InvestmentWebOfTrust

Copied from a comment by ThomasKalka on the page CommunityWikiBank:

To lower of the information burden on depositors CWB could establish a web of trust (and also “professional reviewers”). I allow someone I trust (maybee with a special focus), to do assignments for me (for a maximum amount). So the web of trust between us will automatically establish the board of directors, which may bee different for any project.

Thomas, I think this is a brilliant idea. A sort of LiquidDemocracy for making investment decisions. As you suggest, it could be carried out in a totally decentralized manner. And it seems like it solves a few things that I view as inefficiencies in our current economic system:

  • Even if you have an idea to start a new business, no one wants to quit their day job until they have obtained that first bit of seed capital; but it’s hard to get money from venture capitalists unless you already have the time to fly around and present to them. In other words, I think there is a chicken-or-the-egg problem at the very beginning of the process of getting investment for a startup that prevents a lot of potential startups from actually happening.
  • As an investor who knows a bit about technology, but who doesn’t have much money, I would like to invest in tech startups “on the ground floor”, that is, I would like to invest my paultry savings in tech startups that are just getting started, ones that are based around technologies that few people have heard of but techies, but that I personally have high hopes for. I don’t want to wait until the company gets big enough to get on the NASDAQ; by then, that “new technology” that no one has heard of won’t be so unheard-of anymore, and my “comparative advantage” as an investor (knowledge allowing me to have a better estimate of which cutting-edge technologies will be useful) won’t be put to use. But I also can’t be a venture capitalist myself, because I don’t have enough money.

Your system would allow large blocks of “ordinary people” to pool their money to fund new businesses. But unlike the venture capital industry of today, where the professional venture capital fund operators make all the decisions and the intelligence and knowledge of the investors who contribute their money to the fund goes to waste, your system would allow the knowledge of all participants to have an effect.

Formalizing and automating a system of rumor-passing (“I have a friend who met this guy with a good idea for a business that you might like to invest in”) might just make it easy enough for word about good investment opportunities to spread far enough and fast enough to actually get enough money to start new businesses.

I suggest that the “middle-men”, people who neither start a business nor invest but who merely pass along the word, get compensated also, through some sort of “finder’s fee” or advertisement fee. For instance, perhaps wanna-be new business owners tell their friends, “if you bring in investment money, I’ll give you .1%”; and wanna-be investors tell their friends whose investment ideas they trust, “if you bring me an investment opportunity I like, I’ll give you .1%”. And of course the whole system is transitive, so A could hear about an idea and refer it to B who refers it to C who invests in it, in the processing paying B a small fee, who then pays B a proportion of that fee. This could all be automated, of course, so that no one has to do any bookkeeping on their own.

Note that you wouldn’t have to commit to investing in whatever your friend tells you to, sight unseen; you are just saying that you are willing to review hir suggestions.

Compensating the middle-men gives them an incentive to take the time to keep an eye out for investment opportunities, to learn about them, and to sell them/explain them to upstream investors whom they know.

People won’t try to “cut out the middleman” because the only person they pay a fee to is their trusted friend; the next middleman down the line is a friend of the first middleman, etc, so no one will try to cut anyone out (and if someone does get cut out, it’s their own damn fault for trusting their friend to pay them).

The benefits to the economy at large if the idea works are:

  • More startups get created, because it becomes easier to get that first bit of funding
  • Money is invested more intelligently, because more people’s knowledge of what might be a good investment idea is put to use.

A simpler way to improve on startup funding would just be to have a sort of low-overhead “stock exchange” of startup ideas, even before the startup is started, and in which lawyers carefully make sure that no one makes any promises to anyone else and that no money actually changes hands unless/until a real company is created (i.e. the stock exchange just allows wanna be business owners to acquire a list of names of people who are probably willing to help fund them, and not actually start the business unless that list gets sufficiently long).

But note that Thomas’s idea isn’t limited to startups; you could also use this system as a way of passing around investment tips on existing stocks. If a friend of yours who knows about health care thinks that stock X (which is a health care company; an industry you know little about) is a really really good buy, you’d want to know, right? An easy-to-use computerized system for passing tips, combined with a small incentive for your friend, might ensure that s/he makes a priority of taking the time to tell you about it. Contrast to today’s situation, in which you’ll only hear your friend’s useful information if conversation happens to turn to health care stocks one day.

