My Crowdfunding Concern

Doom1From the article…

Equity-based crowdfunding is basically seeking to democratize venture capital — allowing ordinary folks to invest in startups that may be disenfranchised by the traditional funding model (perhaps due to location or industry). More money chasing more deals.

But one thing we know about venture capital is that it is among the most difficult ways to generate high investment returns. For a while, then ten-year median VC return was actually negative. Things have improved a bit lately, but Cambridge Associates still reports that the 1-year, 3-year and 10-year early-stage VC benchmark underperforms the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 (the 5-year actually bests all three comps). Angel investment returns are even scarier.

Now you’re introducing unsophisticated investors into a new market that has an increased likelihood of issuer fraud. Moreover, the pool of available investments will have negative survivor bias — since many of the most promising startups still will go to traditional VCs.

In other words, odds are that typical crowdfunding investment returns won’t even reach venture capital’s mediocre heights. And, if that proves out, why are investors going to keep investing? Remember, equity-based crowdfunding is different than Kickstarter. The only tangible return here is money, not a trendy watch.

Read more at Fortune

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