Equity Crowdfunding or Democratic Capitalism?

Before you get started, it would be a good idea to read this short Wikipedia paragraph on crowdfund investing so you have an idea of its current state.

In our current capitalist system, businesses are created by entrepreneurs that are willing to oftentimes take on a large amount of risk with the hopes of gaining financially in the future. The unfortunate truth is that the vast majority of these startups will eventually fail.

Online crowdfunding is an ideal framework for the mitigation of this risk. Currently, it is able to bring the idea of an entrepreneur in front of tens of thousands of people and they get to decide if the product is a no or a go. If the cash pledge target is reached, the venture gets funded, if not the entrepreneur loses nothing but the time he put into the proposal and everyone gets their money back.

In an ideal model, the entire population would participate in the judging of the ideas and in this way, ventures that required both very large and very small initial investments could all get funded. If the population viewed the introduction of a new type of home robot that required startup costs of $1.5 million as something they wanted, that could get funded. If they loved some new type of hot sauce, that could get funded too. It is up to the entrepreneur to put together his best proposal and the rest is for Mr. Market to decide. The main risk of the entrepreneur simply taking the cash and not acting could easily be mitigated by infrequent checkups by regulators to make sure the entrepreneur is truly following through with the proposal contract. If they are not they will face the consequences and lose the original seed money.

Now here’s where it gets tricky. The key is to have a system in which all of the initial cash pledgers received some kind of share in the new venture. If the target pledge is reached, the shares of these companies would go on to be traded in the market just as they are today. Now you can think about the amount of gain that goes back to the general population given that the venture is a success. From the robot to the hot sauce example, all of these individuals would now have the power of ownership in a company that has already been proven to be a success based on a prequalifying judgment system. Not to mention the fact that it would incentivize a much larger proportion of the population to participate in the crowdfunding given the heightened prospects of future financial gains through share ownership.

Then again, what if the entrepreneur doesn't want to give away shares in his company and thinks he can do it on his own? It would be up to the entrepreneur to decide how much of his company he would be giving away and include this in the proposal. This would in turn factor into part of the decision made by those considering making a cash pledge. Keep in mind, that this is an added benefit over the current system in which there is no ownership given. In the end, ownership is the price the entrepreneur has to pay to eliminate all risk.

There will always be failures with general business cycles. This system allows for far less given that the businesses are more surefooted from the start. It is important to reiterate the fact that the entrepreneur incurs no risk and the population gets their money back if the target pledge is not reached.

A model in which the entire population participates is also quite extreme. It does however, offer valuable insight into the marginal benefit the system would receive as the number of active participants increased.