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Why Don't Startups Get Their Users To Invest In Them?

85 points by edent 13y ago

heldtogether 13y ago
It's not a bad idea, but there are so many things that need considering. For example, you can't have more than 500 investors before you're required to declare your accounts. For a company that's in a growth period rather than a 'making shed loads of money that looks good to your average joe on the street' period, declaring your accounts isn't necessarily a good idea. Secondly when you have shareholders you have to be seen to be doing things to increase value for your shareholders, and not necessarily for the long term. Raising money doesn't always coincide with making profit, so the companies would be exposing themselves to potentially hindering lawsuits (which would probably be dismissed but are definitely distracting).
robertlaing 13y ago
This article is not 100% clear on whether it means "true" investment or just paying for a service, which is not the same thing at all. But regarding "true" investment, It's something we looked at 18 months ago when raising our Series A. At the time it was impossible due to SEC regs around accredited investors and max number of investors (deeper analysis here: http://www.startupcompanylawyer.com/2012/05/26/is-crowdfunding-legal/ http://www.startupcompanylawyer.com/2012/05/26/is-crowdfundi...) so we gave up. But it would be great to have simple ways of getting it done. https://wefunder.com/ https://wefunder.com/ and others (round-up here: http://www.thecrowdcafe.com/investment-crowdfunding-platforms-whos-funded/ http://www.thecrowdcafe.com/investment-crowdfunding-platform...) are trying to make it happen. Good luck to them :)
wilfra 13y ago
They can't take money from non-accredited investors (those who make below $200k per year or have less than $1 million in assets). This is the reason you can't get shares or profit sharing on Kickstarter. The JOBS act loosened the regulations to open it up to anybody - but those changes have yet to be implemented and you presently still need to be an accredited investor to invest in startups. As for whether they'd even want to do it, that's another question. WeFunder (a YC company) wasn't able to convince many of their batchmates to offer shares to the public when they launched and the company I tried to fund through them (Strikingly) appears to have ignored everybody who attempted to back them through WeFunder and went with traditional investors instead (or at least that's what they've done in my case).
- dragontamer 13y ago
  I came here just to post this. Then I noticed that you already mentioned it. The JOBS act is new, and companies aren't taking advantage of it yet. It was only passed a month ago after all... That said, how do Co-ops work? As well as companies like REI or Vanguard? Purchasing an REI membership makes you a holder of the company, and same thing with Vanguard funds... or many credit unions. Is there a reason why the JOBS act was needed when customer-owned businesses already existed?
  - nknighthb 13y ago
    Whether you realize it or not, I believe you've just asked for a dissertation on the myriad rules covering ownership of incorporated entities. I'm not qualified to give it to you, but I can say it's not nearly as simple as "IPO or accredited investors only!". You need only consider one scenario to realize this: You don't need to be an accredited investor to incorporate a company. This is not comprehensive, but it's a good starting place: http://www.sec.gov/info/smallbus/qasbsec.htm http://www.sec.gov/info/smallbus/qasbsec.htm
    - dragontamer 13y ago
      Thanks for the link, I'll give it a look over :-)
- OldSchool 13y ago
  The accredited investor requirement is right on. It doesn't stop crooks who don't care about law, but without it we'd have rampant 1920's-style fleecing of individuals by smooth talking con artists. That's not to say there aren't some wealthy people out there whose only successful product was stock, but at least they were forced to do it through proper channels and often endured the boilerplate shareholder lawsuit that's in the top drawer at certain law firms during economic downturns.
- dragonwriter 13y ago
  > They can't take money from non-accredited investors (those who make below $200k per year or have less than $1 million in assets). That should be an "and" not an "or" (meeting either the income test or the asset test qualifies for "accredited investor" status.) And there are several conditions under which firms can make accept limited numbers of non-accredited investors along with unlimited numbers of accredited investors. > The JOBS act loosened the regulations to open it up to anybody That's not entirely accurate. The JOBS Act requires the SEC to do two main things in this area: 1. Remove the requirement prohibiting general solicitation and advertising for investment opportunities, if those opportunities are restricted exclusively to accredited investors and the firm seeking the investments takes steps to verify that the investors qualify as accredited investors. 2. Allow "Crowdfunding" with specified per-investor limits of up to $1 million in a 12 month period, via an SEC-registered intermediary. Neither of these really opens things up to people who couldn't invest before: the first option allows public advertising but is expressly restricted to accredited investors; the "Crowdfunding" option is basically similar to the Rule 504 "seed capital" option, both of which have a $1 million in a 12-month period limit, and neither of which is restricted to any particular class of investors ("seed capital" restricts general solicitation but allows the firm to sell securities directly, "crowdfunding" allows general solicitation but requires the firm to act through an SEC-registered intermediary.)
orangethirty 13y ago
They do, its called selling a product. Tumblr didn't sell much of anything, because they did not have much of anything to sell. They provided free blogs to people. That's it. You can't complain about not making money if you did not make sure to have a clear way to make some. Reason for which one should first make sure to validate the business.
- scotty79 13y ago
  Buying product from a company doesn't allow you to participate in its financial success.
- lancewiggs 13y ago
