Why Don't Startups Get Their Users To Invest In Them?
By @edent
· facebook money Social Networks · 21 comments · 550 words · read ~9,870 times.
So, Yahoo! is to buy tumblr for $1.1 BEEEEEELLION.
I don't understand money. Well, specifically, I don't understand how companies are funded, classify shares, or any of that finance stuff. But, there's something which has been bothering me about the recent sale of some social media properties.
According to some estimates, tumblr has 170 million users.
$1.1 billion / 170 million users is.... double checks workings $6.47 per user.
Err... what? Even if those number are off by 50% - Yahoo have paid the equivalent of just $13 per user.
Now, I realise that $6 - $13 is a lot for some people, especially young people and those without disposable income. But it's not exactly an extravagant amount, is it? If a social network's worth is in selling advertising to users - you would expect said users to have enough income to be worthwhile advertising to.
Take, for example, Facebook. When they sold their shares they raised something like $16 billion and had roughly 901 million users.
Does sums. That's about $18 per user.
These are not huge sums for an individual.
The thing is, it's pretty hard for an ordinary person to buy a share of a company. You usually need to be able to buy a large quantity of shares, pay for a trading account, try not to get ripped off with various fees, and deal with taxes.
The Internet is making this slightly better - but market trading for small people still needs a hell of a lot of disruption. At the moment, I can't simply hand over the $26 I made in babysitting money and own a single share of Facebook.
I appreciate that selling your company isn't just about the money... but it seems that if you do want to raise cash, getting your users to invest may not be the worst idea in the world.
Sure, the transition from "user" to "part owner" may be uncomfortable - but it's not impossible. Look how Co-ops, Building Societies, and other partnerships manage it. Invested users could vote on major decisions, and feel a sense of pride and community in what they were achieving - not to mention the potential for receiving dividends or other forms or returns on their investment.
Take, for example, App.net. Users pay for their accounts on the microblogging service - developers like me pay slightly more. But we're still just sharecroppers tending someone else's plantation. This isn't a criticism of Dalton Caldwell and his team - but just being a customer isn't enough to convince me that the service won't suddenly shut down or follow some dark path.
I want to be an investor - a very small one - in the services I use. I don't want my attention to be sold to the highest bidder on the stock market.
Like I say, I don't really understand how corporate financing works. I'm sure there are lots of problems with my idea. Not least that Goldman Sachs wouldn't make quite as much money.
I sincerely think that Internet-scale companies should look to those with the most emotional investment to provide them with financial investment. Or they will end up selling not just their customers' eyeballs - but also their trust, loyalty, and love.
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The JOBS Act is meant to address that http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups_Act
Good thinking. But the reverse seems to be the case. People expect most Internet services to come free of charge. The real value is in the data and access that the owner collects.
2 points:
1) The only way to ensure that your service won't go down that path is to start your own service you control. Other than that you can't avoid it. At some point in time some giant will offer enough dollars that a start-up won't be able to turn down. The alternative is when the startup goes public and makes its fortune down that route.
2) Investing in these types of companies at an early enough stage where it actually pays off for investors is actually MUCH HARDER than you even described. It's easy to buy a share of public stock. But private share? Before a company is public? You have to be an accredited investor. Meaning, at least $1 million personal network or $5 million in assets, or have made over $200k the last two years and expecting to continue to make over $200k in the next year.
In other words, the regular person CAN'T really invest in a startup. Unless it's your own, your fate is sealed to being the product of startups and will eventually be sold to the highest bidder.
Enrique Torres says:
(shameless plug of a friend's company)
Take a look at https://wefunder.com/
They're trying to tackle just the issue you're talking about.
Very interesting (although their site seems down at the moment). I've also been told about http://www.loyal3.com/ which allows you to buy stock - or parts of stock - in existing companies.
Just taken a look at WeFunder - it's not tackling the issue at all
"Invest as little as $1000 in some of the hottest startups in the country."
Facebook stock is $26 at the moment. That's within reach of most of its EU/US demographic. Why can't I buy a "personal stake" in a company?
lakawak says:
Why CAN'T you buy a personal stake in Facebook? Buy a share of their stock.
