In case you guys missed it, the SEC in Title II of the JOBS Act rolled out TODAY. That means startups can now raise funds from accredited investors on Wefunder site itself. This is HUGE but that's not all.
Next summer SEC will roll out Title III which means EVERY SINGLE AMERICAN can now invest in startups for as little as $100. This will be a massive boost for all startups everywhere, especially for non-traditional startups that couldn't get funding before. I'm very excited to see all the new startups coming out of this.
This is the beginning of Bubble 2.0. I'm a libertarian, but this decision is fucking scary.
I invest a lot of money for people in my life (for free), so I fairly regularly get emails effectively saying: "Oh look at this stock my friend forwarded to me (pump and dump scam)" which I then have to explain why it isn't going anywhere. So it is already pretty bad (especially on venture exchanges), BUT when thirty thousand startups start taking investments from mom and pop investors the consequences are going to be massive. We're talking tens or hundreds of thousands of dollars from MILLIONS of people. Right into the lap of startups that don't even have a merchant account.
So the lesson here is get in on this early, profit harvest, and get the fuck out before it crashes due to irrational exuberance.
I can understand your viewpoint, and I'm usually pessimistic about human nature... But in this one thing, I'm an optimist.
I think it's a problem that the rich and well-networked effectively had a government-protected oligarchy to investing in the best private companies. Much of the capital appreciation in this country over the last couple decades went to private companies before they IPO, of which mom and pop investors had no access too... because the government 'protected' them by not allowing them to invest their money where they see fit.
The JOBS Act has a good balance. No one making $90k will be able to invest more than 5% of their income in startups. That makes sense.
There's still the possibility that companies will choose investment from larger investors, for the other values those investors provide.
That's not to say I feel that way. I love that I will soon be able to invest, without being a high net worth individual. Though I've had it pointed out to me that if I were to have my company valued in some way, either by taking funding at a higher valuation or by getting it appraised, I could probably qualify as a high net worth individual and invest already...that's a process I don't want to go through.
I think this is definitely a democratizing influence on capital. Especially since the public markets have become such a late stage fundraising process....Google was already massive when it went public. Many companies I'd like to be invested in aren't public and show no signs of going public. Dropbox is a multibillion dollar company, and isn't public, for instance.
My concern is that weak companies will flood this channel, making it harder for money to be smart...which hurts the market as a whole. But, a lot of big money isn't very smart, either, so I guess we just have to deal with dumb money, no matter what.
Yes but big dumb money on average is smarter than small dumb money. Also I'm guessing in aggregate there is a lot more small dumb money. I find this scary.
I don't have strong feelings one way or the other about the JOBS Act although I do think it will be interesting to see how everything develops.
But let me play devil's advocate for a moment.
From the standpoint of a founder, I know that raising small chunks of money from lots of investors is more likely to be problematic than it is likely to be beneficial. There are numerous logistical and legal downsides to this.
From the standpoint of an investor, I know that spray and pray investing rarely produces great wealth. And I would have to assume that general solicitation and the willingness to raise money from lots of investors are signals, and not necessarily good ones.
Taking both of these things into consideration, I would have to conclude that companies taking advantage of the JOBS Act to raise money are, in theory, probably going to be less attractive as investments than companies that don't have to. In other words, the JOBS Act might create more opportunities for me, but it would be foolish of me to assume that these are the same opportunities the rich and well-networked have access to.
In order to attract the type of high-quality companies currently fundraising on Wefunder, we've were forced to figure out how to take away all of the downsides.
The most important thing we do is manage a fund that aggregates all of the smaller investors. These investors are actually Wefunder's investors. Wefunder then makes one investment into the startup.
So the startup doesn't have to deal with dozens of investors on their cap table.
Or, put in other words, all the logistical and legal hurdles are placed on Wefunder, not the startup.
> From the standpoint of a founder, I know that raising small chunks of money from lots of investors is more likely to be problematic than it is likely to be beneficial. There are numerous logistical and legal downsides to this.
We've fixed this with WeFunds - our LLC fund that bundles many small investors into a single item on a cap table, relieving the logistical and legal downsides.
We also believe in the crowd as a value-add investor. For example, Casetext (YC S13, SV Angel) is raising on Wefunder because they'd love to have lawyers who are outside the Silicon Valley bubble invest in them.
> We've fixed this with WeFunds - our LLC fund that bundles many small investors into a single item on a cap table, relieving the logistical and legal downsides.
