JOBS Act and the Crowd-Sourced Startup

In April 2012, the JOBS Act was signed into law, but the SEC has been slow to implement it. The first part of the act will finally become active tomorrow, which will allow startups to publicly announce that they’re fundraising. However, they will still only be able to raise money from accredited investors, i.e. rich people.

Phase III of the JOBS Act will allow crowdfunding – ordinary people will be able to invest small amounts of their income in startups (see Crowdfunding passes in the Senate). This will help many small companies and startups raise money from a large number of people. Currently, a person or company can raise money on a site like Kickstarter, but can only offer backers rewards (like their product or tshirts), but not equity in the startup. Imagine how many more people will be interested in backing startups if they can hope to get rich from doing so! This will raise the risk of scams though, which is why there will be various regulations on crowdfunding once it is (eventually) implemented.

Startups will be able to raise money from the public, and could also use their “crowd” of investors to help to do things for their company. For example, a company could perform market research with their crowd investors, or ask them to help promote the company’s product on social media. Quirky uses its crowd to help decide what physical products to create, so tech companies could consult with their crowd to help decide on new features for an app.

Perhaps a company’s crowd could  be consulted with to work on a specific task, such as creating some icons for a site or improving its SEO. Crowd investors will want to be compensated for large tasks that they do, but it could still be easier to hire someone already invested in the company than an external consultant. In fact, maybe this work could be an alternative form of crowdfunding – instead of investing in a company, people could contribute work and get a share of equity. This would differ from standard employment for equity since it the work would be distributed to a large number of people. While this could make collaboration more difficult, many open-source projects have been successful with a large number of contributors, so perhaps startups can do the same thing.

Paul Graham once said:

I don’t think crowdfunding is good for startups. For startups, having large numbers of investors is bad, and having inexperienced investors is bad. So having a very large number of inexperienced investors is the worst scenario possible.

 

While too many ordinary investors could be a nuisance, a large group could by filtered through a crowdfunding site and can offer more value than standard rich investors. This may be why Paul Graham accepted the crowd-sourced startup FundersClub into Ycombiantor. Startups may even start crowdfunding because of the product and marketing opportunities it will provide.

 

Lottery Ticket Investing

In a previous post, I listed a bunch of Startup Ideas, but I didn’t go into any details about them. In this post I will discuss one of the ideas – Lottery-ticket investing. I decided to start from one of the less realistic ideas, so I can move to more realistic ones in later posts. While writing this post, I realized there were even more issues than I initially thought.

Q: So why are you publishing it?
Well I thought it might still have some potential somewhere, and I can use a Q&A format to discuss its issues. And it touches on some questions in economics and psychology.

Lottery-Ticket Investing

Problem: People buy lottery tickets despite the poor odds, i.e. their negative expected return. They do this because they’re excited by the prospect of large winnings, and may not evaluate the odds correctly. But there should be some way to let them get tickets that offer a large prize, but still have an overall positive return.

Solution: Create an Investment Lottery: Invest the lottery ticket money in stocks, which historically have a strong positive return. Use a investing method with high-voltaility so there is a chance of large payouts.

Q: But how would you distribute the money?
One way would be to have an actual lottery at the end of the investment period and give the money to specific winners. However, this is too similar to a regular lottery, so the state governments wouldn’t allow it. Instead, one could give the actual returns of each ticket to the buyer. This way people who get or pick the right tickets can win big.

Q: So you’re basically just selling people stocks.
Yes, these tickets would let people easily invest small sums in a high-risk but high-reward manner.

Q: That sounds pretty boring.
It’s true that people are motivated to buy because of the hope of getting a huge prize, but people also buy tickets for smaller prizes. So one would need to examine where the cut-off would be. For example, people might be willing to pay $10 for a ticket that could potentially win $1000. If they here about one winner who won a huge prize, they might get excited enough by that possibility, even if it rarely happens.

Q: But how would you ever get 100x returns on investments in a short time-span?
There are a number of possibilites that one could explore. Perhaps there’s some way to do it with margin-investing, or with some variety of that. For example, the lottery stock tickets could insure other investors against losses, so the ticket-holders take larger losses or bigger gains if the stock has a large change. This will let the ticket-holders magnify their risk and provide insurance to safe investors.

Q: That doesn’t sound like a very good idea, and people can insure against losses without any lottery involved, e.g. by buying put options.
OK, so that idea might have some flaws. But there are risky investments that one could find, such as certain junk bonds. In addition, it will soon be legal for ordinary people to invest in small companies. They could serve as a very-high risk investment that could have extremely good returns. By making it easy for people to buy “Investing Tickets”, they can be encouraged to invest in a system that has good overall returns instead of losing so much money in the lottery. While they might not make it rich this way, they’ll have better long-term odds than in the lotto.

Google, Wireless & Posting Too Quickly

Yesterday, The Next Web and other tech blogs reported that Google had purchased a Wifi hotspot company for $400 million. I had written previously in SeekingAlpha about how Google might expand into wifi, so I quickly wrote another article on the topic based on the breaking news.  When I finished, I went back to check on updates and it turned out the whole story was false. The tech media wants to get out their story first, so they end up taking a “publish first, ask questions later approach”. I guess I did the same thing by relying on them.

Anyways, most of what I had written is still likely to apply in the future, so I edited my article and re-submitted it to SeekingAlpha. Might be a bit lame, but I think the basic points are true. The Big Cellular Carriers will face increased competition in the future from companies like Google or Dish Networks, and users will have more choice, either through cellular service or even wifi. Click on the article to find out more:

seekingalpha.com/article/1030591-more-wireless-choice-may-affect-the-big-cellular-carriers

 

Brain, Patents and Trading

extremetech.com/extreme/136446-darpa-combines-human-brains-and-120-megapixel-cameras-for-the-ultimate-military-threat-detection-system
Humans are still better than computers at interpreting images, but they’re too slow. So it makes for the Army’s threat-detection system to to use a computer to filter the images to only show the human possible threats.One would think the job would then be for the human to press a button when a threat is detected. However, that’s too slow for the computers, so instead they just use an EEG to read the human’s brain and sense when a threat is detected. So the human is like an advanced motion detector for the machine.

blog.stackoverflow.com/2012/09/askpatents-com-a-stack-exchange-to-prevent-bad-patents/
The Patent office came to StackExchange to ask for help in detecting prior art so patents can be invalidated. If this catches on, it can help reduce some of the rampant patent lawsuit that have been going on. Maybe one day they’ll consider crowd-sourcing the actual granting of patents.

blogmaverick.com/2012/09/21/what-business-is-wall-street-in-3/
Another attack on high-frequency trading, pointing out that they’re just ‘hacking’ the system without providing any benefit to society.

 

Google And The Future Of Search

What challenges and opportunities does Google face in search? Read my article to find out:

Google And The Future Of Search – Seeking Alpha

[Commercial searchers] could benefit from real a web service that helps them choose the best deal for their needs, as opposed to just looking through a list of links. If another company is able to build a successful service to answer this need, it could harm Google’s revenue, even if people continue to use Google for general searches.

Facebook’s Potential

To get a wider readership, I decided it would make sense to publish some articles elsewhere online. The first article is about Facebook’s recent new features and the potential it shows for Facebook to expand into new areas. To be relevant to SeekingAlpha.com, I discuss at the end how this raises Facebook’s IPO value. (It’s pretty speculative though.)

Linkhttp://seekingalpha.com/article/509281-the-potential-in-facebook-s-recent-return-to-roots