  • waterlesscloud 14y ago
    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.
• pg 14y ago
  I don't think crowdfunding is good for startups. For startups, having large numbers of investors is bad, and having inexperienced investors is bad. So having a very large number of inexperienced investors is the worst scenario possible. 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.
  • tmilard 14y ago
    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
  • tstegart 14y ago
    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."
    • patio11 14y ago
      Harvard University invests quite a bit of money in equity vehicles so for illustrative purposes I'm going to pretend they are a LP in KP. Here's a conversation which will never happen: "Hey, YC company! This is Bob at Endowment Management at Harvard. I've decided to forget my 20 year career in finance while simultaneously hopping straight over our trusted partners at KP and ask you directly about our investment. As you'll recall, we dropped a whole Benjamin on that software whatsamahoozit of yours, and we want to know you're working hard on protecting our investment. It shouldn't have cookies, or crackers, or whatever the trace your Facebooks on the Googles thing the WSJ was talking about this morning. You should probably give me your cell phone number so I can call at odd hours with spurious requests. By the way I hear Steve at Stanford says you're a dick for not answering your phone -- not cool! Steve paid 20 perfectly good dollars for your stock, you OWE it to him to take his questions."
• handzhiev 14y ago
  I like the idea but don't see why YC will want to start it. Perhaps that could be done by someone else. Add: there are already equity based crowdfunding sites - for example Symbid.com
• solnyshok 14y ago
  I would rather see crowdscreening of YC applications. Letting people apply for HN screening about 2-4 weeks before YC deadline, discussing application's strong/weak points, etc here on HN. You can do it here adhoc, but more formal approach with voting, might help to narrow down 3000 applications to 1000 or so.
  • poppew 14y ago
    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.
• eatmyshorts 14y ago
  Problem: Crowdsourcing-for-equity quickly will result in >500 investors. This requires a C-corportation (not an S or an LLC), and requires full SEC filings and regulation. This means the company will be going public with no product, customers, or otherwise. Honestly, I think there's a role for a Kickstarter-like fund for startups (as opposed to Kickstarter's focus on creative projects). Still no equity--the "prizes" generally would be promises of receipt of future products. But without equity, there's none of the legal wrangling associated with going public. For new companies, such an entity would give: 1) market validation based on the number of financial contributors, 2) market research based upon feedback of pre-sale customers, and 3) relatively strings-free funding. In fact, I thought heavily about announcing my current project on Kickstarter until I read their terms and conditions. I'd definitely be using it to fund a new company, and funding one that would be difficult to call "creative".
  • kaitocracy 14y ago
    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.
• arikrak 14y ago
  I doubt YC would be interested in this, and there's no reason to tie such a venture to one news site, like HN. However, the JOBS act will allow for many crowd-funding ventures to get started, and SecondMarket, WeFunder and maybe Kickstarter will join in. Any company that does this will need to take various safeguards to prevent fraud or unqualified people from raising money. KickStarter and LendingClub seem to have been doing OK managing related issues, but it will be harder with actual investments. It will also be interesting if crowd-funding expands to crowd-companies, so people also contribute to a startup like they contribute now to open-source software. You will probably still need a core team of people committed full-time to the venture.