By Howard Anderson , When Congress passed the Jumpstart Our Business Start-ups Act (“JOBS Act”) last year, the rationale sounded right: some “good ideas” don’t come to market because entrepreneurs often lack the necessary connections to privately raise significant amounts of capital. If they could get such funding, the argument went, jobs would be created. And that’s a good thing.So part of the JOBS Act now permits private firms, including start-ups, to seek equity investments without registering shares for sale, though only from accredited investors. But if implemented, other provisions of the law would allow entrepreneurs and others to use crowd sourcing or social media to troll for money from virtually any would-be private investor. And that’s not such a good thing.
The economy has never suffered from a lack of good ideas. Anyone can come up with a good idea. I have an idea for a SCUBA wet suit that can keep you five degrees warmer, another for a cell phone battery that only needs charging once a month, and a car wax that makes your vehicle “stealth” to police radar. Anyone with even an idiotic idea can start a company, but it takes talent and experience to manage it and to make the business scale and grow. And consumers – who under the possible extension of the JOBS act will in essence become the Funding Source of Last Resort – are in no position to make such success calls.
Sure, the crowd may pick an occasional winner. At the same time, there will likely be instances of fraud, bad faith and substantial losses. In short, this will play out a lot like legalized gambling, but without the oversight. Consider last June’s Kobe Red (as in Japanese beef) ripoff, which Kickstarter finally put the kibosh on after the startup raised $120,000-plus. Or Ciang, the swordfighting game that has soaked up $500,000 in crowdfunding money and still isn’t ready for prime time. Brace yourself for lots more.
I have been an Angel investor, a member of an angel group and the co-founder of Battery Ventures, which has raised some $4 billion since its inception in 1985 and has invested in hundreds of startups. I know firsthand that it’s hard – and it should be hard — to invest with all the screening that sophisticated investors do. It’s hard to start a company and get it off the ground. And it’s hard and demoralizing to raise money.
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The following guest post is by Howard Anderson, the Bill Porter (1967) Distinguished Senior Lecturer of Entrepreneurship and Senior Lecturer, Martin Trust Center for MIT Entrepreneurship. He is founder of the Yankee Group and cofounder of Battery Ventures.