Synopsis: Crowdinvesting is more than just a way for startups to raise money – it also promises to supercharge the new entrepreneurial economy. Read it NOW understand the true promise of crowdinvesting to drive the future of innovation.
Technology Does Not Wait For Us To Catch Up
It is a cliché to say that the world is changing fast – people have been saying this for at least the last 150 years and probably longer.
But with drones, blockchain technology, self-driving cars, 3-D printing, hover-boards, and the sharing economy either here or close on the horizon, people can sense that this time, it really is different.
With this step-change in entrepreneurship so obviously visible, it is quite striking that most people have barely changed the way they are allocating their investment dollars. The average person’s retirement fund is still made up, largely, of the debt and equity of large corporations, or keep it locked away in the bank at near-zero interest rates.
Any time the wisdom of stock ownership is questioned, fund managers will invariably trot out their well-rehearsed trump card: “over the long-run, stock market investments have performed well,” probably accompanied by a chart of the S&P500 over the last 100 – 200 years to back up their claim. But when it comes to investing, we shouldn’t care about the past, we should care about the future – and they’re not the same thing.
Nassim Taleb brought this into sharp focus with his seminal book, The Black Swan. The title of Taleb’s book comes from the belief of pre-colonial Europeans that all swans were white – a belief which was shattered when Australia was discovered. The early explorers, to their surprise, found black swans in this new land, instantly forcing a revision of belief despite the prior data of centuries.
No matter how many white swans we see, we cannot definitively say “all swans are white.” And just because we have over 100 years of backward-looking data saying “over the longrun, stock market investments have performed well” does not mean we can declare with confidence that stocks are still going to be a good bet for the future.
In Thinking Fast and Slow, author Daniel Kahneman blames a form of mental laziness called the “affect heuristic” on our tendency to extrapolate the past into the future. “Which assets will outperform in the future” is a more difficult question to answer than “which assets have outperformed in the past.” Our brains, finding the first question to be too tough, will substitute the second answer for the first question – often without us even being conscious of it.
Why has stock ownership performed so well throughout the 20th century, and what evidence suggests that this good run may be coming to an end?
Crowdinvesting And The New Entrepreneur Economy
Ron Davison’s book The Fourth Economy conceptualizes Western economic growth over the last 700 years. He argues our economic progress has been defined by three distinct stages: A land-based economy until 1700, where the powerful were the kings and lords who could raise armies and acquire territory. When the industrial revolution took hold, capital became the most important factor for growth, making the banks that controlled it extremely wealthy. Around 1900, capital became easier to access and the knowledge-based economy of the 20th century took its place, meaning a shortage of educated workers who could plug into corporations.
The 20th century was exceptionally kind to big corporations. Company laws changed in all kinds of favorable ways. Corporations were able to benefit from globalization to expand their reach, and the bigger they got, the more powerful they became. We had Standard Oil, General Motors, US Steel. Economies of scale ruled the day. Investing in the stock market generally means investing in large corporations.
In most cases, fund managers simply do not have the mandate or the wherewithal to invest in small, non-listed companies. Only venture capital is allowed to do that.
I make the case that owning shares in the stock market (and therefore in large corporations) during the 20th century is comparable to owning land during the renaissance, owning capital during the industrial revolution … or owning information, big data, and web traffic today. Therefore, the returns we saw to corporate equity in the 20th century are unlikely to be repeated in the 21st.
We now sit at another transition point. The advantages that corporations enjoyed are now being dissipated among many more entrepreneurs, targeting many more niches, with very low startup costs breaking down the barriers to entry. As Silicon Valley’s Paul Graham put it:
“Innovation has become more important than scale.”
We don’t need to look far to see proof — these days, small disruptors routinely beat huge incumbents if their idea is better. The question therefore becomes: during this time of unprecedented disruption, should we be crowdinvesting in the disruptors, or continuing to pour investment into the incumbents?
Why Crowdinvesting Matters
Thanks to Taleb, the term “Black Swan” has come to be synonymous with high-impact, seemingly low probability events – the collapse of communism, September 11, and the credit crunch of 2008/09 being examples. Taleb also convincingly argues that our psychology systematically underestimates the probability of Black Swans, and therefore in financial markets, systematically underprices them.
Crowdinvesting gives exposure to positive Black Swans. They are investments with capped downside and virtually unlimited upside. People can invest in the growing companies with huge ambitions that need money to bring their plans to fruition.
Crowdinvesting matters to society because it is helping to fund an economy which is itself in desperate need of renewal. And ordinary investors gain the ability to participate fully in the new, entrepreneurial economy in this time of unprecedented disruption.