I think that the issue at stake here is not buying a stake in Facebook, it is buying a stake of the network that you are passionate about at an early stage. Peter Teal grew his investment by 2,000% by the time of the Facebook IPO however once a member of the public is able to buy stock the potential grow is basically exhausted. It is also too late to have any meaningful part in shaping the business.
Customers investing in companies - isn't that just making a purchase? I suppose your point, then, is that you'd also like to own a small part of the company itself (at least in some cases). Fair enough, though pretty unconventional.
No. Purchasing a product isn't the same as investing in a company. Buying an iPod doesn't get you any say in Apple's affairs, nor a dividend. I'm talking about co-ops. They're reasonably common here in the UK but seem less so in the USA.
Dave KryKey says:
we are doing that now, problem is we have over 48000 customers with over 23M people going to the service and we sent out an email and only 3 people replied - its not easy raising money this way either.
Bob says:
Also, alot of users are not active users. So, if you have like 10% as active users your looking at approximatly $100-$200 per active user.
I think this is a really cool idea, but I have a few questions.
You're assuming a working service that someone is already willing to invest in. Where do I get my seed money? Does kickstarter / indiegogo make sense for this?
If the co-op needs to raise a big round can it seek outside investment? Can I take a series A and give one person ("corporations are people my friend") a large pool of shares while also selling shares to my users?
Should the stock be splittable? If I have 500k outstanding shares and my user base grows to 100 million should I split the stock? dilute it?
Should the co-op be able to make a capital call to it's users? ("hey guys, we're going to shut down if you don't give us more cash").
I'm not trying to poke holes. I think this is a really interesting idea (and as startups continue to build communities I think we're going to have to have more outside the box thinking related to how they keep their doors open). I'm sure you've thought about these problems for much longer than I have and I'd love to hear your take on some ways to address issues like that in such a system.
The problem is telling all your users to find accredited investors. That breaks the rules of general solicitation, which the SEC was supposed to have updated last year but has been dragging its feet. So startups can only really talk to accredited investors, and can't talk to their users and tell them they're going to pay dividends or something.
However, they CAN charge their users for SERVICES 🙂
I agree completely with getting users to pay for services, I just have a side comment. When Facebook was basically at the bottom of its value, I opened an account on Sharebuilder and bought 5 shares. First time I'd ever bought any stock and it was as easy as any other website account. I had waited many years before buying stock because I thought it was hard but when I decided to try it out it turned out it was pretty easy these days.
the disconnect is that Value is fueled by users. We contribute our photographs without compensation. The Value accrues to the owners. Its a form of hyper-captialism where the few amass great wealth at the expense of many. We, the users, think we are ahead because we use services for "free." Maybe we need to think about it differently.
lakawak says:
The answer is simply...because 98% of their users would NOT invest. And then the amount required for each willing user would skyrocket to several hundred.
Not to mention..it is not just money you don't understand. IT is ALL numbers. When a site says they have X number of users, that does not mean that that many users are still using the site. So those would be immediately out.
Thanks for your comment.
I'm not saying that it would be the sole way to raise money - just one out of many opportunities.
If you read very carefully, you will see that for the Facebook numbers I quote the number of active monthly users - not total registered.
Thanks
Great post!
It's funny I came across this blog post on Hacker News. Our sharing economy startup, Producia, is taking this approach with the hybrid cooperative approach, where the workers and members own the company (investors can only participate in a royalty-based deal, using the "Open Enterprise" model (advocated by the now defunct startup, BetterMeans).
My book, The Producism Manifesto: A New Game For A New Economy, explains our model in detail (readable online at producism.org). Would love to hear your thoughts about it.
The new economy is coming, and the enterprise is being disrupted.
This idea of a co-cooperatively owned social media site seems to be becoming more current. It is a topic we've been discussing on the debate site Volconvo at "Social media, forums, and the co-operative business model" http://www.volconvo.com/forums/general-discussion/43788-social-media-forums-co-operative-business.html.
AO says:
That's what the jobs act is supposed to do....now waiting on the SEC. What you are describing is equity crowdfunding. Think kickstarter but instead of rewards you get equity.