Thursday, April 14, 2011

Crowdfunding: the Next Big Scam

In the age of social networks, connections-galore and friends of friends lists, it was a matter of time before a few clever entrepreneurs came up with the concept of bypassing professional investors (super angels and venture capital funds).

In the last few months, I must have seen a dozen good pitches about funding a crowdfunding platform. A few are already live on the web.

Why would hard working high net worth investors "give away" their hard earned savings to a far away entrepreneur without "adult supervision" (i.e. board governance)?  this doesn't sound to me like an investment exercise, rather it smacks of cash giveaways. So it is a pass for me.

The SEC is now considering "whether to let fast-growing companies use social networks such as Facebook and Twitter to raise funding by tapping thousands of investors for small amounts of money, according to the Wall Street Journal." 
Has the SEC forgotten the 1992 fiasco where they let startups raise up to a $1M without any disclosures to investors? They had to shut down that brilliant idea in 1999. why? frauds-galore.

I simply think that if "it ain't broke, don't fix it". The reason angels and venture capital funds exist is because the capitalist system made that food chain efficient. The invisible hand of Adam Smith works wonders between the supply of innovations from entrepreneurs and the demand from the limited capital in the hands of angels and VCs. The best ideas rise to the top, and attract more capital for subsequent rounds.