Today Twitter will finally complete its much-chatted and – tweeted-about initial public offering, or IPO.
Market pundits and analysts have devoted an incredible number of hours to micro-analyzing the details of the microblogging site’s offering. But what matters a lot more to the rest of is not Twitter’s first day “pop” but another big deal: what happens to the SEC’s new crowdfunding proposals, aimed at giving us all the chance to get in on the ground floor of the next Twitter.
Twitter isn’t just an IPO, it’s a symbol. It’s yet another example of the spectacular returns that techie geniuses expect and that only make us drool. More than one of us will look at the coffers of riches from the Twitter IPO and think, "Why can't I make money like that?"
Now, just in time to feed our insecurities, here comes crowdfunding. Crowdfunding might make us feel better about the fact that we won’t be among the people making the biggest profits from Twitter: employees and the company's deep-pocketed earliest backers.
Crowdfunding is already familiar to some because of companies like Kickstarter. It helps artistic and philanthropic ventures raise money from the public, without having to go begging and scraping to rich, powerful funders. Some hope it may do the same for businesses. Enter the Jobs Act and the SEC.
Last month, the SEC published its proposals for how the crowdfunding model might work for companies looking to raise money. Crowdfunding’s proponents hope the plan will be working by next spring. As proposed by the SEC, anyone with a debit card will be able to invest a few thousand dollars – and as much as $100,000, depending on their net worth – in a whole new crop of exciting business ideas.
If you’re sure that you have the vision to recognize an embryonic Google at 100 paces, you’re likely to think that crowdfunding is a very, very good thing. For the first time, you’ll have a level playing field with all those Silicon Valley insiders who have dominated the financing landscape for so long, and who've reaped rewards from exciting new companies like Twitter.
Crowdfunding provides capital, and capital is only part of what an entrepreneur needs. It’s management skills and experience – and the poor business decisions that follow from the lack of them – that cause many failures among small businesses, and at least as many as any dearth of money.
Entrepreneurs may grumble about giving a stake in their business to venture capitalists – but they know they’re getting more than capital: they also gain expertise and access to a network of savvy backers eager to see them survive. And even then, even in the hands of experts, as many as 40% of venture backed businesses go belly-up. We only hear the success stories for startups, like Twitter.
As Ryan Feit, CEO of SeedInvest – likely to be one of the portals through which you’ll be able to invest in crowdfunded deals – was quite ready to admit, “It is no secret that the vast majority of startups looking to raise capital are either not ready or simply not fundable.”
Here's where a smart person will pause. We’re just not doing well enough in terms of planning for our retirement – as I wrote last week – to run big risks by throwing a few thousand dollars away on untested companies, especially those that are far more likely to fail than become the next Twitter.
Then there’s the 800lb gorilla in the room: the question of fraud. It will probably be an issue with only a fraction of crowdfunded companies, but what happens if it’s the one you chose to invest in? Are you confident you have the resources to figure out whether an entrepreneur and his business idea are legitimate?
If you think you have it handled, you might want to reconsider, suggests Randy Shain, founder of BackTrack Reports. Clients of his 20-year-old firm pay a few thousand dollars for the kind of detailed background investigation that he believes is necessary before investing in any startup. “That’s going to cost more than most crowdfunded investments.”
Think it can’t happen to you? Convinced that you have what it takes to recognize a great investment? Think again.
For centuries, fraudsters have swindled investors out of billions of dollars, with the Vancouver Stock Exchange of the 1970s and 1980s and Bernie Madoff being only two examples that spring to mind.
Meanwhile, not everyone is as good as they think at spotting the winners. I know at least one technology investment banker who desperately ducked every potential encounter with the Google guys, Larry Page and Sergey Brin, as the two of them were struggling to get their business up and running. And yes, he’s been kicking himself ever since.
Crowdfunding may be good for some companies, but it's still a "buyer beware" situation. Don’t envy what look like quick and easy profits. They’re almost never what they seem.
This article originally appeared on guardian.co.uk