  Tumblr seemed to do a very poor job of asking customers for money, and it's a lesson that everyone can take away. At the very least provide users with some money to spend with an easy incentive to spend it, and make the transaction very easy and quick.
  - orangethirty 13y ago
    Exactly. Blogs are a super easy sale. All you needs to do is upsell customization. Plugins, themes, more storage, etc.
martinkallstrom 13y ago
The concept of a business is hundreds of years old and history has seen most types of business financing, both benevolent and scammy. As a result, there's a massive amount of regulations around it. No matter if intentions of the business owners are benign or not, when the public invests in companies there is a need for rules governing transparency and control. What the post is referring does exist, it's called the stock market. It is a set of rules you need to follow before you can allow thousands or millions of shareholders to invest. Committing to the rules and getting the permission to do so is called an IPO.
- sliverstorm 13y ago
  To my understanding, the thing that is really new is the current strategy surrounding IPOs. From what I gather, IPOs used to be a key option for raising funding, rather than a key option for cashing out. If you use an IPO as a source of fund raising, it seems like you'd have little trouble using the stock market to do this very thing- allow your users to invest in you.
  - btrautsc 13y ago
    I think (for technology companies you're correct).. Private money is 'cheap' for growing tech companies, so going IPO as a way to source further growth capital makes little sense (also worth noting, the cost of starting/ growing is accelerating down). So, why give up massive amounts of control - in many cases having to actually listen to those owners, be forced to share information with competitors through filings, and deal with the headaches when VC money is so cheap and relatively plentiful? Look at an example like Groupon, where many of the major shareholders had largely cashed out before ever making it to the stock market (through VC fundings). Similar situations have happened with both Facebook, Twitter in terms of pre-emptive cashing out.
- VLM 13y ago
  "need for rules governing transparency and control." And when they're implemented, the politicians the existing large players hired via campaign contributions are very careful to make sure the regulations favor the existing large players who pay the politicians bills, in other words the exact opposite of startups. So that's probably not going to end well for the startup.
tobinfricke 13y ago
A business owned by its "stakeholders" (customers and/or employees) is called a co-op.
- alexchamberlain 13y ago
  Now all you need to do is make it really easy to set up a co-op and "sell shares" online... I'm guessing this could be done in the UK - we have a few major co-ops here; is the US the same?
  - antoko 13y ago
    Federal Credit Unions work in a similar way to the UK's Building Societies. There are other co-ops here but I don't think they have the same penetration as in the UK. One national brand I CAN think of that is a co-op is REI, I'm sure there are others though, lots of local-focused food businesses use a co-op model. Costco and Sam's club (wholesalers / cash n carry) offer membership benefits but I think that's more related to getting air miles on your credit card.
    - cglace 13y ago
      Costco and Sam's club (wholesalers / cash n carry) offer membership benefits but I think that's more related to getting air miles on your credit card. I'm confused. What on earth does being a member of Costco have to do with credit card air miles?
      - antoko 13y ago
        Apologies, bad choice of word on my part. I should have said "akin" rather than "related". The point I was trying to make is that whilst those companies offer a membership incentive structure its not a true co-op and you don't have an ownership stake in the company. You just receive some member benefits like cash back and discount coupons - similar to your credit card company giving you air miles.
    - brudgers 13y ago
ronilan 13y ago
There once, during the internet bubble of 2000, was a startup that said anybody who signs up for their newsletter will get a share in the company. All the serious finance people said it was a scam, but a lot of people fell for it and did enter their email. Internet was hot back then. How did it end? After many years, the company paid about $4 for each shareholder and then IPOed. It is still an awosome newsletter business today. It's called TravelZoo (TZOO)
ig1 13y ago
Wordpress.com has 66 million blogs and it's parent company made ~$45m - and I'm guessing a significant chunk of that came from a tiny percentage of power users. Most users just aren't willing to pay for a consumer web product let alone invest, for something like tumblr you'ld be lucky if you could get a tiny fraction of a percent of users to even think about investing.
quackerhacker 13y ago
I think the reason most startups are hesitant to ask their user base for funding is because even selling OTC stock in a company still requires alot of regulation with the SEC. If I remember right (others feel free to weight in here), the startup has to designated a transfer agent, then the company also has to value all of it's assets, past revenue, and I don't think they can account potential revenue. Selling OTC stock in a company, I don't believe is just stick a price on it and sell it for that amount. In other words, a startup would be better off formulating a clear and concise business plan.....or be like Mark Cuban, and sell high and go on Shark Tank...funny, what happened to Broadcast.com and the buyer? [yes, I know the buyer is Yahoo, and the basis of this article is Tumblr]
c3vin 13y ago
I can't imagine a majority of facebook users making decisions. ..that sounds dangerous.
brudgers 13y ago
"I want to be an investor - a very small one - in the services I use. I don't want my attention to be sold to the highest bidder on the stock market." The second sentence explains why allowing investors described in the first one is a bad idea for a startup. Investors have rights, and investor relations is time consuming. It is better if the interests of investors align with those of the business owners, e.g. making a large amount of money. Otherwise, there is real risk of being dragged down by lawsuits.
fitzpasd 13y ago
