The agony and the ecstasy: patronage, transparency, and what counts as a success in investment crowdfunding

The lack of regulations is not the only big question make hanging over crowd investing. The merits of crowdfund investing in the US are also hotly debated. While many people are predicting a positive sea change for companies and common citizens, there is also no shortage of skeptics worried that investors will be ripped off, or at best invest in nothing but junk. With this controversy raging, it behooves everyone involved in crowd investing: companies seeking money, platforms, the politicians and regulators, and yes, the investors themselves, to sit down and think about how success should be defined. One option, and the one most likely to be put forward by the skeptics, is that the investments should be evaluated solely on whether they make the investor money. Towards the other side of the spectrum is the notion that the value of crowdfund investing lies with the relationship between the company and its investors, and that market performance is a secondary concern.

In a recent piece Paul Niederer, the CEO of the Australian Small Scale Offering’s Board (and guest of the CrowdFundCast), argues that patronage serves as a motivation for many crowd investors. Patronage, as Paul defines it is “the support, encouragement, privilege, or financial aid that an organization or individual bestows to another” and, Paul based on his experience, argues the major motivation for the “friends, fans, family and followers of the entrepreneur” who comprise the bulk of the entrepreneur’s crowd investors. While Paul acknowledges that a financial return on investment may be a partial motivation for investors, and the sole motivation for a subset of investors, it should not be the end-all-be-all when discussing whether a particular investment was successful.

Paul raises an excellent point. When deciding whether an investment is a success or failure it is the intent of the parties to the transaction, the investor and the company, that matter. If the investor is only looking to maximize its financial return then making money is the only metric. If however the investor is motivated, in whole or part, by a desire to support the entrepreneur for reasons other than money, whether it be affection for the entrepreneur or a belief that it is important to give the company a chance regardless of the financial concerns (such as a green technology company) then that desire must also be considered when evaluating success. It isn’t the place of outsiders to dictate whether an investment makes sense, and “I wouldn’t have spent my money this way” is not the same thing as a bad investment.

Of course, for the intent of the parties to be meaningful it also has to be informed, which is why transparency is key to crowd investing. An investor may be willing to give up some financial return to achieve a different goal, but that should be the investor’s choice. This means that companies need to be upfront about what they are doing, why, and what obstacles they face. Investors, for their part, need to do their homework to make certain they know what they are getting in to

Given the nature of the companies seeking crowd investment, and crowdfund investing’s lineage, it is unlikely that monetary return on investment is going to be the sole, or even primary motivator for investors, so crowdfund investing’s success should not be evaluated by reference to financial returns. Rather, it should also be judged on how many people, investors and entrepreneurs got what they bargained for…even if it was only a chance to support an idea they believe in.

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