April 26, 2013

Packers, Craft Beer and the Experience of Ownership

“Dude, I would totally invest in _____ Brewery!”  Fill in the blank with someone’s favorite brewery and you have the standard response to my explanation of what CraftFund is about.  Typically the interest has nothing to do with striking it rich.  Sure, craft beer is a booming industry that could offer investors dividends, but most people get excited simply about the experience of having an ownership stake in their favorite craft brand.

From this viewpoint, craft beer investment crowdfunding would be similar to buying “stock” in the Green Bay Packers.  Despite zero opportunity for a financial return, thousands of fans bought Packers "stock" for a sense of ownership and desire to feel more closely connected with the brand that they are so passionate about.  The same will be true of craft beer investments.  Unlike stock in the non-profit Packers, investments in breweries could yield a financial return in the form of dividends; however, many could choose to invest in order to experience a sense of ownership in connection with their favorite brands.  The return on investment is therefore experiential.

 As I have written about before, there are two key reasons why financial return will not be the exclusive motivator for investment crowdfunding generally:

  1. Caps on investments. The JOBS Act restricts most Americans to up to $2,000-$5,000 in crowdfund investments per year.  Most returns on this kind of investment will be modest, which suggests that many won't choose to invest simply to become rich.
  2. Millennial behavior.  Tech-savvy millennials are expected to be a key demographic for investment crowdfunding.  Millennials view investments differently than older generations as evidenced by how mutual funds and other traditional investment vehicles have struggled to attract this group. Favoring customized and participatory options, millennials are more likely to approach investment crowdfunding as an experience.

Understanding the experiential component of investment crowdfunding is critical to getting it off the ground.  Yesterday’s Washington Post article described how there are concerns that the SEC might derail the new form of capital envisioned in the JOBS Act due to investor protection concerns.  The concerns are based on the assumption that crowdfund investments are motivated primarily by prospects of financial return.  One commentator described the SEC's approach as follows: “The way they look at it is, small companies are very risky and therefore bad investments.”

Risky in what sense?  To be sure, people will be attracted to investment crowdfunding because of potential financial returns that the current rewards crowdfunding model (Kickstarter) cannot offer.  However, investment crowdfunding will also provide an experience that rewards crowdfunding cannot offer: an experience of ownership. Does investment for the sake of an experience constitute a “bad investment?” Do investors need to be protected from this impulse? 

We believe that people will choose to purchase shares in breweries and other consumer goods in part for the experience of ownership. That's not to say it will be the exclusive motivation. Nor does it render investor education irrelevant (affinity fraud is real threat in this space, a topic we will discuss at great length in the future).  However, the likelihood that investors will engage for the sake of experiences should shape the investor protection discussion.  The JOBS Act is too important and we need to make sure we get it right. It's silly that only high net worth individuals have access to these kinds of investments.

What do you think?  Would you invest in a brewery for the experience, the potential financial return, or a combination of both?

 

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