Tuesday
Mar182014

Some Musings on crowdfunding - May the best horse win!!

March 9, 2014:

I recently went to few crowdfunding talks leading to many interesting discussions at home which made me want to pen some down.  In my opinion while too early to tell whether crowdfunding works for investors - the data just isn't there given how young the industry is - I have often wondered whether following the crowd would make you more money than not?  Does that mean that all the due diligence done by angel investors before determining whether or not an investment is potentially a winner is a waste of time? Management, management, management is all I think about when looking for winning deals - am I better off scouting crowdfunding sites and looking for the best deals on there?  While this is completely contrary to my traditional belief system and what I learned in the VC world - it does give me food for thought.  After all, the odds of an entrepreneur actually making it are so shitty (pardon my language) - does the due diligence really matter?  Or is it better to use a portfolio-based approach which crowdfunding offers very easily access to lots of deals and transparency?  After all even Warren Buffett says: “By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals.” As long as you are then spreading your money over lots of deals and dollar cost averaging by participating in lower valuation rounds does this strategy sound sound???

While I am not convinced yet, it does leave me wondering whether the market is segregating itself for two different types of investors - one who can't invest  without spending  a reasonable amount of time on due diligence and feels they have the ability to influence and make change which the other can only do to a somewhat lower degree.  However, when it comes to influence and connecting the entrepreneur to sources of value one might argue that asking a thousand shareholders (through the crowd roster) surely give you better odds of getting to those sources than one or two angel investors (in most cases I would think!).

Does it then just boil down to analysis paralysis?? Therefore would angels over time only end up investing in transactions that the crowd is not geared up to understand?  Or will the crowdfunding platforms evolve into one that provide this advisory service along with a listing service such that you and me begin to understand the more complicated businesses that need a through investigation, although my gut still tells me that all businesses do!!  I have seen technology disintermediate many an industry in the last fifteen years of my working career and wouldn't be surprised if major changes were coming.

However, no matter what betting platform I use when I go to Ascot I still end up betting on the horse with the highest odds - even though investing with the crowd, a thorough investigation having been done behind the scenes on the winning horse!

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