Crowdfunding: Not The Innovation You’re Looking For?

Last year I heard that there was a Kickstarter project to fund the republishing of a board game that I enjoyed playing many years ago. (Read to the end to find out which.) I immediately looked it up and put in my contribution, with the promise of getting the game and some goodies if the funding level was reached. It was, but the company was not prepared for the tsunami of interest, or the effort involved. A year has passed, and still no game.

Still, I’m a fan of crowdfunding small projects, but lets not take the idea too far – for example, into the area of floating equity or debt. Crowdfunding companies instead of projects is a bad idea. Here’s why.

I knew the company that I helped fund, and I trusted them. I wasn’t giving them very much, and if they failed to deliver as promised, I had very little at stake. I’m actually quite confident they will deliver, I have no burning need for the product, and so I’m willing to wait through process and delays.

In the end, this is a transaction, not an investment. The company and I have not entered into a long term relationship. The situation would be very different if I were helping to fund the company, not a product.

The process of agreeing to fund a company is highly regulated for a reason. The prospectus has to be clear about the potential risks and the pro forma financial statements have to be audited. Without these safeguards, there was simply too much plain thievery and fraud in the system.

Crowdfunding throws out all of the built up safeguards of the existing process. I suppose that this criticism could be overcome, and the same requirements of informed consent put in place until we’re at a point where we can say “NYSE, there’s an app for that.” It would still be wrong.

One of the fundamental things we’ve learned about investments is the power of diversification. We really, really don’t want individual investors picking stocks again (still) whether it is through brokers or Kickstarter or an app on their tablet. Anyone actually concerned with wealth creation for individuals should be helping them understand life-stage appropriate funds, not allowing another platform for stock-floggers to attract them with “ooh, shiny!” presentations in HTML5. The smartphone is not a platform for stock picking.

I’m not a technology Luddite. If you think crowdfunding is important/inevitable then use it to do the right thing. Don’t fund companies, fund indexes!

What did we say above? We want individual investors to invest in diversified funds. You want to do that with crowdfunding? Fine. Here’s the plan. “Kickfunder.com” takes in funding proposals from small and medium sized enterprises in XBRL. Everything is tagged – the financials, the business plan, the whole prospectus. We know how to do this, we know how to use familiar apps and web sites as front ends for this, so don’t whine that structured data will be too expensive. Structured data is what allows the idea to work at all. You have to expect millions of proposals and handle them in a completely automated fashion.

Proposals are scored, bundled, and tranched. Again, we know how to do this, we’re just applying the technology of the MBS market to an even more micro level. So instead of investing in a single company, Bob’s Aluminum Siding, investors are offered a fund – High Quality General Contractors (California).

Here’s the goodness – investors get to invest the ‘right way’, in very broad market funds, and at the same time in the SMEs that most people think are drivers of economic growth. The SMEs benefit from having a single point of contact, reduced financing costs and more efficient non-core processes by using standardized data. And the folks that run Kickfunder.com get rich selling Google Adwords, or something.

 

Oh, yeah, the game was OGRE, from Steve Jackson Games.

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