That may solve a few of the problems with having numerous small investors, but it doesn't solve them all. For instance, if I raise $25,000 each from 20 investors who are spraying and praying with a dozens or more other startups, I have to consider that potentially none of these investors will have the motivation or wherewithal to provide additional assistance (financially or otherwise) if and when I need it.
I agree that a company dependent on the JOBS act to raise money is less attractive, but that's only one of several profiles of folks who would take advantage of the JOBS act (that's a terrible sentence, forgive me).
Companies with founders who have a fundamental problem with the VC/Entrepreneur relationship may see this as an opportunity to take their business to the people they really want to serve. The visionary customers who will be buying the first release of your product may also be interested in making a (small) early investment in your company.
There's certainly a great deal of risk for these more casual investors. They need to really understand the risk before they get involved, but investors are supposed to be evaluating their risk anyway. Hopefully companies like wefunder will do a good job of helping investors identify risk and opportunity. If they don't, other services will likely take their place.
There's no limit to how much someone can spend on lotto tickets, slot machines, craps tables, options, etc. Why is startup investing any more dangerous?
Because people are being approached and told misleading crap by fly-by-night companies. At least they were, when the blue sky laws were enacted in the 30s.
The real regulation, imho, should be around truth in advertising and representation. There's not enough of that.
> So the lesson here is get in on this early, profit harvest, and get the fuck out before it crashes due to irrational exuberance.
Investments in early-stage startups are highly illiquid so in most cases, getting in early won't mean a thing because you will never be able to get your money out.
I think he means 'get in on the phenomenon in general', not any one particular startup. I mean, looking at the portfolio, I think even with wefunder, most of the companies "look like crap" (although I'm sure that some of them will be alright), and if I could clear the requirements, I'd only invest in two of them.
How does JOBS Act (and platforms like Wefunder, FundersClub, AngelList) handle small investors selling their stock, pre-IPO? i.e. is it even possible to "get the fuck out"?
It's kind of funny. Some libertarians who want economic freedom might actually be against it. And I am for it, even though I am in favor of a welfare state with safety nets. I guess it's all about what we are faced with on a day to day basis.
I don't have a problem with the JOBS Act, but I would also point out that you cannot look at the JOBS Act in a vacuum:
1. "Accommodative" monetary policy has created an ultra low yield environment that has punished savers and made life incredibly challenging for many investors.
2. The environment has "encouraged" (others might use the word "forced") savers and investors to reach for yield and returns.
3. This reach has resulted in capital misallocation and malinvestment and has artificially inflated numerous asset classes from real estate to publicly-traded equities.
4. A good number of investors who have significant exposure to these asset classes have significant gains (realized and unrealized), which influences their investment decisions.
5. Risk is dramatically being underpriced. You don't even need to look at, say, the corporate debt market. Just look at the terms being offered on some of the Wefunder deals and you can see that risk is being underpriced in the angel market.
Making it easier for companies to publicly solicit investment at the same time monetary policy has pushed significant amounts of money into riskier and riskier asset classes may, in hindsight, prove to be a bad combination for investors who are less sophisticated and/or greedy.
I agree that it is strange, but here is something to think about:
Imagine a world where people are conditioned to believe that they can't make a very bad mistake even if they want to. Objectively they should be able to make this mistake, but if we allow them to, who is at fault? Is it the person who allowed them to make the mistake? I don't think so.
Same idea for libertarians. If we all knew we were going to be in the battle pit, we'd all done hardened armour, but we mostly think we'll be ok, so we don't.
Safety nets have a moral hazard of course. Nothing is perfect. People do fall through the cracks, others take excessive risks and some even game the system (risking being caught and put in jail).
But on net (no pun intended) welfare has reduced poverty. Consider limited liability companies and corporations. They can afford to go bankrupt and starve of resources. The free market discipline can apply to them. But when it comes to living beings such as humans, we need to mitigate the loss.
A quick warning for everyone. Investing without having a complete access to the books of the company you invest in is extremely stupid. No serious investor would do that. Don't be stupid.
You must make sure the valuation is fair, this means - check the valuation report, check the reputation of the company who did the valuation report, sanity check it, look for signs of bullshit.
Keep in mind, even if the founders have solid reputation there may be some unethical MBA behind the scenes who can act without founders understanding exactly what he is doing.
"there may be some unethical MBA behind the scenes..."
