A handful of websites have turned user-generated content into figurative gold: think YouTube, which started with $11.5 million in venture capital, convinced a few hundred thousand amateurs to upload their home videos, and got purchased by Google for $1.65 billion. But now a trio of Harvard Business School students has launched a Web business designed to transform users’ creativity into literal lucre.
The UpDown, a free-to-play fantasy investing and social networking site that launched today in Cambridge, plans to single out the members whose imaginary portfolios show the best performance and use their strategies to manage a real stock fund seeded by Swiss angel investor Joachim Schoss. Revenues from the fund will be used to operate the company, reward the top performers, and who knows—take over the world?
Well, not quite. If the wisdom-of-the-crowd concept turns out to be a good investment strategy, The UpDown will simply create a larger hedge fund or mutual fund and invite outsiders to invest, acording to Michael Reich, the startup’s CEO. The more the fund earns, the bigger the rewards the company will kick back to its members, says Reich, who co-founded the company with fellow HBS students Georg Ludviksson and Phuc Truong. “It’s all for fun—but hopefully we can get it to the point where people are making good enough money that they appreciate it,” he says.
Don’t start on that resignation letter quite yet: so far “Neurodoc,” the top performer in The UpDown’s closed beta test, has earned all of $202.86 in rewards. (Testing, which began in June, involved about 1,000 students from various business schools and their invited friends.)
The UpDown isn’t the first fantasy-investing network where the results have been used to inform real stock investments. Over the last three years, Marketocracy Data Services has recruited 55,000 people to manage model portfolios; sister company Marketocracy Capital Management, which manages a family of mutual funds, uses data on the best-performing portfolios as part of its research. Then there’s Gotham Capital’s exclusive Value Investors Club, which limits membership to 250 people and offers a weekly $5,000 prize to the authors of the best investing ideas.
But The UpDown’s idea is different. Reich’s explanation is worth quoting at length: “Our idea is to have a fund that is managed by thousands of people. But if you just take everyone’s advice at the same value, it would probably be tough to have a good investment strategy. Obviously you need to apply some kind of intelligence to find out who are the people among those thousands who actually should be running the fund. There are two ways to do that. You could either say ‘I’m a good fund manager myself and I’ll use the community as a form of research’ [the Marketocracy and Value Investors model]. That’s not how we plan to do it. The other way is to use a quantitative model to take into account all of the information we have about the performance of the users on our site, and select the ones that have an investment strategy that is superior, then weight their opinions a lot more strongly than people who have shown inconsistent performance or who have only been on the site a short time.”
The UpDown is building that quantitative model right now, and plans to start applying it to the seed fund it as soon as UpDown users have compiled a decent track record to draw upon—possibly as soon as three months from now, says Reich.
Meanwhile, there are plenty of other activities to keep The UpDown members busy. Members start off with one million imaginary dollars to invest, and the site’s tools help them buy and sell stock as often as they like, as well as track the performance of their portfolios over time. Opinionated members are encouraged to submit company analyses (including buy or sell recommendations) that are then rated by other members; each week The UpDown hands out cash prizes to the authors of the highest-rated stock picks. Members can also join groups where members collaborate to manage a joint portfolio and interact via message boards and private messages.
While the website includes a few contextual ads from Google, The UpDown is subsisting for now on a $500,000 angel investment from Schoss, according to Reich. Schoss “has started maybe 20 Internet comapnies in Europe, and is also very active in the alternative investment space, which I think explains why he really liked our company,” says Reich. “It has this investment side and this Internet aspect, and the way we do it is completely new.”
