Gambling, Investing and Startups
“It seemed crazy to me that you have to be an accredited investor to invest in a company,” says Case, “but you can go to Las Vegas and lose $10,000 at the table in an hour but you don’t have to be an accredited gambler to do that.”
What seems crazy to me is that an experienced executive and investor would make this statement. Has Steve Case never been embroiled in a shareholder lawsuit before? Has he never heard of corporate fraud or investment scams? Does he realize that most early stage investments NEVER produce a return on capital, and in fact, lose the entire value of the investment?
What Steve Case has done is mix apples and oranges using a very sly analogy. The truth however is that his comparison has no merit. It makes for good copy and fodder for the social media channels, but it is propagating a dangerous message.
Gambling is entertainment. You can also blow $10,000 on a business class plane ticket to Asia, $34,000 for a one night’s stay in the Ty Warner Penthouse at the Four Seasons, or $60,000 for one shot of the Macallan 64 Years Old single malt. As the adage goes about a fool and his money…
As a society though, we do not tell people how to spend their money. They earned it and they can certainly spend it as they wish outside of engaging in activities or purchasing products that are illegal. The same goes for gambling, and as long as the odds are clear and the games are not rigged, it is your God given right to lose $10,000 playing roulette, throwing down a few hands of poker, or betting on the Jets to win a game.
Investing however is not gambling and it is not a game. It is a wealth building strategy where the investor deploys capital incrementally in order to increase one’s wealth. Yes, there are certainly exceptions (e.g. day traders acting like gamblers and sports bettors acting like professional investors). However, by and large, the spheres are different and the expectations, models, and laws are set up accordingly.
Letting just anyone plop down $10,000 on a high-risk, early stage startup is ludicrous. As much as the public markets can be a rat hole for the unsophisticated investor, there are rules that dictate regular and audited reporting by these companies, laws to prevent stock manipulation, and processes in place to protect investors. When the laws are broken or corporate malfeasance occurs, there are agencies that can provide restitution to investors.
None of that exists in the private markets and for good reason. If the same rules applied to startups as they do public companies, you could kiss innovation and job creation good-bye. No one would start a business given the onerous and costly rules that public companies have to follow. Could you imagine what the 10-K’s would look like for startups anyway? Just look at the filings for “more credible” tech companies that have recently filed papers to go public for further proof. But these rules are necessary in the public markets to protect the investing public and provide a sense of trust in the markets. Without that trust, no one would want to invest in those companies and companies in turn would have a much more difficult time raising capital.
Do I want to see startups have more outlets for raising capital? I think it is a laudable goal, but we have to be careful that as a society we do not create false economies. We saw what happened to housing in 2008 and to dot com companies in 2000. Even now, there is inflation in the Web 2.0 world. If we open up the floodgates, that could certainly help many more startups acquire needed capital, but it also risks accelerating an already heated market. The danger is that those who are least sophisticated and least able to afford a total loss will take the brunt of the losses and become the collateral damage when this current market tanks.
There are already well established outlets available to startups for raising capital that work. We know they work because a lot of startups are getting funded and America is still recognized as the global leader for technology innovation. We have seen the rise of services like AngelList, ProFounder, and Gust that help connect investors and entrepreneurs. Websites like RocketHub, IndieGoGo and Kickstarter have brought crowdfunding to the mainstream and have already funded thousands of artists and entrepreneurs. There is an incubator program or two opening up every week in locations all across the world. There are more and more angel investors investing and seed funds forming and large corporations launching investment groups. The Internet is awash in the information about the funding process and access to investors is exponentially easier now with the availability of online tools and social networks. All the while, the barrier for developing cutting edge technology is becoming less and less costly.
Do all startups get funded? No, but then again not every entrepreneur and idea is deserving of funding. That being said, there are ways that the fund raising process can be improved. Reporting rules around raising friends and family rounds could be eased, the bar for accredited investors could be lowered to their previous levels, and crowdfunding could be opened up to enable the exchange of small amounts of equity for capital as the bill Scott Brown introduced proposes (though the numbers still seem high). These are all modest proposals that can add to the pool of available investors and capital that can be deployed without imposing unnecessary rules onto startups, inundating the courts with lawsuits, or putting non-accredited investors in significant financial jeopardy.
We should be cautious about jumping head first into opening up startup investing to all. In theory, it sounds like an excellent idea to help even more entrepreneurs fund even more innovative ideas that could spur job creation. It is the unintended consequences however that could come back to harm a lot of people that are ill-equipped to handle the roller-coaster ride of private market investing.
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