A ton of investors are unfortunately (for them — fortunately for entrepreneurs) going to learn the hard way that startup investing is not a very desirable asset class.
Maybe in the short term traditional VC’s will be impacted, but in the long term they have nothing to worry about. Why?
1) Instigated by hype, we’re going to see a ton of investors with zero understanding of how this stuff works dump cash into startups. They’re all going to have unreasonable expectations for every single one of their investments and 99% of them are going to have a bad experience and never want to do it again.
Even if they are fortunate to see a return, it will take many painstakingly, excruciating years and that’s not even the worst part. An investment they are ever so fortunate enough to see a return on, probably won’t be their first. Which means there will be countless other bad investments before receiving an update email that provides sufficient reason to smile.
Most of these investors, my guess is, won’t have the cash flow or stomach to sustain these loses.
2) The best founders capable of executing on a world class level know there is smart and dumb money. Being fortunate enough to be presented with the option, means they’re able to secure meetings with traditional VC’s. Any logically minded founder is going to take money from investors that make the most sense and provide value to the company beyond monetary means.
So who is this going to benefit most?
1) Founders that don’t have a chance securing meetings with traditional VC’s. Instead these entrepreneurs will be better suited evaluating their product and going after local, non traditional investors that are likely to see the value in what they are building. These people are probably much more accessible and will probably find much more intrigue as such deals may seem foreign to them — so they invest to momentarily spice up their life.
2) Ironically — traditional VC’s. They are going to experience a lighter inbox and see much less inquiries from aspiring entrepreneurs they likely would have never invested in anyways, in comparison to the quality of their current deal flow.
And the founders that are capable of executing on a world class level but DON’T have access to traditional VC’s are so few and far between that it’s not even worth it for traditional VC’s to invest the time in locating these deals.
So there you have it.
An influx of cash from investors that will run once they’ve realized what they’ve gotten themselves into. An influx that may force some sort of pivot in the strategy for traditional VC’s that will revert right back to their old ways once all the scared money is gone.
The JOBS act — a step in the right direction, but most certainly not as influential as the hype suggests.