P.S. you might call this “multi-level marketing for investment”

P.P.S. i think this would work particularly well in the music industry, i.e. a process to fund new bands; because the network of people who are interested in a particular genre of music is usually a social network, and people are already happy to tell their friends about a new band that they have discovered. Certainly fans of that particular genre of music would be better at distinguishing quality new bands than a music label rep. Therefore those fans are the best people to decide which bands to invest in. Therefore the fans should fund the new bands directly – because of their expertise, they will be able to reap a better ROI from investing in new bands than the music labels will. The bands benefit because they have more control (being less dependent on the labels for raising capital). The fans benefit because they make money off their expertise.

One could use this to help overcome the intellectual property problem too; maybe each CD would come with something like a “share of stock” in the band; you can copy your friend’s CD but then you won’t be able to participate as an investor.

Of course, there are some audiences who would think mingling money with music would be uncool (and who don’t dwell too much on how much they are already mingled in the status quo, usually in a way that hurts small bands and helps large labels).

Thanks Bayle and Thomas for your insightful contributions.

Agree with your assumptions about the difficulties we have in France too to get the first bit of seed capital. I just translated the beginning and will be drop it on InvestissementWebDeConfiance to be reviewed by any french fellows.

Sorry for my english but I’d also be happy to express here a first idea I’ve in mind and checked last month with some private investors interested in CyberneticEconomy, … ready to syndicate and to fight against MS1 :

How about an European FundControlledByWikiCommunity?. A bit different of CWB but could complete your neat system of “multi-level marketing for investment” and work/be invested by CWB…

Let me try to present some points :

  • Vocation / MissionStatement2
    • project detection, → magnetism of money governed by community ?
    • communication inter-projects
    • CollaborativeCriticism
    • Help young entrepreneurs to build a first team, share and cooperate in order to create value.
    • Coaching, share of resources (offices, services, servers, lawyers, public relations, communication, design, marketing…)
    • Bring industrial some information-radar on a monthly basis (summarization)
    • Real-meetings (WikiConference? ?) with these open-technologies entrepreneurs/enterprises.
    • Invite industrials to work/cooperate with them
    • Push the entrepreneurs to a second tour (stock exchange, etc).
  • … (to be continued with a diagram)
  • OpenProcess :
    • Associate industrials, banks, private equities, services interested in the future of OpenSource
    • Make them invest in small Funds whose objectives would be clearly to detect and seed young techies entrepreneurs working on any innovative and FreeSoftware/FreeCulture projects.
    • Funds would not be governed by the industrials or any venture capitalists, but as you described above, those investors would really DelegateResponsibility to a RatingGroup-community-wiki of experts composed of
      • representative technies, geeks, analysts, experts and entrepreneurs
  • Decision-Making / Governance
    • decide on the startup projects to seed
    • % of profit to be distributed

Note the profit won’t be the primarily objective, but could be distributed on a classical capitalistic point of view depending on the % of investment. Naturally, a pourcentage of the profit should be allocated to the rating-group.

I have begun to MindMap a first draft but it’s not SVG and I’ve still to find a relevant name. FundGovernedByCommunity? perhaps ? Anyway, I have still financial work, search on reputation systems to end a first executive summary. Let’s say that first reactions in France seem good. I’d be happy to finalize this project first and imagine afterwards any synergy with some sort of CWB, this neat low-overhead “stock exchange” of startup ideas and find out a good gouvernance based on an OpenProcess of decision making. Anyway, I feel really excited by the future of this InvestmentWebOfTrust.

As soon as I’ll have a draft, I’ll make you know and will probably move within one week a contribution in French to FondsInvestissementGouvernéParWiki?. Any suggestion, CollaborativeCriticism welcome ;-)

Footnotes:

1. in France some famous people talk of ‘’micro-chiottes’’ :-)
2. find out a SuperordinateGoal - currently thinking of an OpenSource Fund with a CommonCause like a game ‘’fire on [CraoWiki:Microsoft ms]’’ - assorted with some ‘’propagation know-how mechanisms all over Europe’’
(CommunityWikiFooter)

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EditNearLinks: MindMap DelegateResponsibility FreeSoftware OpenSource FreeCulture CollaborativeCriticism

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