Thread by @ryan_caldbeck

1/ Equity crowdfunding or equity investment marketplaces failed. Full stop. Didn’t work.

Here is my synopsis on why the industry hasn’t taken off. Lots of reflection and painful lessons I hope others can learn from.

2/ Reason #1: The financial feedback loop for vc takes yrs. If you want one core reason the industry has not succeeded, it is this. Time between when an investor writes a check and gets confidence she should write again- is way too long to encourage repeat investment

3/ If you are ever at a YC event and some entrepreneur pitches you on a marketplace that helps private companies raise money…..ask how they will solve this issue.

[imagine being at a cocktail event again?]

4/ I missed this point when we started. Frankly the 60+ investors that passed on us also missed it- or at least it never came up as a key concern. Not once.

The difference between credit, with financial feedback loops that took days or months, and equity is huge.

5/ In private investments it is typically >5 yrs before you see the financial feedback. Win or lose thats a long time for most people. If you’re running a VC fund you’re making $ along the way with management fees, but angel investors….are just shelling out checks.

6/ That’s the key problem. How many checks will you write through an online investment marketplace before you see a return? That is the financial feedback loop- or lack thereof.

7/ We tried non-financial feedback loops. Information feedback loops (“look the co. is growing revenue- that’s great”) and product feedback loops (“look here is the new product from the company”). Nothing was powerful enough to matter when the financial feedback loop took years.

8/ Long feedback loops, along with many other things on this list, made generating non-institutional repeat investor demand on the marketplace extremely difficult.

9/ Reason #2: The Psychic Feedback Loop isn’t close to strong enough. So many people would say “if Kickstarter could help a watch brand raise millions of $, surely an equity marketplace would be even more successful because you’re getting equity.”

No.
marketwatch.com/story/10-kicks…

10/ @kickstarter delivered physical products when someone would give tens or hundreds of $. That’s a dramatically different value prop to asking someone to *invest* tens of thousands of dollars (or millions) in exchange for equity. It is like comparing Apples and Beef Jerky.

11/ Reason #3: Misaligned incentives. Too many equity marketplaces were set up as “Heads we win, tails you lose.” Some sites allowed people to form deal-level SPVs, charge mgmt fee and/or carry on deal by deal, without transparency on their track record.
avc.com/2016/02/fund-l…

12/ To quote a former #1 syndicate lead, who no longer runs these SPVs: “dont invest into my [SPVs], I put my worst deals there.”

13/ The sites themselves also had misaligned incentives. They knew they got valued off of volume (GMV). They often received revenue off of that GMV. Some didn't see incentives to ensure strong investor performance over the long-term.

14/ To be explicit- that means that some marketplaces put bad deals on the platform and didn’t care because they wouldn’t have to answer for those bad deals.

15/ Reason #4: Lack of transparency. How did the deals on the site perform last year? How did the deals for a given SPV lead perform? Can we get direct access to the CEO, to their financials? How is the platform getting compensated?

16/ An example. The CEO of one of the equity platforms [which is still operating though he left several yrs ago] would often tout that he was investing into the co's. Turns out he usually was investing a very small $ but was receiving big $ in advisor shares. Rarely disclosed.

17/ Related point: how does the platform get paid. It was convoluted, often skirted the law, hard to explain to both sides (creating mistrust and friction in the marketplace). It also led to many platforms having to negotiate each fee structure piecemeal.

18/ Reason #5: Lack of standardization. Different levels of detail/transparency, different levels of communication w/ the co's themselves, different valuation methodologies. All on the same platform. *Standardization helps marketplaces scale*. Investment marketplaces lacked that.

19/ Related: Operationally cumbersome processes- there was huge friction in onboarding co's, investors and closing a deal. There are few marketplaces on earth which had as much friction in transacting as equity crowdfunding did.

20/ Reason #6: Inconsistent and confusing regulations. SEC No Action Letters. Vague guidelines led to mis-understanding @ which marketplaces were above board and which weren’t. In my view most were above board. But investors and entrepreneurs could never know that.

21/ FINRA was another whole beast. We went through the process to get registered with FINRA. So then we were members and (effectively) regulated. Which meant we couldn’t talk about things like unrealized IRR but our competitors that *didnt* jump through all the hoops could.

22/ Reason #7: Adverse selection. In tech this was brutal. The best co's went to 750 tech vc firms, incubators and 1K+ angels. They didn’t sign up to put their financials on a website. Sorry. If it’s an industry or geo where they cant get the attention then this is less true.

23/ Yes there were a few winnners- but amongst thousands of losers. It felt a lot like gambling with the deck stacked against you.

24/ Reason #8: No customer acquisition plan.

In most industries, starting a successful marketplace means getting great supply (here: companies raising $) to join you even before there is enough demand. Usually requires a fair amount manual pushing to get the flywheel spinning.

25/ Generally speaking, marketplaces have had a wide variety of hacks over the years to solve this problem. Most equity marketplaces had nothing to get supply (companies) other than “we have a great network.”

That’s just not enough.

26/ Reason #9: The experience wasn’t meaningfully better. Technology truly wasn’t adding much value. It was pretty status quo vs. the offline experience- still required lots of pitching and individual phone calls.

27/ At times it was a solution looking for a problem (to quote my co-founder). In most industries, early stage capital comes in the form of a small collection of sophisticated investors. Why would entrepreneurs want/need to trade that for hundreds of relationships to manage?

28/ Reason #10: These marketplaces just didn’t expand the market meaningfully - on the supply or demand side. Yes it brought in some dentists and doctors that would invest $25k here or $100k there. But fundamentally it wasn't moving the needle in terms of size.

29/ Reason #11: No network effects. Unlike many online marketplaces that get stronger as they get larger, equity marketplaces didn't. Best co's didn't like to hear that their private info was available for hundreds of investors to see. Even less when they were told thousands.

30/ So many online equity marketplace tried to create private deal rooms….thus defeating all hope of network effects. A marketplace without network effects...is pretty tough to grow.

31/ Probably other drivers that prevented greater success but those were some that we recognized. I don't share this to disparage any existing attempts, more to hopefully help any new industry participants think through how they would solve these issues and learn from prior work