I can't imagine what Facebook would be like today if every user had a share, given the community uproar (at least initially) to any new changes to the UI, feature set etc.
deleted 13y ago
[deleted]
gnoway 13y ago
I didn't read all of this, but isn't the current standard business plan to get as many 'free' users as possible, monetize them by adding advertising, then selling their eyeballs to Yahoo, etc. for actual money? Asking your users to actually pay themselves would mess up step 1, right?
- mindcrime 13y ago
  but isn't the current standard business plan to get as many 'free' users as possible, monetize them by adding advertising, then selling their eyeballs to Yahoo, etc. for actual money? No. There may be a lot of people pursuing that sort of thing, but there are plenty of startups selling "stuff" (whether it's software or something else) to people with money to spend (probably businesses) for real money. Don't fall for the silicon valley groupthink / herd mentality BS. Building a company that makes money the old fashioned way is still very feasible, and - IMO - always will be.
nolite 13y ago
we all those "customers" in the real world
lucaspiller 13y ago
Brew Dog, a craft brewery - but a startup none the less - did exactly this. They needed to raise a few million pounds to expand their business: http://www.brewdog.com/equityforpunks http://www.brewdog.com/equityforpunks http://www.thetimes.co.uk/tto/business/industries/retailing/article3092355.ece http://www.thetimes.co.uk/tto/business/industries/retailing/... They also do pretty good beer :-)
kp27 13y ago
There's a fundamental difference between investors and customers. Users are customers, they pay if they feel the value of the product is worth XYZ. Investors are banking on the idea/product to be worth more in the future than what it is now. They also have an appetite for risk, mainly because they understand investing and diversify.
brackin 13y ago
In the UK crowdfunding startups is becoming common using Seedrs or Crowdcube and a few startups I know have raised a few hundred thousand from their users (and wealthy individuals using these sites).
lifeisstillgood 13y ago
They can - it's called an Enterprise license Many a startup has bootstrapped off one or two customer "investments" - Marc Andressen famously walked a cheque for 11 million USD round the early Netscape offices. I believe he regretted taking the money be ause it made them beholden to features that customer wanted - but try telling the difference between that and a equity investment
- lifeisstillgood 13y ago
  Honestly, I don't get the down vote. Maybe a facetious tone, but 11million bucks helped one of the web's formative companies take off - and that was a customer "investment". The person(s) who signed that cheque probably had done dozens like it before and dozens like it afterwards - whoever they were, and like hundreds of other senior corporate radicals across the globe, they take the one thing scelortic huge companies have plenty of (money) and push it back to nimble innovative companies. Its an investment in all but name. And it pays everyone dividends when it works. seriously - if you want investment from your customers, find the big names in your email list.
- beachstartup 13y ago
  selling products and services to companies who will pay for it, thereby getting the money you need to expand??? what a radical idea. it'll never catch on.
morgante 13y ago
It's called an IPO, and the structures are in place for a reason. Can you actually imagine the difficulty of keeping 170 million "investors" updated on the status of the company? You'd have to share so many reports, make sure everything is done fairly, release regular earnings. Oh, wait, that's exactly what the SEC requires for doing IPOs... Seriously though, it'd be a scary world where everyone is an investor. Most people just aren't qualified to understand risk and make smart decisions for the future of the company. Startups would end up with no revenue and people's investments would be worthless.
minimax 13y ago
The thing is, it's pretty hard for an ordinary person to buy a share of a company. You usually need to be able to buy a large quantity of shares, pay for a trading account, try not to get ripped off with various fees, and deal with taxes. This is FUD. You can easily buy one share if you want to. You don't pay to open a trading account. The fees are about as transparent as they could possibly be. And the taxes are not much more complicated than normal income taxes -- if you hold for less than a year your profits are taxed at the marginal rate and if you hold for longer than that you are taxed at the long term capital gains rate. I'm not saying it's a good idea to buy one share of a $25 stock. It's not. But modern retail trading is accessible to pretty much anyone these days.
- Retric 13y ago
  I would also add that many companies let you bypass fees and directly buy there stocks. Which can save you significant amounts of money if you want to say buy a few shares every paycheck. PS: Fees are the #1 problem for small time investors. It's generally more important to reduce fees than it is to spend a lot of time investigating companies. http://www.forbes.com/sites/moneybuilder/2012/06/20/how-to-invest-using-direct-stock-purchase-plans/ http://www.forbes.com/sites/moneybuilder/2012/06/20/how-to-i...
- edent 13y ago
  Got any links? In the UK I was using iii.co.uk - but they recently started imposing fees which were prohibitive for small scale transactions.
  - minimax 13y ago
    Sorry I should have put a disclaimer that I was talking about trading in the US. I'm not as familiar with retail trading in the UK. In the US you will typically pay between $7 - $10 per trade for stocks (regardless of order size). These are the sorts of retail rates you see here: https://www.scottrade.com/online-brokerage/trading-fees-commissions.html https://www.scottrade.com/online-brokerage/trading-fees-comm... https://us.etrade.com/investing-trading/pricing-rates https://us.etrade.com/investing-trading/pricing-rates https://www.tdameritrade.com/pricing.page https://www.tdameritrade.com/pricing.page So at these rates, a $25 trade still doesn't make any sense, but a $500 - $1000 (still well short of a round lot) trade might.
ehm_may 13y ago
"I don't understand money. Well, specifically, I don't understand how companies are funded, classify shares, or any of that finance stuff." lol - stopped reading
capex 13y ago
