Some thoughts on startup crowdfunding

Like a lot of people, I’m excited about crowdfunding, and specifically the crowdfunding of startups now that’s it’s legal in the US. Based on my own experience investing in startups, here are some thoughts and issues that come to mind regarding startup crowdfunding. 1. Startup financings tend toward the extremes of being very oversubscribed or very undersubscribed. If you graphed out investor interest, it would look like a “U”. This is primarily the result of signaling – once a few investors commit (especially high quality ones), other investors pile on. If investors don’t commit, other investors start to wonder what’s wrong. So when you consider startup crowdfunding, it’s important to distinguish the oversubscribed cases from the undersubscribed cases. (Although one counter to this is that the U is the result of an inefficient market – when the crowds get involved valuations will float to their market clearing prices). 2. Historically, startup investing returns have tended to obey power laws (Peter Thiel has a good discussion of this phenomenon here). The vast majority of the returns came from the breakout hits. And if you go back and look at the early financings of breakout hits, a lot of them were hotly contested […]

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