The US’ JOBS Act is not the entrepreneur’s savior it seems to be

Yes, there are some wonderful, honest companies that deserve investment and cannot get it, but they are not that common. I see a lot of start-ups. Many are appealing and have good ideas, yet most of them fail. Now the quality of even the honest start-ups is likely to decline as more of them are established and they will spend more of other people’s money before failing.

For example, with more start-ups, it will be even harder for each of them to find management talent and the right employees. Indeed, many people whom an entrepreneur might have hired will probably become chief executives of competing start-ups. Meanwhile, all of them will be competing for a finite number of customers, and those companies that make progress will then have to compete for scarcer scale-up capital.

Many investors in these startups are likely to lose their money. Even under the current system, many angel investors lose money.

The best route to success in angel investing is to invest in, say, 10 or more separate companies, so that you have the chance of at least one big winner. However, again, a broader investor pool is likely to reduce the average number of investments per investor, with inadequate diversification leading to many more losers than winners.

The faith that drives the JOBS Act is the same magical thinking that drives many Internet phenomena: People are good and everyone means well. However, the Internet’s easy accessibility and low entry barriers have led to spam and malware and bad behavior; each new service starts out “clean,” but then ends up requiring its own regulations.

Just ask eBay, Google or Facebook how much they spend on security, fraud detection and the like. They do not want to tell you, which says a lot. As on the Internet, so in real life: Sometimes friction has a purpose.

Esther Dyson, chief executive of EDventure Holdings, is an active investor in a variety of start-ups around the world. Her interests include information technology, healthcare, private aviation and space travel.

Copyright: Project Syndicate