By reading the description of how Scruge works, one may say that our solution is rather simple. While it’s arguable that simplicity is bad, let’s put this question aside and instead ask a more pragmatic question of what problem we are solving and whether we do it efficiently and inclusively.
The problem we’re solving is eliminating exit scams in crowdfunding and giving crowd investors the leverage over how their funds are being used. Now there are mainly two ways how crowd investors can be protected.
Ex-ante protection
Ex-ante protection means pre-screening startup before allowing it to raise money. Pre-screening can be done in various ways: by some experts or by the community, but we think this approach is insufficient. Let alone the problems of potential corruption by the party conducting pre-screening, this form of protection may only help to evaluate the quality of the project, but it can’t ultimately foresee the future and give investors any protection after the money has been raised. Bear in mind that a startup can be not outright fraudulent, but somewhat underperforming on its promises, like a famous game Star Citizen, and there’re no ways to predict how the founding team may perform.
Ex-post protection
This type of protection is associated with how the founders are developing the product. A lazy example of this may be relying on the legal system and legal enforcement, and penalising founders for non-compliance and outright fraud, but as discussed in one of our previous posts, this approach is cumbersome and expensive for startups, as well as limiting the jurisdiction from which startups come. A more interesting approach would be in using blockchain and smart contracts to minimise trust associated with investing in startups and allow investors to control how their funds are being spent through voting directly.
We’ve decided to take the latter approach, and use blockchain based-voting. The benefits of the following are various, but the most important thing is that it’s consistent with our values of reducing bias and promoting equality of opportunity. Using ex-ante protection or relying heavily on the legal system would mean that we would exclude some people from the opportunity to raise money based on our judgement, which may be flawed, or ban people based on their geography. On a more pragmatic side, this model is the cheapest, the most scalable and ultimately protects investors in the best way possible. We think there can’t be better protection for investors than having an ability to withdraw funds.
This way, we think that we have the best crowdfunding model with our blockchain-based ex-post protection, which is quite simple for investors to understand and appreciate and gives investors direct control, rather than relying on intermediaries. We encourage readers to send us their objections, and if we receive significant ones, we’ll address them in our following posts.
