If Crowdfunding is the New Day Trading, Look Out

Crowdfunded equity investments should be treated as gambling, don&#x27;t do it unless you&#x27;re willing to lose money.<p>Over half of traditional angel investments don&#x27;t return the investors money and 90% of the returns come from 10% of the companies. These are traditional angels who are well connected, do due diligence, etc.<p>With crowd-funding from the start you face an adverse selection problem, a lot of the &quot;best&quot; looking startups are going to take money from well respected angels and are going to fill up their seed rounds long before they need to turn to crowd-funding. So with crowd-funding you&#x27;re left trying to find the good companies (which there are significantly less) which aren&#x27;t obviously good from a surface analysis.<p>So rather than 10% of the companies returning 90% of the returns with crowd-funding it might be closer to 5% or 1% of companies (only time will tell us the exact numbers).

The nice thing about Crowdfunding is that, like traditional trading, motivations vary.<p>For example, I recently backed the Infrared Human Vision study on Microryza [1] simply because it sounded like cool research. I backed the Ubuntu Edge even though I knew it would most likely fail to reach its funding goals because I wanted to send a message that there&#x27;s a market for a &quot;pocket to desktop&quot; convergence device. I sent a few dollars to Oculus on Kickstarter because I wanted to see that become reality.<p>I&#x27;m not naive... I know that as this gets bigger there is going to be room for technical trading, abuse, and an emergence of some myopic thinking similar to the &quot;quarter-by-quarter&quot; tunnel vision that plagues public companies on Wall Street. But the thing I like the most about crowdfunding is that it takes this long-standing idea of &quot;principled investing&quot; and really lets you put your money where your mouth is.<p>[1] <a href="https://www.microryza.com/projects/can-we-biologically-extend-the-range-of-human-vision-into-the-near-infrared" rel="nofollow">https:&#x2F;&#x2F;www.microryza.com&#x2F;projects&#x2F;can-we-biologically-exten...</a>

I see an interesting parallel of &quot;crowdfunding&quot; to MOOCs. The original (private capital &#x2F; high-prestige colleges - or their synthesis in Harvard, a hedge fund with a university attached for tax purposes) is a clubby self-dealing arrangement designed to preserve a certain level of oligopoly profits. The cheap substitute gets held up as a way for the average person to buy into that system, when it&#x27;s really a way to dump an inferior product on the public with the same brand and none of the private advantages that make it worthwhile in the first place.

I disagree that just because most people who day trade lose money, that wider access to the markets is a bad idea.<p>I&#x27;d rather have the option to enter a market when the odds are against me than not have that option at all.

This disdain for &quot;common&quot; investment is over the top.<p>A much bigger concern than the potential for poor decisions by individuals is the creation of financial instruments that are, by government fiat, only available to an elite group of institutional investors and the otherwise-wealthy.

Non-acredited investors are only allowed to invest 5% of their income. If grandma aint&#x27;t got no income she ain&#x27;t losin&#x27; alot of money. As long as all transaction go through marketlaces and the marketplaces are forced to validate the limits. Then no one is losing their life savings. Personally, The better option is to force the state lottos to inact the 5% limit and worry about the crowdfunding.

If you don&#x27;t know who the sucker at the table is, it&#x27;s you.

Wow, this editorial exactly parallels my concern. Basically people chasing outsized returns getting fleeced by the bottom of the barrel type pump-n-dump types.<p>Here is my thesis, there exists a significant number of people who attempt to exploit people&#x27;s desire four outsized returns using illegal &quot;pump and dump&quot; schemes where they pump up the value of a penny stock and them dump their shares to the unwitting victims. This is illegal and they get hunted down and sometimes caught. Now we&#x27;ll have a &quot;perfectly legal&quot;[1] way for these same folks to create the illusion of an outsized opportunity. And that will create dark versions of wefunder type companies which are focused not on enabling the next generation of entrepreneurs but instead in fleecing the next generation of technology &quot;investors&quot;.<p>[1] &quot;Perfectly Legal&quot; - code for a way to take money from someone where they cannot get it back, and yet had they known all of the facts would never have handed it over in the first place.

I&#x27;m a little surprised at HBS, this is not a very well thought out commentary.<p>People like to say startup investments are &quot;like betting&quot; and it&#x27;s true to a certain degree -- it&#x27;s very risky and odds are against you. But what separates it from more popular forms of betting (casinos, lotteries) is...<p>You have to hold on to your investment for many years.<p>The timeframe on returns is a huge difference between day trading and early stage investments. Day trading was a very close approximation of off-track betting. It had similar psychological dynamics driving it. You win some, you lose some, you keep coming back for more, you think you can beat the odds tomorrow if you just get some money together.<p>Those addictive dynamics don&#x27;t play as well over a timeframe of 5-10 years. It&#x27;s like buying a lottery ticket for 2020. Not as addictive.<p>I&#x27;m not saying there are no downsides to unsophisticated investing. Just that day trading is a poor comparison.

I&#x27;m worried that crowdfunding will lead to serious malinvestment, with large numbers of naive investors throwing money at a thousand Fakeblocks and Colors.

What they are describing doesn&#x27;t sound like crowd-funding at all. It looks more like advertized private equity with dramatically lowered quality standards.<p>It does not sound as if &quot;accredited investors&quot; would necessarily include a lot of people, especially when people know that the risk is worse than in the usual stocks.