The crowd’s got that.
I remember one of my step-father’s favorite posters growing up, which was a sketch of a lone sheep slowly making her way back through a herd, all of whom were systematically launching themselves over a cliff with a bubble caption of her saying, “Excusé moi, Excusé moi”. It’s an image that has stayed with me throughout my life, as a reminder to make my own path and not be unduly influenced by others.
It may then appear to be incongruent that I am a proponent of crowdfunding- an investment strategy that is based on aggregating the wealth of the masses, or pooling the wisdom of the herd. That is indeed what many people are saying, and part of the reason that the SEC has been slow to approve Title III of the JOBS Act, which will finally allow non-accredited investors (accredited investors are those earning over $200k per year or holding assets over $1 million not including their primary residence; non-accredited investors are the rest of us) to invest in small businesses on a web-based platform. The SEC has delayed its implementation for over two years now, worried that the average investor will make poor decisions in the absence of an informed expert to guide their irrational and uninformed choices.
I disagree. People working together, collaborating and sharing ideas almost always makes something better. But what about investing — can the crowd pick a winner? Yes, absolutely. An early experiment testing the wisdom of the crowd was at the beginning of the 20thcentury when a British scientist — Francis Galton, ran an experiment at a county fair with the hypothesis that most people are really rather stupid. He took 800 estimates from a crowd of people who each guessed the weight of an ox, slaughtered and dressed. Many of the participants were farmers and butchers and had experience, but many were not. The results surprised Galton who found that individual guesses varied widely, but that the average estimates of the crowd came to 1,197 pounds, exactly one pound shy of the actual weight of 1,198 pounds. Incredible.
My own opinion is that we will not lose our shirts when crowdfunding is opened up to the general public. That the wisdom of our herd will help us to pick the winners and actually drive up the overall returns made by ‘experienced’ angel investors and venture capitalists who fund the majority of startups at the moment. I have read that investments in the startup world follow the 80/20 rule, meaning that 20% of investments make 80% of the returns. I think we can do better. How about you?
Would love to hear from you.
Contact me anytime — kim@designbook.com
Originally published at designbookcom.tumblr.com.
