May 14th 2016

How crowdfunding can help save Silicon Valley from its harebrained investors

There are fears that another Ice Age is about to hit Silicon Valley because of the implosion of its unicorns — start-ups valued at more than one billion dollars. By one estimate there were 229 such companies in January of this year. Their valuations are dropping precipitously because they were overpriced and overhyped. The fear is that venture capital will dry up and hurt the innovation ecosystem.

In previous eras, such a setback to venture capitalists would surely have had a chilling effect on the innovation ecosystem because startups were dependent on their funding. But in today’s era of exponential technologies, there will hardly be a blip.

To start with, the cost of building new technologies has dropped so significantly that inventors no longer need venture capital. The desktop computers, server farms, racks of hard disks, and enterprise software that were needed would cost hundreds of thousands, sometimes millions, of dollars. Today, there is on-demand computing and cloud storage — which can be purchased for almost nothing from companies such as Amazon, Google, and Microsoft. And tools such as sensors and 3D printers, which are needed for building sophisticated medical devices and robots, are inexpensive. What costs the most in Silicon Valley is rent and food. But you can share an apartment and live on pizza and ramen noodles.

And instead of begging venture capitalists, angel investors, or friends for the $50,000-100,000 that it typically costs to start a technology company, founders can go directly to the people they are building their products for. They can post a video of a heart-felt pitch and demonstrate a prototype of their ideas on sites such as IndiegogoKickstarter and Plum Alley. If they get funded they’ll know they have a good idea; otherwise is time to go back to the drawing board and come up with something better.

The crowd makes better decisions than venture capitalists do. With crowdfunding, there is direct feedback from the market and a strong connection between the inventor and the funder. The community of funders feels a sense of ownership for the product and helps spread the word. And there is no filter such as a venture capitalist who has his own race and gender biases and only invests in the same trendy technologies as other VC firms.

The failure rate of crowdfunded projects is remarkably low. Three quarters of venture capital investments fail to return investor capital. Yet only 9 percent of crowdfunded projects fail to deliver on what they promised, according to Ethan Mollick of University of Pennsylvania –who researched 47,188 Kickstarter projects.

When entrepreneurs take money from venture capitalists, they know that this is coming from deep pockets and is just a financial investment. When dealing directly with customers it is personal; so entrepreneurs put in extraordinary effort and spend their own money to fulfill their promises. This is what leads to better outcomes.

One of the best examples of a technology that would not have seen the light of day without crowdfunding is virtual reality. As Mollick explained, this was largely ignored by traditional funders after it failed to gain traction in the 1990s. In 2012, a 19-year old Palmer Luckey, who had built a prototype of a virtual reality headset in his parent’s garage, launched a Kickstarter campaign for a commercial product. His goal was to raise $250,000 but there was so much demand that he ended up getting $2.4 million in orders. The product he later developed, Oculus Rift, was acquired by Facebook in 2014 for $2 billion. This set off a frenzy of funding by venture capitalists and greatly accelerated the progress of a world-changing technology.

So far, there have been limits to what start-ups could offer the crowd. They could only pre-sell their product and offer perks such as T-shirts and badges.  This is about to change.

Starting May 16, the Securities and Exchange Commission is rolling out a new program that will allow private companies to use crowdfunding to sell securities — up to $1 million over a 12-month period. This was a provision of the 2012 Jumpstart Our Business Startups Act (or JOBS Act) to assist small companies with capital formation.

Individual investors with less than $100,000 of net worth will be allowed to invest the lesser of $2,000 or five percent of their annual income or net worth. Wealthier individuals can invest up to 10 percent. The investment must, however, be through an authorized funding portal. These portals are required to vet the companies and let investors shop among offerings and discuss them online. They can’t offer investment advice, make recommendations, or solicit purchases.

One of the first funding portals, Crowdfunder didn’t waste time in taking advantage of the new rules. It recently announced a VC Index Fund which offers an investment in a portfolio of hundreds of venture-capital backed startups. Crowdfunder chief executive Chance Barrett said his goal was to “allow everyday people to invest online alongside the world’s leading venture capitalists, while targeting a fund 10x more diverse, in the number of investments, than a traditional VC.” In other words, the public can become “super VCs.”

It remains to be seen if equity crowdfunding achieves the same success as product crowdfunding. The stakes are now higher and the risks of fraud are much greater. But one thing is certain: the balance of power is rapidly shifting — from venture capitalists to entrepreneurs. This is a good thing because it will lead to a greater diversity of start-ups. And with a bit of luck, there will also be fewer over-priced unicorns and less wastage of investment capital — because the venture capitalists will follow the crowd.



For Vivek Wadhwa's site, please click here.

To follow Vivek Wadhwa on Twitter, please click here.


