Would You Invest in the Netflix for Toys?

Imagine your otherwise batshit crazy neighbor comes up with a big idea. Really big. The type of idea that could become the next Facebook, Twitter, Pinterest, or maybe just the next Coffee Joulies – how much would choose to invest? Let’s say you’re feeling restless and want to invest $1,000. Your neighbor thinks his idea is worth $50k. He’s willing to give you 2% equity in his idea/company if you put your $1,000 toward getting it started. He wants to go online and find 49 other investors. Today, as far as I can tell, there is no legal framework in the United States that allows this. You save $1,000 and you neighbor goes back to drinking bourbon and spying on lawn gnomes.

Jobs Act

President Obama, in the interest of gnome privacy, is preparing to sign the JOBS Act into law on Thursday (April 5, 2012). Once this happens, startups will be able to raise up to $1 million in funding from non-accredited investors (read: regular people). This appears to accomplish two big things:

  • It increases the total amount of money available to startups (theoretically should increase the number of startups that…start)
  • It gives the common citizen the ability to invest a small amount in an early-stage company

There are a few clear problems that come with this Act. Namely among these is the potential for fraud and the reality that these are very high-risk investments and those seeking funding might downplay that risk (or those doing the investing might be blind to it). For startups acquiring crowdfunding the failure rate could climb as high at 90%. Despite these drawbacks, I predict this change will be a net positive for both entrepreneurs and for the US economy.

I would really love to see a Kickstarter-esque platform grow out of this. Individuals would be charged only after the funding goal was reached and each investor would receive equity instead of (or in addition to) “rewards”. Using this platform investors could keep tabs on the various companies in their portfolio and companies could easily communicate with their numerous shareholders.

What are you thoughts? As a non-accredited investor, would you consider investing in a brand new company? Add your comments below. As for the title, sorry, that already exists.

EDIT (4/7/2012) – Toygaroo closed just a few days after I posted this article, reportedly because “the growth…experienced was simply too fast and [they] were not able to secure the additional investment needed” to sustain that growth.

Image stolen from The Huffington Post – Go read their stuff too.

By Collin

Collin runs this place and writes everything you find here. He likes to interact with people - so if you talk to him he'll probably talk back.

2 replies on “Would You Invest in the Netflix for Toys?”

Hey buddy–

I’m interested in this. How different is it from Kickstarter though? Couldn’t you raise the money through Kickstarter and give out shares? I’m not very educated here, just curious.

Hey Chris,

I’m confident that if Kickstarter wanted to enter this game they could do it (and I sincerely hope they make the attempt) – but they would need to do some serious backend work to accommodate the needs of a startup raising funding (versus a filmmaker pre-selling DVDs). The first thing that comes to mind is the eventual need for multiple funding rounds and the potential confusion of investors in terms of valuation/liquidity/equity dilution/etc. There is also the legal side of things – they need a system to track the shares and contracts that protect everyone.

I suppose they might be risking bad PR as well if 90% of small-time investors lost all the money they invested. If I were Kickstarter I would start a sister site called Kickstarter Shares (or something) that separated the creative projects from the business ventures.

Another thing to consider, if you have a product idea it’s possible to launch a Kickstarter campaign (right now) and raise loads of cash without giving up any equity at all. The messy part comes in when people start investing in apps/websites/services that will flow through multiple iterations before succeeding/failing. Even the investors in the successful companies might not see any ROI for 7+ years.

Needless to say, it will be very interesting to see what happens next!

Leave a Reply

Your email address will not be published. Required fields are marked *