Investor marketplaces seem to be all the rage nowadays. In fact there are eight of them that we’re currently aware of:
- DocSend Fundraising Network
- FirstDollar Deal
- Raise (Mercury Bank)
- Vectors Angel
- Visible Connect
There are several issues with equity investment marketplaces however.
First, and most often mentioned among founders and investors alike, is the issue of adverse selection. Strictly speaking, adverse selection is a market situation where buyers and sellers have different information. That itself, in the strictest sense, is common across almost every market — since nearly zero markets actually have perfect information symmetry. However, perhaps even more relevant is an example of adverse selection: George Akerlof’s idea of the Market for Lemons, in which the sellers (founders in this case) are selling both lemons (a terrible car with lots of problems) and peaches (a great car that will require minimal repairs).
In this scenario, buyers (investors) change the price they are willing to pay to accommodate the risk of buying a lemon. However, that drives peaches out of the market, further reducing the price that a buyer is willing to pay because now the chance that they end up buying a lemon is even higher. Imagine you’re buying a car from a very high-end dealership dealing only in brand new cars under warranty — surely you’ll pay a premium for the risk that has been reduced for you as compared to the scenario of purchasing a car from a small roadside used car lot, where the risk of a lemon is greater. This is the kind of market that investor marketplaces often generate: one where the number of lemons is unknown, and therefore affects the prices of even the strong assets for sale. As the price drops due to the unknown quantity of lemons within the available inventory (whether the inventory is cars, companies, or something else), more and more peaches are driven out of that specific market, and the feedback loop continues until, in the worst case scenario, only lemons are left.
That is one example of why these marketplaces don’t work, however, I think there are broader issues at play as well.
1. Most equity investors rely on social proof as a filter for making investments, whereas these marketplaces strip that away from the process (for the most part).
2. The best investors don’t use these marketplaces. Therefore, we end up with the reverse scenario as described above – where the best founders now avoid these marketplaces because they are aware that the top investors are only found elsewhere. Thus creating a feedback loop that continues to degrade the quality of both deal flow and investors participating.
3. The obvious: there are eight — count ’em — eight marketplaces listed here. Meaning that even if the other issues were overlooked, both sides of the market are now fragmented further, and they are 87.5% less likely to be matched with their ideal counterpart.
All of that said, these marketplaces clearly garner participation from both sides of the market — demonstrating that although they may not be perfect, they are serving a need.
This directory is a living document and we work to update it as often as possible. Please contact the team at Bootstrapp if you would like to submit an organization for consideration — you can simply shoot a quick note to [email protected] and we will review your submission.