This is an unnecessary smear on MBAs. There are bad ones out there, and there are plenty of good ones. Just like with any other degree.
Your points are completely sound, and I agree, but it's time we ended the knee-jerk hatred of those three letters. There are YC-backed startups with MBAs at the helm, and there is an increasing number of engineers with MBAs or dual degrees.
MBAs are fine. But their job is to take as much money as possible and give back as little as they can. This is fine when they are dealing with other equally equipped parties (YC, vc funds etc). If you don't understand the game, there is almost no doubt that an MBA will try to offer you the worst possible deal for you. If you have no means to examine the details of the deal, that's a guarantee. That's how business works. It is their job and they would be doing a bad job if they do otherwise.
You're painting "MBAs" with too wide a brush. There are MBAs in marketing, MBAs in health care, MBA software engineers, MBAs in consulting, MBAs in advertising, MBAs founding companies, MBAs in production and creative fields, MBAs in media, etc.
"MBA" is not a job title; it's a degree. I think the term you're looking for is "finance" or "Corp Dev," which is more of a specific job role that often fields MBAs to fill it. Their job is to get the most favorable terms possible in a deal, but not at the expense of the deal itself. So yes, go into a deal with a finance or corp dev person with your eyes wide open -- but they lose more than they gain if they develop a reputation for completely screwing people over again and again. It pays to know what their incentives are, how their firm makes money, and what your alternatives are to a deal with them (and often, your alternatives involve deals with other finance types).
What you enumerate are MBA specializations. The core of every MBA course is about optimization and modeling. There is no argument what to do when you can sell something at price P or 100*P, no matter what kind of MBA you have.
There is a mindset associated with it. It's a personal failure if you miss an opportunity to make more money as an MBA.
That's just nonsense to say that applies to every single MBA. You are almost a parody of the anti-MBA Hacker News type that make me suspect you may even be trolling (without looking at your profile; not funny if you are).
Do you have an MBA? Do you know the motivations of every single MBA in the world?
Hold on a second. I have nothing against MBAs. I also very clearly said "may" in my initial post so I am not even claiming my comments apply to every single MBA in the world. I don't see any substance in your comments, just calling me names.
It's not a big leap to assume that MBA students sign up to make more money and have more power. Why don't you tell me what exactly are MBAs after?
There is nothing wrong with making money. Like I said, this is fine and everybody can understand it. Why should I apologise?
I am simply arguing the MBA programs teach a certain mindset. Just like being a doctor, an engineer or an arts person are different mindsets. The difference is the guy with the MBA brings value by identifying and taking every opportunity to make money, while an engineer's focus is to build things. An MBA is typically held accountable for missing opportunities like that. And I would be really happy to read what's your take on how an MBA brings value.
Most early stage deals, like the ones you'll find on WeFunder or AngelList, typically do not have valuations or financials to share simply because it's too early on for a company to seriously offer that. Why waste time putting together financial and valuation models, when you could be working on the product and trying to grow?
These guys are asking for very specific prices on their website. They must have some kind of valuation behind it. I just need to know how they came up with this number. Also, both IRS and SEC have rules and guidelines on how to do valuation on startups - they use things like committed potential customers, founder reputation, CVs and things like this. Every startup has to do valuation before issuing stock options for example.
When I did the "valuation" on my startup for crowd-funding (Seedrs), when it was nothing more than a wire-frame and an idea in my head (and an MBA research project, but you almost make me feel like I should be ashamed to admit that or something), I just did it based approximately on the valuations that various accelerator-type programmes (including YC) were giving. I came up with 14% for £30k, giving a valuation of £214k. Low enough to get investment fairly quickly - nobody complained. How on earth are you meant to do a books-based valuation of an early-stage pre-revenue company? You have to give a specific valuation so people know what they are getting.
Just google it. There are many methods to do valuation of startups. And again, you can not issue stock options without IRS-supervised valuation. Most startups on the website are post-seed with more than 3 people on the team already BTW. So it's pointless to discuss pre-seed valuation at all.
Whatever numbers you have in your valuation I need to know how you got them to decide if it makes sense.
(Edit: You may be from the UK, so it's a little different than US. I was speaking for the US case here.)
You're mistaken, almost all of them are seed-stage, minus one. You can issue stock whenever you want.
