Herd Investing vs. Crowdfunding

At the moment, we cannot say that crowdfunding will be substantively different from herd investing, but we should have a better idea when the crowdfunding impact is felt in a year or two.  Herd investing is not the same as buying lots of cattle or alpacas, an investment that might one day find a welcome reception in farmcrowdfunding.com (don’t forget to give us a shout out if you’re certifiably crazy ambitious enough to pursue that).

What is herd investing? That’s when the so-called smart money piles into the deal du jour, an orgiastic money eruption led by venture capitalists and angels who can’t believe they unearthed the 23rd social/mobile/geolocated/game-changer thingy that might be snapped up for 10x returns in five years . . . as long as the 22 preceding startups with nearly identical attributes and better management teams don’t find a buyer first.

Alexis Madrigal of The Atlantic indirectly pokes the titans of private equity investing in The Jig Is Up: Time to Get Past Facebook and Invent a New Future:

Certainly, some of the blame for tech startup me-tooism is just the tendency of startups to cluster around ideas that seem to be working. Social networks? Here’s 500! Mobile social plays? Here’s another 500! Social discovery apps? Behold 1000! Perhaps that’s inevitable as dumb money chases chases smart money chasing some Russian kid who just made a site on which men tended to flash their genitals at web cameras.

His point is that we arrived at an innovation lull, the tech convenience store where incremental improvements and copycats loiter while nothing very interesting happens. Meanwhile, robust funding activity masks a lack of originality. Where to go from here? Crowdfunding might be different from herd investing if Main Street investors stay away from chasing the smart money love affair with all things shiny in Silcon Valley.  Or crowdfunding might just flood the party with more money–until the party ends.

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