Steve Rattner, former Obama “Car Czar” and prominent financier, recently wrote an article in the New York Times denouncing the JOBS Act as, “a hodgepodge of provisions that together constitute the greatest loosening of securities regulation in modern history,” saving his most scathing criticism for the legalization of equity based crowdfunding. Mr. Rattner raises many valid concerns, some that I share. But, his conclusions are wrong. Crowdfunding can benefit independent investors, small businesses, and the country overall by using the power of the internet to allow for an open, transparent capital raise.
Mr. Rattner argues that investing in private businesses should be left up to the professionals. In his words, “Picking winners among the many young companies seeking money is a tough business, even for the most sophisticated investors. Indeed, most professionally run venture funds lose money. For individuals, it’s pure folly.”
I could not agree more with the first two sentences of Mr. Rattner’s first contention. It is a leap, however, to move logically from the assertion that professionally run venture funds lose money investing in small businesses to his claim that for “it’s pure folly” for individuals to invest in them. If one is to make the assertion, it would seem of interest at least to consider why it is that most VCs lose money. Venture capital is one of those rare businesses where past results are indicative of future results, as success in VC creates a virtual cycle: a VC backs a start-up, the start-up is a huge success and generates publicity- both for the start-up and for the VC. ,The best start-ups know capital hear of this. They seek out the successful VC based on track record. In turn, the VCs get to pick and choose. All of this leads yet again to more success for that VC, and so it goes While this cycle is great for the Kleiner Perkins and Accels of the world, it is not so for VCs overall: for the 10-year period ended Q3 2012, the average VC returned a mere 6.1%; lagging the S&P 500’s 8.0% return during that time period. And this is before any illiquidity discount is applied to the VC return.