But I realize that your point is that you'd prefer due diligence and transparency on terms before using a site like WeFunder. The thing is, most investments at that stage don't have that much due diligence beyond market size, team, and traction. I think this is where you're misunderstanding.
You're mistaken. Most of these companies are raising >500K, this is not seed money. Seed is typically less than 100K. There are at least 10 companies that come from YC, which means they already got their seed round. You can't do seed twice by definition.
That would be highly unusual. But it doesn't matter that much to me if it's true. We were simply talking about different thing when saying "seed". No harm done.
That's why companies use convertible notes. While the cap is a proxy for valuation, there is no issued stock options until the note converts to equity in a priced round.
Because a basic model can take 20 hours, and then is useful in supporting the valuation in discussions. It can literally bump the value of your company post-investment, similar how an MS on your resume can get you a bigger salary. You COULD do without it, but it's not so obvious why you should always omit it.
No, rather it's that as a founder you have limited time to expend, and spending effort getting traction will have a much larger return than trying to optimize for the various requests of angel investors.
There are also enough quality investors out there who use signals other than hand-wavy financial reports that you could be spending your time to get.
Valuation of the company is determined by supply and demand (of the company itself in the form of stock). Supply is of course limited; companies will only raise a few 100K$ max in a seed round. Demand on the other side, is largely decoupled from how the company is doing in the market since its just too damn early. In other words, the only things that matters at this point are the founders and the market. If there is high demand, companies can raise their market cap. When companies struggle to raise money, they lower their cap. Established business can use revenue as an indicator to potential investors. This makes little sense to companies that have a few months of revenue total.
They don't have monopoly, but their job is essentially to take as much of your money as possible and give back as little as they can. When you have a party like this involved you watch your back.
It worries me too, although an acquaintance of mine has a bumper sticker that reads "just one more bubble, this time I'll sell."
My concern is that non-qualified investors will once again be participating in a complex equities market with technology companies that are pushing the edge of the envelope. That will fund companies that should not be funded, lose money for people who cannot afford to lose it, and create another period of ill will for "tech" investment.
The main similarity, besides both being YC alumni: FundersClub and Wefunder both form single-purpose LLC's that aggregate small investors, and then make one investment into the startup. So the startup only has one investor on their cap table.
The main difference is one of long-term vision. FundersClub is invite-only and exclusive. Wefunder is designed for everyone to be able to invest in startups. We're most excited by Title III JOBS Act, which will let unaccredited investors invest as little as $100.
We believe that the true value of crowdfunding comes from having your most passionate users and customers invest, not just C-level execs in an invite-only club who you've never met. The people who love your product can invest small amounts on the same terms as professional investors.
Investors on Wefunder are investing on the same terms as the professional investors. It's possible that investments could get squished, but that would lead to a lot of pissed off people, not just the smaller investors in the fund.
To make it simple: Let's say you invest $1000 in a startup. The startup gets acquired and your stake is worth $10,000. You get your $1000 back, and then get 90% of the rest. So you get $9100, and Wefunder gets $900.
AngelList is optimized for professional investors in Silicon Valley. It's a little like inside baseball - "Oh, Dave McClure invested - now I gotta get in!"
We're optimized for people who love a particular startup because they use the product, but may not be as well networked in Silicon Valley or as familiar with startup financing. Ultimately, we're all about everyday Americans investing as little as $100.
We also have fully-integrated self-service fundraising software, since we're not relying on SecondMarket like AngelList does. This gives us a little more flexibility. Startup founders can use our software to do digital signatures, escrow, investor accredited verification, contract generation, etc, for as little as $100.
How do you address the quality problem? It seems that most startups don't need just capital, they need capital and connections to help with introductions and hiring.
So it seems that the modus operandi for an early stage startup would be
* join a well-known incubator, get investments attached to that program, if that fails
* reach out to well-known angels and super-angels, rely on them to syndicate, if that fails
* reach out to not-so-well-known angels and superangels, if that fails
* crowdfunding
It seems that the startups that are attracted to crowdfunding are either those that only need capital and not connections (a rare thing), those that have been spurned by incubators and angels, and those that need more capital than incubators or angels could provide but had been spurned by VCs.
If you look at the portfolio of 25+ companies currently fundraising on Wefunder, I think the results speak for themselves. All except one went to an incubator AND used us.
Most of the YC companies do not need capital. Most have raised significant amounts from very well-known investors.
We don't replace the current system of fundraising. We're just another tool founders can use.