TO FOLLOW WHAT'S NEW ON FACTS & ARTS, PLEASE CLICK HERE!

Vivek Wadhwa is a Fellow at Arthur & Toni Rembe Rock Center for Corporate Governance, Stanford University; Director of Research at the Center for Entrepreneurship and Research Commercialization at the Pratt School of Engineering,  Duke University; and Distinguished Fellow at Singularity University. He is author of  “The Immigrant Exodus: Why America Is Losing the Global Race to Capture Entrepreneurial Talent”—which was named by The Economist as a Book of the Year of 2012, and ” Innovating Women: The Changing Face of Technology”—which documents the struggles and triumphs of women.  In 2012, the U.S. Government awarded Wadhwa distinguished recognition as an  “Outstanding American by Choice”— for his “commitment to this country and to the common civic values that unite us as Americans”. He was also named by Foreign Policy Magazine as Top 100 Global Thinker in 2012. In 2013, TIME Magazine listed him as one of The 40 Most Influential Minds in Tech.

Wadhwa oversees research at Singularity University, which educates a select group of leaders about the exponentially advancing technologies that are soon going to change our world.  These advances—in fields such as robotics, A.I., computing, synthetic biology, 3D printing, medicine, and nanomaterials—are making it possible for small teams to do what was once possible only for governments and large corporations to do: solve the grand challenges in education, water, food, shelter, health, and security.

In his roles at Stanford and  Duke, Wadhwa lectures in class on subjects such as entrepreneurship and public policy, helps prepare students for the real world, and leads groundbreaking research projects.  He is an advisor to several governments; mentors entrepreneurs; and is a regular columnist for The Washington Post, Wall Street Journal Accelerators, LinkedIn Influencers blog, Forbes, and the American Society of Engineering Education’s Prism magazine.  Prior to joining academia in 2005, Wadhwa founded two software companies.





  