You are mistaking Facebook's 900 million users vs 900 million users willing to chip in $18 for 1/900 millionth of Facebook.
smalldaddy 13y ago
Depends on the startup business model. I work in the "enterprise space" and at my last company, and the one I am just starting this is our plan. We are actually in discussion with two major enterprises who will help fund our initial development through NRE and invest. This is possible since we are talking 5 figure sums, where the legal hurdles and time negotiating are worth it. IF the sums of money are small, this would not work.
- mindcrime 13y ago
  with two major enterprises who will help fund our initial development through NRE and invest. What is "NRE" in this context?
  - mintplant 13y ago
    Non-recurring engineering: https://en.wikipedia.org/wiki/Non-recurring_engineering https://en.wikipedia.org/wiki/Non-recurring_engineering Basically, the one-time cost, time, and effort to develop something. Putting in funds so a product/service can exist in the first place.
  - count 13y ago
    I think non-recurring expense?
jwr 13y ago
One good reason is because it's illegal. You can't just go around selling shares in your company to anyone. There is a reason why an IPO is called a "Public" offering and why there is tons of regulations and paperwork. This is to prevent scams, pyramid schemes, and the like. And forming a non-public company with more than 20 or so shareholders is a good recipe for a completely unmanageable entity. So while the basic idea seems good, it would be difficult to pull off. I guess a ransom-type deal would work better: "Dear Users, we have a $1.1 billion buyout offer. But you could just pay us $13 each and then assuming we get $1.1 billion in revenue, we promise to maintain the service for 2 years."
- roc 13y ago
  > " I guess a ransom-type deal would work better: " Or you could just, i dunno, charge for the service.
EGreg 13y ago
The problem in the USA is telling everyone you are looking for invstment. That breaks the rules of general solicitation, which the SEC was supposed to have updated last year but has been dragging its feet. So startups can only really talk to accredited investors, and can't talk to their users and tell them they're going to pay dividends or something. However, they CAN charge their users for SERVICES :)
- dragonwriter 13y ago
  > The problem in the USA is telling everyone you are looking for invstment. That breaks the rules of general solicitation, which the SEC was supposed to have updated last year but has been dragging its feet. So startups can only really talk to accredited investors, and can't talk to their users and tell them they're going to pay dividends or something. Startups can talk directly to potential investors, both non-accredited and accredited investors (how many non-accredited investors can invest in them depends on which of the exemptions from registration requirements they are taking advantage of), all current registration exemptions however, prohibit general solicitation and advertising and solicitation except that certain state-law conditions can allow general solicitation and advertising for Rule 504 "seed capital" fundraising. The update the SEC must make under the JOBS Act for general solicitation would remove the general solicitation restriction for offerings that are restricted to accredited investors where the offering firm takes certain steps to verify that any investors qualify as accredited investors. There's also a crowdfunding option that requires an SEC-registered intermediary (and has overall limits similar to the existing seed-capital option in Rule 504.) Its not clear to me that either is necessary (or even helpful) to a company that wishes to conduct direct solicitation directed to purchasers of the company's existing offerings who are not necessarily qualified as accredited investors.
  - EGreg 13y ago
    Okay, I am a bit confused. Right now, most startups are probably advised to make a good-faith effort to ascertain that their investors are indeed accredited. If they engage in general solicitations, then the bar is higher for ascertaining this. Correct? If I wanted to message all my users and tell them to point their investor friends towards our AngelList profile, wouldn't that be public solicitation?
mousefad 13y ago
Because the users are the product.
- zwieback 13y ago
  Yes, I think that's basically it. Right now the valuation of companies with little or no revenue is based on future cash flow from users. That makes the calculation of how much one user is worth much harder since 90% of users will just drop off and use the next free service. Also, it's really hard to predict how much users are willing to pay for distraction and entertainment. There are some sites I get value from (e.g. buying/selling or booking things) but the vast majority is just entertainment.
beat 13y ago
Look up "qualified investor". Opening ownership shares up to literally thousands (if not millions) of not-qualified investors makes it impossible to get proper funding from VCs later. Imagine having to get signatures from 100,000 ten dollar investors, just to get a million dollars. Crazy.
fudged71 13y ago
It seems like a viable idea to let users of big sites vote for feature upgrades with their wallets, kickstarter style. Pay to get into a beta rollout. Early adopters will do a lot to get a new feature, and they love to decide on features. So let them do that. I don't know why Facebook doesn't do this, honestly.
famousactress 13y ago
There's an easy solution and it's called charge them fucking money for your product. Every bootstrapped, for-pay startup has users who invest in them. Do those get shuttered? Sure, that happens.. but with less frequency I'm sure, especially when the business is actually turning a profit. As a user, it makes sense to pay attention to the complete cost of 'free' when choosing a service.
oscargrouch 13y ago
Folks, we are in the beginning of the digital currency era.. the idea is that the founders of a company say "Starter", create the Starter currency.. make a evaluation of how much the whole company worth.. translate this value to Starter units.. and decide the amount to share, and sell.. Then people would buy it, indexed with bitcoins and/or dollars.. The idea is to create a digital crypto-currency the same way bitcoin is.. but indexed by each company evaluation by trading, sell/buy operations.. how about that?
icedchai 13y ago
why don't they get paying customers instead?

