U.S. Startups Fail to Attract Expected Crowd of Small Investors
Crowdfunding appears to be a <i>terrible</i> deal for retail investors:<p>* VCs survive by maintaining portfolios of companies in which 1-2 in 10 survive (most VCs fail to generate returns that beat the public markets). This means more than that you need 10 companies --- it also governs the kinds of companies you can invest in. Despite being a message board in part dedicated to startups, it feels like very few of the relatively specialized people here understand why VCs don&#x27;t back quietly, steadily profitable companies.<p>* VCs compete for access to dealflow. The very best startups don&#x27;t need to crowdfund and will usually get better terms from VCs. Moreover, there are logistical hassles with adding retail investors (in any form) to your cap table. All this is compounded by a signaling problem, where taking crowdfunding taints your company in the eyes of future VCs. So there&#x27;s a huge adverse selection problem.<p>* Retail investors are given a deceptive view of the outcomes for startups. We all know most startups fail and zero out their investors (any S&amp;P 500 component that did that would generate nationwide headline news for weeks). But more startups fail than we think, because many (maybe most) startup acquisitions are really managed failures.<p>There are probably more reasons than this.<p>I think equity crowdfunding is structurally broken, and more likely to hurt people than to do anything for our technology market.