Browse articles by author

More Essays

Jul 31st 2020
EXTRACT: "From a Kantian standpoint discrimination based on race – or religion, or gender – is fundamentally wrong. It is wrong, first of all, because it is dehumanizing, a denial of human dignity. When I racially discriminate, I am denying the person’s intrinsic self-worth, I am, in fact, denying their very right to exist, whether I know it or not. The moral law demands that I treat every individual as a free person equal to everyone else. If the moral law grants each of us a kind of infinite worth, it does not grant someone greater worth than anyone else."
Jul 12th 2020
EXTRACT: "Remember, your wellbeing is extremely important when supporting someone with depression. Take time for self-care so you can model positive behaviours and be replenished enough to provide this crucial support."
Jul 4th 2020
EXTRACT: "--- Nobody is more dangerous than he who imagines himself pure in heart, for his purity, by definition, is unassailable. --- Author James Baldwin’s words, written in the America of the late 1950s."
Jun 29th 2020
EXTRACT: "Numerous studies have shown that children who grow up in more deprived neighbourhoods tend to have worse physical health as adults compared to those raised in more affluent areas. This is the case even when researchers take into account family income and education, and whether or not parents have major illnesses. In order to address this health disparity, researchers need to understand how those living in disadvantaged neighbourhoods end up with worse health outcomes. Our team’s latest study has highlighted one potential way your childhood neighbourhood may influence your health for years to come. It might do so through changing how the activity of your genes is regulated."
Jun 29th 2020
EXTRACT: "Ruth Poniarski is a painter and the author of Journey of the Self: Memoir of an Artist (Warren Publishing, 2020), in which she tells the story of her decade long struggle with mental illness, a “spiraling malady” which led her into a “pattern of psychosis”. I recently had the opportunity to talk with Poniarski about her life and work, and how she eventually overcame her demons."
Jun 27th 2020
EXTRACT: "I know I’m good in a couple of things, really good in a few things, and that’s enough. My confidence is big enough that I can really let people grow next to me, it’s no problem. I need experts around me. It’s really very important that you are empathetic, that you try to understand the people around you, and that you give real support to the people around you."
Jun 27th 2020
An essay about the "the enormously influential 1940 'Head of Christ' painting by evangelical Warner E. Sallman" pictured below.
Jun 17th 2020
EXTRACT: "The diverse, non-human life forms that live in our guts – known as our microbiome – are crucial to our health. A disrupted balance of these contribute to a range of disorders and diseases, including obesity, diabetes, inflammatory bowel disease. It could even affect our mental health..... It’s well known that the microbes living in our guts are altered through diet. For example, including dietary fibre and dairy products in our diets encourages the growth of beneficial bacteria. But mounting evidence suggests that exercise can also modify the types of bacteria that reside within our guts."
Jun 13th 2020
EXTRACT: "Bonhoeffer’s life holds an important lesson for us today, regardless of our religious affiliation or lack thereof. And simply put it is this: you are called upon; you are called on behalf of your neighbor. When you are called to be responsible that is not an obligation which you can decline, discharge or acquit yourself of – it is an infinite responsibility, a “forever commitment” as Charles Blow recently put it. And we all must be prepared to make any sacrifice necessary when we are called."
Jun 11th 2020
EXTRACT: "People differ substantially in how much they’re affected by experiences in their lives. Some people seem to be more affected by daily stress, or the loss of someone close to them. On the other hand, some people seem to get through the same experiences relatively unscathed. Similarly, some people benefit strongly from counselling, or having a support system of close family and friends. Others seem better able to manage on their own. But understanding why some people are more sensitive than others isn’t just a question of how they were raised, and the experiences they’ve been through. In fact, previous research has found that some people in general seem more sensitive to what they experience – and some are generally less sensitive."
Jun 7th 2020
EXTRACT: " The root causes of anthropogenic climate change – which has led to the endangering of countless species across the globe – cannot be adequately grasped in isolation from the technological application of modern science. While Swedish activist Greta Thunberg was certainly justified in calling upon American legislators to “unite behind the science,” neither can we overlook the culpability of science in bringing about the environmental crisis. "
May 23rd 2020
EXTRACT: "The QAnon movement began in 2017 after someone known only as Q posted a series of conspiracy theories about Trump on the internet forum 4chan. QAnon followers believe global elites are seeking to bring down Trump, whom they see as the world’s only hope to defeat the “deep state.” OKM is part of a network of independent congregations (or ekklesia) called Home Congregations Worldwide (HCW). The organization’s spiritual adviser is Mark Taylor, a self-proclaimed “Trump Prophet” and QAnon influencer with a large social media following on Twitter and YouTube."
May 23rd 2020
EXTRACT: "The aim of my research for the Understanding Unbelief programme was to investigate the worldviews of non-believers, since little is known about the diversity of these non-religious beliefs, and what psychological functions they serve. I wanted to explore the idea that while non-believers may not hold religious beliefs, they still hold distinct ontological, epistemological and ethical beliefs about reality, and the idea that these secular beliefs and worldviews provide the non-religious with equivalent sources of meaning, or similar coping mechanisms, as the supernatural beliefs of religious individuals."
May 22nd 2020
EXTRACT: "Psalm 91, for example, reassures believers that God will protect them from “the pestilence that walketh in darkness… A thousand shall fall at thy side, and ten thousand at thy right hand; but it shall not come nigh thee”.............Luther was a devout believer but insisted that religious faith had to be joined with practical, physical defences against sickness. It was a good Christian’s duty to work to keep themselves and others safe, rather than relying solely on the protection of God. "
May 22nd 2020
EXTRACT: "Evidence from this study shows clearly that eating foods rich in flavonoids over your lifetime is significantly linked to reducing Alzheimer’s disease risk. However, their consumption will be even more beneficial alongside other lifestyle changes, such as quitting smoking, managing a healthy weight and exercising."
May 5th 2020
EXTRACT: "It’s possible that the answers to questions like, “how do I live a virtuous life?” or “how do we build a good society?” are not the same as they were a few weeks ago."
May 2nd 2020
EXTRACT: "Strangely, those with strong beliefs tend to be admired. The human mind hates uncertainty, so it is comforting to be told what to think, and to form settled opinions. But it is not rational. As the philosopher Bertrand Russell wrote: “The fundamental cause of the trouble is that in the modern world the stupid are cocksure while the intelligent are full of doubt.”
Apr 21st 2020
Extract: "Humans, Boccaccio seems to be saying, can think of themselves as upstanding and moral – but unawares, they may show indifference to others. We see this in the 10 storytellers themselves: They make a pact to live virtuously in their well-appointed retreats. Yet while they pamper themselves, they indulge in some stories that illustrate brutality, betrayal and exploitation. Boccaccio wanted to challenge his readers, and make them think about their responsibilities to others. “The Decameron” raises the questions: How do the rich relate to the poor during times of widespread suffering? What is the value of a life? In our own pandemic, with millions unemployed due to a virus that has killed thousands, these issues are strikingly relevant.
Apr 20th 2020
Extract: "If we do not seize this crisis as a moment for transformation, then we will have lost the war. If doing so requires reviving notions of collective guilt and responsibility – including the admittedly uncomfortable view that every one of us is infinitely responsible, then so be it; as long we do not morally cop out by blaming some group as the true bearers of sin, guilt, and God’s heavy judgment. A pandemic clarifies the nature of action: that with our every act we answer to each other. In that light, we have a duty to seize this public crisis as an opportunity to reframe our mutual responsibility to one another and the world."
Apr 16th 2020
EXTRACT: "Death is the common experience which can make all members of the human race feel their common bonds and their common humanity."