85 points by edent 13y ago

It's not a bad idea, but there are so many things that need considering. For example, you can't have more than 500 investors before you're required to declare your accounts. For a company that's in a growth period rather than a 'making shed loads of money that looks good to your average joe on the street' period, declaring your accounts isn't necessarily a good idea. Secondly when you have shareholders you have to be seen to be doing things to increase value for your shareholders, and not necessarily for the long term. Raising money doesn't always coincide with making profit, so the companies would be exposing themselves to potentially hindering lawsuits (which would probably be dismissed but are definitely distracting).

robertlaing 13y ago

This article is not 100% clear on whether it means "true" investment or just paying for a service, which is not the same thing at all. But regarding "true" investment, It's something we looked at 18 months ago when raising our Series A. At the time it was impossible due to SEC regs around accredited investors and max number of investors (deeper analysis here: http://www.startupcompanylawyer.com/2012/05/26/is-crowdfunding-legal/ http://www.startupcompanylawyer.com/2012/05/26/is-crowdfundi...) so we gave up. But it would be great to have simple ways of getting it done. https://wefunder.com/ https://wefunder.com/ and others (round-up here: http://www.thecrowdcafe.com/investment-crowdfunding-platforms-whos-funded/ http://www.thecrowdcafe.com/investment-crowdfunding-platform...) are trying to make it happen. Good luck to them :)

wilfra 13y ago

They can't take money from non-accredited investors (those who make below $200k per year or have less than $1 million in assets). This is the reason you can't get shares or profit sharing on Kickstarter. The JOBS act loosened the regulations to open it up to anybody - but those changes have yet to be implemented and you presently still need to be an accredited investor to invest in startups. As for whether they'd even want to do it, that's another question. WeFunder (a YC company) wasn't able to convince many of their batchmates to offer shares to the public when they launched and the company I tried to fund through them (Strikingly) appears to have ignored everybody who attempted to back them through WeFunder and went with traditional investors instead (or at least that's what they've done in my case).

dragontamer 13y ago
I came here just to post this. Then I noticed that you already mentioned it. The JOBS act is new, and companies aren't taking advantage of it yet. It was only passed a month ago after all... That said, how do Co-ops work? As well as companies like REI or Vanguard? Purchasing an REI membership makes you a holder of the company, and same thing with Vanguard funds... or many credit unions. Is there a reason why the JOBS act was needed when customer-owned businesses already existed?
- nknighthb 13y ago
  Whether you realize it or not, I believe you've just asked for a dissertation on the myriad rules covering ownership of incorporated entities. I'm not qualified to give it to you, but I can say it's not nearly as simple as "IPO or accredited investors only!". You need only consider one scenario to realize this: You don't need to be an accredited investor to incorporate a company. This is not comprehensive, but it's a good starting place: http://www.sec.gov/info/smallbus/qasbsec.htm http://www.sec.gov/info/smallbus/qasbsec.htm
  - dragontamer 13y ago
    Thanks for the link, I'll give it a look over :-)
OldSchool 13y ago
The accredited investor requirement is right on. It doesn't stop crooks who don't care about law, but without it we'd have rampant 1920's-style fleecing of individuals by smooth talking con artists. That's not to say there aren't some wealthy people out there whose only successful product was stock, but at least they were forced to do it through proper channels and often endured the boilerplate shareholder lawsuit that's in the top drawer at certain law firms during economic downturns.
dragonwriter 13y ago
> They can't take money from non-accredited investors (those who make below $200k per year or have less than $1 million in assets). That should be an "and" not an "or" (meeting either the income test or the asset test qualifies for "accredited investor" status.) And there are several conditions under which firms can make accept limited numbers of non-accredited investors along with unlimited numbers of accredited investors. > The JOBS act loosened the regulations to open it up to anybody That's not entirely accurate. The JOBS Act requires the SEC to do two main things in this area: 1. Remove the requirement prohibiting general solicitation and advertising for investment opportunities, if those opportunities are restricted exclusively to accredited investors and the firm seeking the investments takes steps to verify that the investors qualify as accredited investors. 2. Allow "Crowdfunding" with specified per-investor limits of up to $1 million in a 12 month period, via an SEC-registered intermediary. Neither of these really opens things up to people who couldn't invest before: the first option allows public advertising but is expressly restricted to accredited investors; the "Crowdfunding" option is basically similar to the Rule 504 "seed capital" option, both of which have a $1 million in a 12-month period limit, and neither of which is restricted to any particular class of investors ("seed capital" restricts general solicitation but allows the firm to sell securities directly, "crowdfunding" allows general solicitation but requires the firm to act through an SEC-registered intermediary.)

orangethirty 13y ago

They do, its called selling a product. Tumblr didn't sell much of anything, because they did not have much of anything to sell. They provided free blogs to people. That's it. You can't complain about not making money if you did not make sure to have a clear way to make some. Reason for which one should first make sure to validate the business.

scotty79 13y ago
Buying product from a company doesn't allow you to participate in its financial success.
lancewiggs 13y ago
Tumblr seemed to do a very poor job of asking customers for money, and it's a lesson that everyone can take away. At the very least provide users with some money to spend with an easy incentive to spend it, and make the transaction very easy and quick.
- orangethirty 13y ago
  Exactly. Blogs are a super easy sale. All you needs to do is upsell customization. Plugins, themes, more storage, etc.

