Photo credit: Guerilla Stock Trading
Mythbuster: The general public doesn’t have the stomach for early-stage investing. Startups go through peaks and valleys constantly, and most investors don’t have the experience to know how to deal with this. While this (arguably) works for public companies, startups are far more fragile; backlash from a thousand scared and angry investors at every turn is far more distraction than any startup needs.
Reality: Yes, it’s true that the last thing a startup needs to deal with are scared and angry investors. And while the SEC has not yet passed Title III (this law will allow everyday, retail investor to invest in startups and small businesses in exchange for a share of the company), this provision is expected to pass in early 2014 so it’s worth talking about now.
So when Title III does pass, it will truly be a monumental moment in US History. This ruling which has prohibited blue collar Americans from taking part in investing in small businesses for over 80 years will finally be uplifted. Detractors are worried that giving the general public access to early-stage investing will be dangerous since everyday individuals run the risk of losing all their money or simply aren’t sophisticated enough to be investing in risky situations. But here are 2 reasons we don’t have to be so stressed out about the general public getting involved with investing their money in early-stage startups.
1. Don’t underestimate the intelligence level of the everyday, retail investor. While the old law was imposed to protect the everyday person from investing so they cannot lose everything (like they did before the Stock Market Crash of 1929), the people today have better access to information than in the past, enabling them to make better decisions. Unaccredited investors today invest in the public stock market where they research companies, look into what funds to invest their 401K, and use the resources available to them to make the best decisions possible.
2. Education will be available for the general public. Crowdinvesting sites that are serious about letting non accredited investors invest in the startup asset class should make it a priority to educate them on the risks and rewards of early-stage investing in startups. In aggregate, the non accredited investor community at large represents a significant portion of the nation’s capital and has not yet been tapped into. While the crowdinvesting platforms should be excited about this, they should invest the time and support on the education portion. On our end, we’ll be rolling out a Resource Center for investors, providing tools for investors such as webinars, workshops, downloadable templates, and education on investment fundamentals.
So let’s take these accredited investor and unaccredited investor classifications and examine them side by side. Assuming both sides have the same level of education and the same access to knowledge and investing tools, the only thing that really sets these two apart is how much money they have in their bank account. The average American is allowed to gamble (which, by the way, has a 49% chance of winning – the house always wins) and invest in public companies (and we all know that healthy PAST performances don’t necessarily point to healthy FUTURE gains). But they cannot invest in early stage companies. So it looks like there are certain activities where the public is allowed to potentially lose money, and that’s ok. So how will it be possible for the everyday person to invest in early stage startups? As long as there’s full disclosure and expectations are managed (sorry, but if you invest in early-stage companies you will not always win – there WILL be times when you will lose your money), and the general public has the brains to decide whether to take the risk and invest in early-stage startups.
I had no idea this country cared so much about those who “had less” in terms of money. If we’re REALLY so concerned with the general public risking their money, why don’t we just go ahead and forbid them from gambling? Why not restrict gambling to “accredited investors” because they can afford to lose? It’s absurd, and honestly, I’m not an accredited investor and I know that the risks are high when investing in early-stage startups. But I sure as hell want the freedom to spend my hard earned money as I see fit. And that’s by investing in early-stage, innovative startups. If I can’t come up with a truly innovative idea myself, I want to help the next guy who has the idea by investing in him/her.
Why let an extremely small percentage of Americans determine which startups and small businesses have the chance to get funded and innovate? Let’s democratize startup finance and let the entire crowd have a say. Let’s level the playing field and give everyone the opportunity to support startups. Peter Drucker said, “The best way to predict the future is to create it.” We’ve come far with startup finance being dominated by venture capitalists and select angel investors. Now imagine if all the capital from the general public gets released. Let’s go disrupt startup finance and take innovation to the next level.