The JOBS Act: Misconceptions And Motives Behind Crowdfunding For Startups

Listening to the discussion of the new JOBS Act, I am of two minds. 

First, lets get rid of the idea that it's a jobs bill in the usual sense. What it really is, is a "company formation" bill that proceeds on the assumption that if we create more companies we will create more jobs. This hypothesis comes from Kauffman Foundation research that says most jobs are created by new companies—specifically companies less than five years old. 

In the last two years, this hasn't been proven true, as many new companies can't afford to hire, or—more important—don't really need to hire when they can collaborate, outsource, or automate. In the last two years, again, according to Kauffman, many startups have been solopreneurs. Of course. Either there wasn’t enough money for them to hire additional workers, or these entrepreneurs were really laid-off workers with no great idea of how to scale a company but wanted to create jobs for themselves. So as usual, the data itself isn’t clean.

Thus, I doubt that the jobs we expect will be created. But that's not a bad thing. We need to stop thinking about jobs in the old way. Rather, we should focus on wealth creation, with or without traditional jobs. If we can all become fulfilled and wealthy working for ourselves, why shouldn’t we? (I’m exaggerating, the point remains.)

I still I think we need to lower the bar for venture capital exits so the venture capitalists make money and are free to fund other companies. Right now, many VCs are trapped in the companies they have already funded for so many years that it de-incentivizes institutions from investing in venture capital and venture capitalists from investing at an early stage in a company’s existence.

And I am heartily in favor of the crowdfunding portion of this bill. When I grew up, small companies could go public easily on the pink sheets, and they did. My father was an attorney and owned his own over-the-counter brokerage, and he helped them do it. Did people lose money? Yes. Did they make money? Yes. Just not on the same companies. 

And now, Kickstarter and its relatives have proven that people may have other motives than just money when they make an investment. People will give small amounts of money to projects they believe in, without the hope of much return beyond a T-shirt, because they want to be a part of something.

Yes, people who invested in penny stocks got snookered by pump and dump boiler rooms and lost money. And people on Kickstarter invest in projects (like Diaspora) that turn out to be failures. 

The solution is to train investors in financial literacy, not to remove opportunity from entrepreneurs. No one forces anyone else to invest in a startup. As a person with high risk tolerance, I invested in penny stocks (and made quite a bit of money), and I invested in startups. I made and lost millions in both. But most important, I feel as if I have been a part of innovations and I have helped people realize their dreams. I would not have lived my life any other way. But I have never asked anyone else to follow my own inclinations.

The new crowdfunding law will indeed have unintended consequences. Con men will come in and hoodwink old ladies into investing their grocery money. But should we stop the entire economy from innovating because some Americans aren't willing to become financially literate? I blame parents and schools for failure to teach even basic financial literacy in high school and earlier. 

We have become a nation of people who believe honesty and ethics can be regulated into existence. They can't.

[Image: Flickr user linus_art]

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