martinkallstrom 13y ago

The concept of a business is hundreds of years old and history has seen most types of business financing, both benevolent and scammy. As a result, there's a massive amount of regulations around it. No matter if intentions of the business owners are benign or not, when the public invests in companies there is a need for rules governing transparency and control. What the post is referring does exist, it's called the stock market. It is a set of rules you need to follow before you can allow thousands or millions of shareholders to invest. Committing to the rules and getting the permission to do so is called an IPO.

sliverstorm 13y ago
To my understanding, the thing that is really new is the current strategy surrounding IPOs. From what I gather, IPOs used to be a key option for raising funding, rather than a key option for cashing out. If you use an IPO as a source of fund raising, it seems like you'd have little trouble using the stock market to do this very thing- allow your users to invest in you.
- btrautsc 13y ago
  I think (for technology companies you're correct).. Private money is 'cheap' for growing tech companies, so going IPO as a way to source further growth capital makes little sense (also worth noting, the cost of starting/ growing is accelerating down). So, why give up massive amounts of control - in many cases having to actually listen to those owners, be forced to share information with competitors through filings, and deal with the headaches when VC money is so cheap and relatively plentiful? Look at an example like Groupon, where many of the major shareholders had largely cashed out before ever making it to the stock market (through VC fundings). Similar situations have happened with both Facebook, Twitter in terms of pre-emptive cashing out.
VLM 13y ago
"need for rules governing transparency and control." And when they're implemented, the politicians the existing large players hired via campaign contributions are very careful to make sure the regulations favor the existing large players who pay the politicians bills, in other words the exact opposite of startups. So that's probably not going to end well for the startup.

tobinfricke 13y ago

A business owned by its "stakeholders" (customers and/or employees) is called a co-op.

alexchamberlain 13y ago
Now all you need to do is make it really easy to set up a co-op and "sell shares" online... I'm guessing this could be done in the UK - we have a few major co-ops here; is the US the same?
- antoko 13y ago
  Federal Credit Unions work in a similar way to the UK's Building Societies. There are other co-ops here but I don't think they have the same penetration as in the UK. One national brand I CAN think of that is a co-op is REI, I'm sure there are others though, lots of local-focused food businesses use a co-op model. Costco and Sam's club (wholesalers / cash n carry) offer membership benefits but I think that's more related to getting air miles on your credit card.
  - cglace 13y ago
    Costco and Sam's club (wholesalers / cash n carry) offer membership benefits but I think that's more related to getting air miles on your credit card. I'm confused. What on earth does being a member of Costco have to do with credit card air miles?
    - antoko 13y ago
      Apologies, bad choice of word on my part. I should have said "akin" rather than "related". The point I was trying to make is that whilst those companies offer a membership incentive structure its not a true co-op and you don't have an ownership stake in the company. You just receive some member benefits like cash back and discount coupons - similar to your credit card company giving you air miles.
  - brudgers 13y ago

ronilan 13y ago

There once, during the internet bubble of 2000, was a startup that said anybody who signs up for their newsletter will get a share in the company. All the serious finance people said it was a scam, but a lot of people fell for it and did enter their email. Internet was hot back then. How did it end? After many years, the company paid about $4 for each shareholder and then IPOed. It is still an awosome newsletter business today. It's called TravelZoo (TZOO)

ig1 13y ago

Wordpress.com has 66 million blogs and it's parent company made ~$45m - and I'm guessing a significant chunk of that came from a tiny percentage of power users. Most users just aren't willing to pay for a consumer web product let alone invest, for something like tumblr you'ld be lucky if you could get a tiny fraction of a percent of users to even think about investing.

quackerhacker 13y ago

I think the reason most startups are hesitant to ask their user base for funding is because even selling OTC stock in a company still requires alot of regulation with the SEC. If I remember right (others feel free to weight in here), the startup has to designated a transfer agent, then the company also has to value all of it's assets, past revenue, and I don't think they can account potential revenue. Selling OTC stock in a company, I don't believe is just stick a price on it and sell it for that amount. In other words, a startup would be better off formulating a clear and concise business plan.....or be like Mark Cuban, and sell high and go on Shark Tank...funny, what happened to Broadcast.com and the buyer? [yes, I know the buyer is Yahoo, and the basis of this article is Tumblr]

c3vin 13y ago

I can't imagine a majority of facebook users making decisions. ..that sounds dangerous.

brudgers 13y ago

"I want to be an investor - a very small one - in the services I use. I don't want my attention to be sold to the highest bidder on the stock market." The second sentence explains why allowing investors described in the first one is a bad idea for a startup. Investors have rights, and investor relations is time consuming. It is better if the interests of investors align with those of the business owners, e.g. making a large amount of money. Otherwise, there is real risk of being dragged down by lawsuits.

fitzpasd 13y ago

I can't imagine what Facebook would be like today if every user had a share, given the community uproar (at least initially) to any new changes to the UI, feature set etc.

