angel investors

Crowdsourcing the Race to the Bottom

postmates flowers

I just received this email from Postmates advertising flower delivery in San Francisco. Within the hour. For $19.95. Delivery and tip included. That’s pretty darn cheap.

Yesterday, Warren told me about another startup, BloomThat, that also delivers flowers. Ridiculously fast.

You should really be wearing a helmet, sir.
You should really be wearing a helmet, sir.

Why are they doing this? What problem are they trying to solve? Did your wife come home from work in the middle of the day and catch you in bed with the housekeeper, and now you need to send flowers, Ridiculously Fast, before she storms back to the office?

Exactly how big is this market, anyway?

As for the $19.95 flower delivery, they can’t possibly be turning a profit, or even breaking even. Operating at a loss to build hype is the same strategy employed by every failed business that ever patronized Groupon.

As of Monday, startups can publicly solicit funds from investors. You can gauge the quality of these crowdsourced startups for yourself on sites like AngelList. Yes, investors are actually putting money into these things.

You see, this is what half a decade of Zero Interest-Rate Policy does to the country. Thanks to Bernanke, we now have USB-powered sex-toy startups closing multimillion-dollar rounds.

crap2

These are all real listings on AngelList. BillMeLater for subprime credit? That’s a winner!

The Startup Bubble Has Only Begun

I asked a couple of angel investors last week about the current state of the startup bubble. Sentiment was mixed:

Most of the companies getting VC funding generate a small amount of ad revenue, at best.

But many get acquired. As far as investors are concerned, these companies are highly profitable, even if they don’t generate revenue.

If these startups are highly profitable for their investors, is it really a bubble?

A bubble arises from unreasonable expectations of indefinite future growth. There has certainly been explosive growth in seed funding and acquisitions:

Seed Investing Activity

It used to be that angel investors wrote off their investments as charitable donations. But now, seeded companies are getting their Series A financing in months. The expectation is that Yahoo and Facebook will keep buying these pump-and-dump startups, just like AIG kept buying toxic credit instruments from Goldman Sachs back in 2007.

follow-on-financing

Who will get burned this time?

In 2001, it was the stay-at-home daytraders. But this time, nobody is going to feel sorry for accredited angel investors. So who are the unwashed masses who will ultimately get burned? Maybe it’s the kids who work long hours at crappy seed-stage startups for chump wages and 0.001% equity. Nothing’s cooler than a job at a hot Silicon Valley startup, right? So they work in indentured servitude, hoping to be forever remembered as Employee #X of the Next Google.

Bring in the sheep!

Crowdfunding for startup investments has only just begun. If the JOBS act goes into effect later this year as expected, even non-accredited investors will be able to put seed money into startups. And sites like Wefunder will be right there to help funnel cash from the masses. If this becomes a reality, then the real bubble can begin!

wefunder

See Also:

There’s A Lot Of Sickness In The Startup World Right Now –BusinessInsider

Obama To Name New SEC Chair, Crowdfunding May Finally Move Forward –TechCrunch

As Crowdfunding Takes Off, SEC Greenlights AngelList’s Investment Platform –TechCrunch