3 Dangers TO Democratizing Startup Finance

Most folks will have noticed that the title of the blog post is not ’3 Dangers OF Democratizing Finance’, but rather ’3 Dangers TO Democratizing Finance’.  The latter category in my opinion is far more dangerous than the risks that are associated with the democratization of finance.  We as an industry, and most other rational folks, have never made the claim that early stage investing is not associated with elevated elements of risk along with heightened standards of prudence. However, the naysayers are constantly creating negative rumors which are simply not true.  It’s unbelievable that people are promoting fear and incorrect information without even permitting the industry to execute on what could potentially be the next big idea. Here are some of the most outrageous arguments I’ve come across. We’ll also be starting a blog series called “Crowdinvesting Mythbusters” every Wednesday addressing the entrepreneurs’ and investors’ reasons against crowdinvesting, and our rebuttal to their arguments.

1. Gambling has better odds than startup investing

I don’t even know where to begin explaining the falsity of this statement. It is true that there are games at a casino with odds of success at about 49% against the house, which effectively implies that you have a 49% chance of winning. It’s also true that startup investing most likely has lower odds than that.  HOWEVER, the 49% chance that a casino provides is 100% of the time.  This means that while there occasionally may be a few winners here and there, the casino will always collect 51 cents for every dollar that has been gambled; the odds are always the same. Startup investing, on the other hand, is a dynamic prospect that actually generates winners and is not a game where only the house can win.

 

2. Angel Investors do it for fun and not to create value

How can someone say this? Why would anyone seek to invest in something that generates no value or profit no matter how rich that person may be? It’s a nonsensical statement that speaks to the protection of the ‘boys club’ that has historically existed among wealthy angel networks with exclusive channels into deal sourcing.  Everyone has the right and probably the desire to  participate in earlier investments and get involved with endeavors that they believe can generate significant profits and change. All of the great ideas in history were funded by angel investors pushing for the creation of innovation.

 

3. There’s going to be endless amounts of fraud

There’s no intelligent or defensible methodology which will create a rational argument for the naysayers.  The primary thing I can say is.. “how do you know?” Until the practice is actually implemented, this is nothing but an unwarranted conjecture.

 

By Sang Lee

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Sang H. Lee
Sang is the founder and CEO of Return on Change. He's constantly searching to help startups that are looking to change the world! He's a leader in equity crowdfunding and is always happy to help entrepreneurs and startups. He previously worked as an investment banker in the energy field at WestLB and BNP Paribas, accruing a wealth of expertise in financial regulation, business, and financial structuring. Sang is also the Executive Director of CF50, a global think tank of thought leaders within the crowdfunding industry. You can find him on Google+ and Twitter.
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