We solve the quality problem by making it a no brainer for the startup - quick and fast money from a crowd of passionate users and customers of your product. But only having one shareholder on your cap table.
I'm curious - does anyone know if someone who doesn't qualify to be an accredited investor can use power of attorney for someone who does qualify to be an accredited investor to make 50/50 investments?
I don't think I'd invest in a privately owned company unless they opened their books up to me in a completely transparent manner (I'd expect the same information that I'd have access to when buying stock in a company traded on a stock exchange). My guess is that this level of information will not be provided, which means that any "investment" in a company like this would be more like betting at a casino.
1. Why does this website feel slimy?
2. Maybe, I just I got used to the status quo?
3. I do think this website is a disaster waiting
to happen? I hope not, but I see nothing but lawsuits
down the line.
4. Taking money from people who understand the risks
involved in start ups is fine, but taking the money
from the average dude who was inspired by Steve Job's
movie is Wrong.
5. To anyone who's rushing over to this site expecting
to make money one your investment; Guy's like Steve Jobs
and Mark Zuckerburg had a lot of luck on their sides too.
Mark would have probably never started Facebook, without
stealing the idea from the rich twins. And the god Steve;
he got fired from his own company.
6. I wish start ups well, but be honest. Or, at least
take money from the people who can afford to lose it.
It's not cool to lose money from the middle class and poor.
There might not be a God, but personal integrity is the
one thing that money can't buy.
2. They decide when to cash in. Usually it takes up to 10 years...
3. I would be a "bother" for the founders (true, but no nicer way of saying this?)
To me, and I am happy to waste HN points on this comment, this feels snarky and offending. They seem to say "we are the cool guys", come join us, maybe you ll be cool too, just gives us the money.
I received a promo email from WeFunder this morning. To mark the occasion of the change in the law, this was the messaging:
To celebrate, we are featuring great 25 startups from Y Combinator, Techstars, and MIT!
Clicking through to the "Raise Funding" page, which includes the pricing, this message appears at the bottom:
We offer a 100% discount to select high-tech startups that recieved funding from Y Combinator, SV Angel, or Andreessen Horowitz.
Not to dump on the accomplishments of the featured startups and those who have received funding from SV Angel or Andreessen Horowitz, but the message to everyone else seems to be: It doesn't matter how great your team is or how well you execute, if you are not part of the incubator/angel A-list, don't expect any breaks from us when it comes to promotions or pricing.
They needed a seed pool of already vetted companies. This is extremely rational on their part, and probably helps their early funders make reasonable decisions.
The biggest concern I think one should have about this is that dumb companies will be paired up with dumb money at a much greater rate than great companies being paired up with lucky (or smart) money, making the whole concept look bad.
Disclosure: That is a referral link - Seedrs give me 5% to invest myself if anyone invests an amount through that link, which I think is astonishing in itself and worthy of comment.
You still need to be an accredited investor until next year anyway. I'm not sure where the $1000 minimum comes from but it sounds like they intend on lowering it to $100 eventually.
What is the reasoning behind limiting non-accredited investing anyway? Why is it a crime for me to give somebody else money if I am happy with the terms of the contract?
I think it's the same as the reasoning behind limiting any form of gambling -- there is a savviness imbalance between the gamblers and the house, and the potential cost to society of gamblers losing more than they can afford is thought to outweigh the benefit of people being completely free to make their own decisions with their own money.
We have a lot more information at our fingertips these days, and 25% of the country is convinced that Barack Obama was born in Kenya.
I feel like we're just running the cycle on this one, someone should put up a countdown to the next Enron and these investments being made illegal again.
I love this idea. I think this is a fantastic opportunity for us plebs to start speculating.
It would be very nice to see if the crowd has a different kind of investment trend from the accredited investors.
Edit: Mostly, I'm curious if there will be enough numbers to see a "wisdom of the crowd" effect or if it will actually just amplify whatever the big money tends to be attracted to.
In case you guys missed it, the SEC in Title II of the JOBS Act rolled out TODAY. That means startups can now raise funds from accredited investors on Wefunder site itself. This is HUGE but that's not all.
Next summer SEC will roll out Title III which means EVERY SINGLE AMERICAN can now invest in startups for as little as $100. This will be a massive boost for all startups everywhere, especially for non-traditional startups that couldn't get funding before. I'm very excited to see all the new startups coming out of this.
Great job Wefunder! The website looks amazing!