deleted 13y ago

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gnoway 13y ago

I didn't read all of this, but isn't the current standard business plan to get as many 'free' users as possible, monetize them by adding advertising, then selling their eyeballs to Yahoo, etc. for actual money? Asking your users to actually pay themselves would mess up step 1, right?

mindcrime 13y ago
but isn't the current standard business plan to get as many 'free' users as possible, monetize them by adding advertising, then selling their eyeballs to Yahoo, etc. for actual money? No. There may be a lot of people pursuing that sort of thing, but there are plenty of startups selling "stuff" (whether it's software or something else) to people with money to spend (probably businesses) for real money. Don't fall for the silicon valley groupthink / herd mentality BS. Building a company that makes money the old fashioned way is still very feasible, and - IMO - always will be.

nolite 13y ago

we all those "customers" in the real world

lucaspiller 13y ago

Brew Dog, a craft brewery - but a startup none the less - did exactly this. They needed to raise a few million pounds to expand their business: http://www.brewdog.com/equityforpunks http://www.brewdog.com/equityforpunks http://www.thetimes.co.uk/tto/business/industries/retailing/article3092355.ece http://www.thetimes.co.uk/tto/business/industries/retailing/... They also do pretty good beer :-)

kp27 13y ago

There's a fundamental difference between investors and customers. Users are customers, they pay if they feel the value of the product is worth XYZ. Investors are banking on the idea/product to be worth more in the future than what it is now. They also have an appetite for risk, mainly because they understand investing and diversify.

brackin 13y ago

In the UK crowdfunding startups is becoming common using Seedrs or Crowdcube and a few startups I know have raised a few hundred thousand from their users (and wealthy individuals using these sites).

lifeisstillgood 13y ago

They can - it's called an Enterprise license Many a startup has bootstrapped off one or two customer "investments" - Marc Andressen famously walked a cheque for 11 million USD round the early Netscape offices. I believe he regretted taking the money be ause it made them beholden to features that customer wanted - but try telling the difference between that and a equity investment

lifeisstillgood 13y ago
Honestly, I don't get the down vote. Maybe a facetious tone, but 11million bucks helped one of the web's formative companies take off - and that was a customer "investment". The person(s) who signed that cheque probably had done dozens like it before and dozens like it afterwards - whoever they were, and like hundreds of other senior corporate radicals across the globe, they take the one thing scelortic huge companies have plenty of (money) and push it back to nimble innovative companies. Its an investment in all but name. And it pays everyone dividends when it works. seriously - if you want investment from your customers, find the big names in your email list.
beachstartup 13y ago
selling products and services to companies who will pay for it, thereby getting the money you need to expand??? what a radical idea. it'll never catch on.

morgante 13y ago

It's called an IPO, and the structures are in place for a reason. Can you actually imagine the difficulty of keeping 170 million "investors" updated on the status of the company? You'd have to share so many reports, make sure everything is done fairly, release regular earnings. Oh, wait, that's exactly what the SEC requires for doing IPOs... Seriously though, it'd be a scary world where everyone is an investor. Most people just aren't qualified to understand risk and make smart decisions for the future of the company. Startups would end up with no revenue and people's investments would be worthless.

minimax 13y ago

The thing is, it's pretty hard for an ordinary person to buy a share of a company. You usually need to be able to buy a large quantity of shares, pay for a trading account, try not to get ripped off with various fees, and deal with taxes. This is FUD. You can easily buy one share if you want to. You don't pay to open a trading account. The fees are about as transparent as they could possibly be. And the taxes are not much more complicated than normal income taxes -- if you hold for less than a year your profits are taxed at the marginal rate and if you hold for longer than that you are taxed at the long term capital gains rate. I'm not saying it's a good idea to buy one share of a $25 stock. It's not. But modern retail trading is accessible to pretty much anyone these days.

Retric 13y ago
I would also add that many companies let you bypass fees and directly buy there stocks. Which can save you significant amounts of money if you want to say buy a few shares every paycheck. PS: Fees are the #1 problem for small time investors. It's generally more important to reduce fees than it is to spend a lot of time investigating companies. http://www.forbes.com/sites/moneybuilder/2012/06/20/how-to-invest-using-direct-stock-purchase-plans/ http://www.forbes.com/sites/moneybuilder/2012/06/20/how-to-i...
edent 13y ago
Got any links? In the UK I was using iii.co.uk - but they recently started imposing fees which were prohibitive for small scale transactions.
- minimax 13y ago
  Sorry I should have put a disclaimer that I was talking about trading in the US. I'm not as familiar with retail trading in the UK. In the US you will typically pay between $7 - $10 per trade for stocks (regardless of order size). These are the sorts of retail rates you see here: https://www.scottrade.com/online-brokerage/trading-fees-commissions.html https://www.scottrade.com/online-brokerage/trading-fees-comm... https://us.etrade.com/investing-trading/pricing-rates https://us.etrade.com/investing-trading/pricing-rates https://www.tdameritrade.com/pricing.page https://www.tdameritrade.com/pricing.page So at these rates, a $25 trade still doesn't make any sense, but a $500 - $1000 (still well short of a round lot) trade might.

ehm_may 13y ago

"I don't understand money. Well, specifically, I don't understand how companies are funded, classify shares, or any of that finance stuff." lol - stopped reading

capex 13y ago

You are mistaking Facebook's 900 million users vs 900 million users willing to chip in $18 for 1/900 millionth of Facebook.

