{"id":38933,"date":"2023-10-20T14:59:47","date_gmt":"2023-10-20T14:59:47","guid":{"rendered":"http:\/\/startupsmart.test\/2023\/10\/20\/this-discrimination-robs-startups-of-valuable-capital-startupsmart\/"},"modified":"2023-10-20T14:59:47","modified_gmt":"2023-10-20T14:59:47","slug":"this-discrimination-robs-startups-of-valuable-capital-startupsmart","status":"publish","type":"post","link":"https:\/\/www.startupsmart.com.au\/uncategorized\/this-discrimination-robs-startups-of-valuable-capital-startupsmart\/","title":{"rendered":"This discrimination robs startups of valuable capital – StartupSmart"},"content":{"rendered":"
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Many Australians<\/a> dream of starting their own businesses.<\/p>\n

But they face restrictions on where they can access startup capital.<\/p>\n

In Australia you must be certified as a \u201csophisticated investor\u201d<\/a> to invest in risky, early stage ventures that cannot yet comply with costly disclosure requirements.<\/p>\n

A \u201csophisticated investor\u201d is someone with an income of at least A$250,000 per annum or assets worth A$2.5 million.<\/p>\n

But this qualification not only discriminates against some investors, it is a very limited view of what it means to be \u201csophisticated\u201d.<\/p>\n

It also ignores recent changes in how companies interact with an important group of early investors \u2013 their customers.<\/p>\n

Even more, it robs startups of valuable capital.<\/p>\n

The argument against \u201csophistication\u201d<\/h3>\n

The argument<\/a> for this restriction is that investing in private companies with unregulated disclosures is risky.<\/p>\n

They are not subject to the same requirements<\/a> of a public company and are potentially more difficult for a layman to evaluate.<\/p>\n

\u201cUnsophisticated investors\u201d should just stick to publicly listed investments because they are less risky and more transparent.<\/p>\n

But there\u2019s nothing particular about having money that makes you a good investor and investors get shortchanged in public markets as well.<\/p>\n

In particular, it is well documented that, on average, shares sold to the public through an IPO significantly underperform other investments in the long-run<\/a>.<\/p>\n

Even when a high quality IPO does come to the market, unsophisticated investors will struggle to get a meaningful allocation, while wealthy, well-connected investors end up with most of what they ask for.<\/p>\n

The academic literature<\/a> refers to this as the \u201cwinner\u2019s curse<\/a>\u201d, whereby unsophisticated investors only receive shares in an IPO when sophisticated investors think it\u2019s a lemon.<\/p>\n

Many startups have a unique relationship with customers<\/h3>\n

But companies also have greater intimacy with their customers than ever before.<\/p>\n

Micro-investing startup Acorns recently sought to raise A$6 million in a private share issue<\/a>, at least partially from its estimated 160,000 Australian users.<\/p>\n

Acorns\u2019 users are reported to have already pledged more than A$1 million to help the startup replenish its cash and pursue further growth opportunities.<\/p>\n

Acorns may be slightly unusual in being able to raise this money, as it is itself an investing app.<\/p>\n

It helps its users build wealth by saving \u201cspare change\u201d and investing this money for them.<\/p>\n

So its client base is at least familiar with the tenets of investing.<\/p>\n

But Acorns\u2019 ability to tap its user base as a source of capital also challenges the notion that only \u201csophisticated\u201d investors are suitably qualified to participate in early stage deals.<\/p>\n

Acorns\u2019 users are typically young tech savvy millennials<\/a> who are unlikely to pass the sophisticated investor test (which is probably why they are using the app).<\/p>\n

Yet, because of their interaction with the app, these users have unique insights in evaluating Acorns\u2019 prospects.<\/p>\n

It raises questions as to whether the distinction between \u201csophisticated\u201d and \u201cunsophisticated\u201d investors remains relevant in the world of app based tech startups.<\/p>\n

These startups often have aggressive go-to-market business models that attempt to capture as many users as possible relatively early in their life.<\/p>\n

Would someone that is cash rich have a better understanding of this business than a customer or user of it?<\/p>\n

In making an early stage investment decision a \u201csophisticated\u201d investor could try to determine whether an app solves a significant problem in its user\u2019s life and thus how deeply a user will engage with it. But predicting the behaviour of app users is inherently difficult.<\/p>\n

So who better to predict it than the users themselves?<\/p>\n

Discriminating against certain investors costs everyone<\/h3>\n

Under the current rules, a lot of \u201cunsophisticated\u201d users are denied access to such investment opportunities because they are simply not wealthy enough.<\/p>\n

This robs investors of an opportunity and startups of a potential source of capital.<\/p>\n

Even more, we all could lose as companies that create incredible products struggle or die for lack of funds.<\/p>\n

For startups, drawing on customer support, as Acorns has done, would provide a source of capital that does not carry the costs and conditions that are typically attached to angel and venture capital funding.<\/p>\n

For small investors it gives them direct access to some potentially very lucrative (but very high-risk) investments that otherwise would be impossible or very costly to access.<\/p>\n

Democratising the way startups are financed could create an environment whereby entrepreneurs, small investors and the economy as a whole all benefit from financing new and interesting endeavours.<\/p>\n

But it all starts with re-conceptualising the current arbitrary notion of \u201csophistication\u201d.<\/p>\n

Jason Zein is an associate professor at the University of New South Wales. He receives funding from the Australian Research Council.<\/em><\/p>\n

This article was originally published on The Conversation<\/a>.\u00a0<\/em><\/p>\n

Follow StartupSmart on<\/em>\u00a0Facebook<\/a>,<\/em>\u00a0Twitter<\/a>,\u00a0LinkedIn<\/a>\u00a0and iTunes<\/a>. \u00a0<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Many Australians dream of starting their own businesses. But they face restrictions on where they can access startup capital. In<\/p>\n","protected":false},"author":2,"featured_media":61486,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,1],"tags":[],"_links":{"self":[{"href":"https:\/\/www.startupsmart.com.au\/wp-json\/wp\/v2\/posts\/38933"}],"collection":[{"href":"https:\/\/www.startupsmart.com.au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.startupsmart.com.au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.startupsmart.com.au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.startupsmart.com.au\/wp-json\/wp\/v2\/comments?post=38933"}],"version-history":[{"count":0,"href":"https:\/\/www.startupsmart.com.au\/wp-json\/wp\/v2\/posts\/38933\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.startupsmart.com.au\/wp-json\/wp\/v2\/media\/61486"}],"wp:attachment":[{"href":"https:\/\/www.startupsmart.com.au\/wp-json\/wp\/v2\/media?parent=38933"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.startupsmart.com.au\/wp-json\/wp\/v2\/categories?post=38933"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.startupsmart.com.au\/wp-json\/wp\/v2\/tags?post=38933"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}