The perils of pushing Crowdfunding

Now that U.S. President Obama has signed the “Jumpstart Our Business Startups” (JOBS) Act, I’ve received more pitches on LinkedIn for angel investments than ever before. One of the concerns that Senate Democrats had with the concept was that the original Bill went “too far in deregulating business”. And they’re probably not on LinkedIn themselves. With some amendments, it eventually passed both House and Senate. Everyone clapped. To quote the President:

“We think big, take risks and believe that anyone with a solid plan and a willingness to work hard can take even the most improbable idea and turn it into a solid business.”

Each of us can sympathize with that sentiment.

But there’s that ugly, real world out there. Which isn’t entirely full of young Steve Jobs’ and Rebecca MacDonald’s. One of the touchstones within the JOBS Act is that “crowd funding” is now legally in vogue. Say what you will about the “Friends and Family Round”, the discipline there was that someone’s friends and family served as the gatekeepers to the private capital markets. If a real Angel investor wondered about the ethical makeup of an entrepreneur, the fact that he/she had raised capital from friends or an Aunt might be properly taken as a validation of the entrepreneur’s moral fibre.

With Crowdfunding via the internet, I fear those days are over. Replaced by the Wild West. To whit:

“Company seeks investment to grow from $1 million revenue to $50 million in three years.”

This came from someone who claims to have 5,000+ direct investor associates. I wonder if I’m unwittingly one of them. Does this Crowdfunding catch-phrase trouble the Ontario Securities Commission? I’ll bet it does.

The more troubling pitch came in the form of a direct request from an entrepreneur with huge promises to keep regarding an acquisition that would take place six months out. Dubious, I asked him to tell me more about the acquisition play. He responded that major players were all “engaged” for what I took be be an M&A auction of his early stage company. Even Goldman Sachs would find it hard to get that collection of buyers on the phone to talk micro acquisitions, and GS was no where in sight.

It turns out that this isn’t the first time this 10 year old early stage company has raised money from Joe/Jill Retail via a private placement; but the internet solicitation is definitely more bold. I knew enough to ask if “engaged” meant that these global acquisitive behemoths had signed NDAs; it turned out they weren’t quite that engaged as of yet.

As anyone who has ever sold their early stage business will tell you, it is hard to sell your company in “as little as 6 months” if no one is yet in the dataroom doing due diligence. But, for that classic unsuspecting family doctor with $100k or $300k to invest, this type of insight may not be readily available.

Think of the Adenyo private rounds, and you get an idea of what can happen to the small ticket investor, even when things sortof work out; if only for a short period of time. Multiple private equity rounds lead to a $100 million all-share flip to Motricity (MOTR-NASDAQ), only to see the stock drop 95% in the space of a few months. Bye bye to your $300k.

There are too many stories like that. Pre-Crowdfunding.

So long as CEOs feel emboldened to pitch a stock offering on the basis that a buyer for their busines is right around the corner, this Crowdfunding concept will do nothing to build long term trust and confidence in private investing. There’s nothing new about the concept, in fact. The South Sea Company kicked it all off in 1720.

Let’s hope the Regulators provide guidance about how it will work this time, and that the outcome for investors will be different.

MRM
(disclosure: this post, like all blogs, is an Opinion Piece)