Would you invest your personal money in a company that runs an online “marketplace for emotional support,” matching users with someone to talk to when they’re feeling down?
Or how about taking a punt on a flying car, billed as “the Jetson car we were promised”? Or a dating site for Chinese people living in North America?
These are among a spate of US start-up investments featured this week on the websites of companies including AngelList, WeFunder and RockThePost.
Their appearance follows the repeal of a longstanding ban on “general solicitation” in the US. For the first time in 80 years, private companies hunting for capital can now advertise to all-comers. The $22 billion that angel, or individual investors invested in private companies last year – and perhaps even the $27 billion put to work by more established venture capitalists – is about to see some competition.
Not sure which are the best risks? Labels identifying “start-up of the week” and promoting “staff picks” are already being slapped on the favoured few, increasing their odds of standing out from the pack.
“Democratisation” of this kind has become an overused term in internet circles. Normally, it is used to describe a new market that lets outsiders participate in areas previously reserved for professionals. Often, the opportunities are self-serving and raise questions about whether most people have the necessary skills and experience – or whether they’re about to become the marks in someone else’s get-rich-quick scheme.
But it’s hard to argue with a change in regulation that gives rank-and-file investors an early look at what could become the next big growth companies.
For most ordinary mortals, the first chance to invest in Facebook came at its initial public offering, when it had already reached a market value of $104 billion – and right before it fell to under $60 billion.
Also, the greater transparency should raise the overall efficiency of the capital-raising process. Silicon Valley loves a good online disintermediation story – especially when it involves cutting out middlemen who have made big profits from their privileged status. In this case, the people at risk of being disintermediated are some of those same venture capital investors.
However, removing the general solicitation rule – as required by last year’s Jobs Act – does not yet herald the “crowdfunding” free-for-all that was promised. Only those who can prove they meet the US Securities Exchange Commission definition of an “accredited investor” – broadly, people with personal wealth of at least $1 million – can play.
And for the first investors in these new online private investment markets, there are plenty of new risks and potential unintended consequences to bear in mind.
With more people competing to invest, for instance, the price of getting into the best deals is likely to rise sharply. The entrepreneurs with the best track records already enjoy star power inside Silicon Valley. Add in unfettered marketing and online reputation management, and some will become global magnets for risk-seeking private investors.
But while the idea of a seed-investment bubble sounds scary, it might at least correct a flaw in the current system.
Arguably, the most promising start-ups have been forced to accept unrealistically low valuations with their first financing rounds. Entrepreneurs say they aren’t given much of a voice in setting the pricing, but seldom complain since they usually view it as a way to secure relationships with big-name investors who can open doors in future.
The biggest concern for investors, though, will be whether they can get access to the best deals. Venture capital has been the most unbalanced of investment markets, with virtually all of the returns going to fewer than 10 per cent of the funds. ‘Deal flow’ – getting early sight of the next potential blockbusters – is all. That the industry continues at anything like its present scale is a triumph of hope over experience.
The entrepreneurs with the best track records and ideas – and no shortage of angel investors already knocking on the door – are unlikely to be the first to turn to public marketing. For them, breaking away from established networks of fundraising and support on which the tech industry has grown up represents a risk.
True, it might lower funding costs: but why try to blaze a trail when there is so much at stake?
In the early stages at least, the best investments will stay with the insiders. But if you are determined to take the plunge, there’s always that flying car.
Richard Waters is the Financial Times’ West Coast managing editor.
Copyright The Financial Times Limited 2013.