smalldaddy 13y ago

Depends on the startup business model. I work in the "enterprise space" and at my last company, and the one I am just starting this is our plan. We are actually in discussion with two major enterprises who will help fund our initial development through NRE and invest. This is possible since we are talking 5 figure sums, where the legal hurdles and time negotiating are worth it. IF the sums of money are small, this would not work.

mindcrime 13y ago
with two major enterprises who will help fund our initial development through NRE and invest. What is "NRE" in this context?
- mintplant 13y ago
  Non-recurring engineering: https://en.wikipedia.org/wiki/Non-recurring_engineering https://en.wikipedia.org/wiki/Non-recurring_engineering Basically, the one-time cost, time, and effort to develop something. Putting in funds so a product/service can exist in the first place.
- count 13y ago
  I think non-recurring expense?

jwr 13y ago

One good reason is because it's illegal. You can't just go around selling shares in your company to anyone. There is a reason why an IPO is called a "Public" offering and why there is tons of regulations and paperwork. This is to prevent scams, pyramid schemes, and the like. And forming a non-public company with more than 20 or so shareholders is a good recipe for a completely unmanageable entity. So while the basic idea seems good, it would be difficult to pull off. I guess a ransom-type deal would work better: "Dear Users, we have a $1.1 billion buyout offer. But you could just pay us $13 each and then assuming we get $1.1 billion in revenue, we promise to maintain the service for 2 years."

roc 13y ago
> " I guess a ransom-type deal would work better: " Or you could just, i dunno, charge for the service.

EGreg 13y ago

The problem in the USA is telling everyone you are looking for invstment. That breaks the rules of general solicitation, which the SEC was supposed to have updated last year but has been dragging its feet. So startups can only really talk to accredited investors, and can't talk to their users and tell them they're going to pay dividends or something. However, they CAN charge their users for SERVICES :)

dragonwriter 13y ago
> The problem in the USA is telling everyone you are looking for invstment. That breaks the rules of general solicitation, which the SEC was supposed to have updated last year but has been dragging its feet. So startups can only really talk to accredited investors, and can't talk to their users and tell them they're going to pay dividends or something. Startups can talk directly to potential investors, both non-accredited and accredited investors (how many non-accredited investors can invest in them depends on which of the exemptions from registration requirements they are taking advantage of), all current registration exemptions however, prohibit general solicitation and advertising and solicitation except that certain state-law conditions can allow general solicitation and advertising for Rule 504 "seed capital" fundraising. The update the SEC must make under the JOBS Act for general solicitation would remove the general solicitation restriction for offerings that are restricted to accredited investors where the offering firm takes certain steps to verify that any investors qualify as accredited investors. There's also a crowdfunding option that requires an SEC-registered intermediary (and has overall limits similar to the existing seed-capital option in Rule 504.) Its not clear to me that either is necessary (or even helpful) to a company that wishes to conduct direct solicitation directed to purchasers of the company's existing offerings who are not necessarily qualified as accredited investors.
- EGreg 13y ago
  Okay, I am a bit confused. Right now, most startups are probably advised to make a good-faith effort to ascertain that their investors are indeed accredited. If they engage in general solicitations, then the bar is higher for ascertaining this. Correct? If I wanted to message all my users and tell them to point their investor friends towards our AngelList profile, wouldn't that be public solicitation?

mousefad 13y ago

Because the users are the product.

zwieback 13y ago
Yes, I think that's basically it. Right now the valuation of companies with little or no revenue is based on future cash flow from users. That makes the calculation of how much one user is worth much harder since 90% of users will just drop off and use the next free service. Also, it's really hard to predict how much users are willing to pay for distraction and entertainment. There are some sites I get value from (e.g. buying/selling or booking things) but the vast majority is just entertainment.

beat 13y ago

Look up "qualified investor". Opening ownership shares up to literally thousands (if not millions) of not-qualified investors makes it impossible to get proper funding from VCs later. Imagine having to get signatures from 100,000 ten dollar investors, just to get a million dollars. Crazy.

fudged71 13y ago

It seems like a viable idea to let users of big sites vote for feature upgrades with their wallets, kickstarter style. Pay to get into a beta rollout. Early adopters will do a lot to get a new feature, and they love to decide on features. So let them do that. I don't know why Facebook doesn't do this, honestly.

famousactress 13y ago

There's an easy solution and it's called charge them fucking money for your product. Every bootstrapped, for-pay startup has users who invest in them. Do those get shuttered? Sure, that happens.. but with less frequency I'm sure, especially when the business is actually turning a profit. As a user, it makes sense to pay attention to the complete cost of 'free' when choosing a service.

oscargrouch 13y ago

Folks, we are in the beginning of the digital currency era.. the idea is that the founders of a company say "Starter", create the Starter currency.. make a evaluation of how much the whole company worth.. translate this value to Starter units.. and decide the amount to share, and sell.. Then people would buy it, indexed with bitcoins and/or dollars.. The idea is to create a digital crypto-currency the same way bitcoin is.. but indexed by each company evaluation by trading, sell/buy operations.. how about that?

icedchai 13y ago

why don't they get paying customers instead?